The Companies Act has introduced a new form of statutory merger which exists in addition to, and not in substitution for, the pre-existing methods used by companies wanting to effect business combinations, namely the sale of the business of the company as a going concern and a takeover offer with compulsory acquisition of the securities of the minority.
Statutory merger is governed in terms of section 113 and section 116 on the Companies and the merger agreement which is an absolute essential in any merger transaction and a mandatory requirement in terms of section 113(2).
One of the most common problems experienced in practice is whether or not the envisiontransaction falls within the parameters of a merger and is not in fact another fundamental transaction. Our point of departure lies in the definition of an amalgamation or merger in the Companies Act as a transaction, or series of transactions, pursuant to an agreement between two or more companies, resulting in –
- the formation of one or more new companies, which together hold all of the assets and liabilities that were held by any of the amalgamating or merging companies immediately before the implementation of the agreement, and the dissolution of each of the amalgamating or merging companies;
- the survival of at least one of the amalgamating or merging companies, with or without the formation of one or more new companies, and the vesting in the surviving company or companies, together with any such new company or companies, of all of the assets and liabilities that were held by any of the amalgamating or merging companies immediately before the implementation of the agreement.
Broadly speaking a merger is a pooling exercise where all the assets and liabilities of the merging entities are pooled into either a new company or into the surviving company. In terms of definition (a) both companies fuse into a new company that has been incorporated in terms of the merger agreement and the merging companies are dissolved or otherwise deregistered. In terms of definition (b) one company fuses into another company, the surviving company, and the merging company is dissolved or otherwise deregistered. If a transaction does not fall within these parameters it is not a merger in terms of the Companies Act.
In addition to passing the solvency and liquidity test in terms of section 113(1) which is a prerequisite for most fundamental transactions and indeed a prerequisite for a merger, section 113(2) provides further mandatory terms and conditions that must be addressed in the merger agreement, namely:
- the proposed Memorandum of Incorporation of any new company to be formed by the amalgamation or merger;
- the name and identity number of each proposed director of any proposed amalgamated or merged company;
- the manner in which the securities of each amalgamating or merging company are to be converted into securities of any proposed amalgamated or merged company, or exchanged for other property;
- if any securities of any of the amalgamating or merging companies are not to be converted into securities of any proposed amalgamated or merged company, the consideration that the holders of those securities are to receive in addition to or instead of securities of any proposed amalgamated or merged company;
- the manner of payment of any consideration instead of the issue of fractional securities of an amalgamated or merged company or of any other juristic person the securities of which are to be received in the amalgamation or merger;
- details of the proposed allocation of the assets and liabilities of the amalgamating or merging companies among the companies that will be formed or continue to exist when the amalgamation or merger agreement has been implemented;
- details of any arrangement or strategy necessary to complete the amalgamation or merger, and to provide for the subsequent management and operation of the proposed amalgamated or merged company or companies; and
- the estimated cost of the proposed amalgamation or merger.
A comprehensive agreement that address the abovementioned requirements is of utmost importance. A merger that takes place in absence of a properly drafted agreement could be in contravention of the Companies Act if it does not comply with section 113 and section 116.