Written for Mondaq by Derrick Kaufmann, a Managing Partner at Andersen in South Africa, head of Corporate, Mergers & Acquisitions a Board member on the African Regional Board of Andersen Global, this guide offers a comprehensive overview of private mergers and acquisitions (M&A) in South Africa, focusing on deal structures, transaction processes, and key considerations for participants.
1. Deal Structure: Choosing the Right Path
South African M&A transactions primarily involve two structures:
- Share Purchase Agreement (SPA): The buyer acquires the entire company, including its assets, liabilities, and intangible assets like goodwill and intellectual property. This structure is ideal for full ownership and control.
- Asset Purchase Agreement (APA): The buyer acquires specific assets and liabilities chosen from the target company. This allows for a more targeted approach, cherry-picking desired components.
Choosing the Right Structure:
Several factors influence structure selection:
- Buyer's Objectives: Does the buyer require the entire company (SPA) or specific assets (APA)?
- Target Company Characteristics: Are there potential liabilities the buyer wants to avoid (APA)?
- Tax Implications: Each structure has different tax consequences, requiring careful evaluation.
- Due Diligence: The scope and depth of due diligence vary depending on the chosen structure.
- Negotiation Leverage: Each structure offers different leverage for negotiation between buyer and seller.
- Regulatory Approvals: Both structures might require regulatory approvals, depending on the nature of the transaction.
2. Transaction Process: A Step-by-Step Guide
A typical South African private M&A transaction involves several stages:
- Initial Preparatory Stage:
- Confidentiality Agreement: Protects sensitive information shared during discussions.
- Non-Binding Letter of Intent: Outlines basic terms for negotiations.
- Exclusivity Agreement (Optional): Grants the buyer exclusive negotiation rights for a defined period.
- Break Fee Agreement (Optional): Protects the seller if the buyer walks away after exclusivity or due diligence.
- Due Diligence Access Agreement: Defines procedures for accessing information during due diligence.
- Standstill Agreement (Optional): Restricts both parties from taking certain actions during negotiations.
- Financing Commitment Letter (Optional): Showcases the buyer's ability to secure financing.
- Due Diligence:
- Financial Due Diligence: Evaluates historical financials, forecasts, and potential liabilities.
- Legal Due Diligence: Reviews contracts, compliance, and potential legal claims.
- Commercial Due Diligence: Assesses market position, customer base, and operational efficiency.
- Tax Due Diligence: Analyses tax liabilities and potential risks.
- Environmental Due Diligence (if applicable): Identifies environmental risks associated with the target.
- Corporate and Regulatory Approvals:
- Shareholder Approval (if applicable): Required for transactions exceeding a certain threshold or affecting voting rights.
- Board of Directors Approval: Necessary for transaction approval.
- Creditor Consents (if applicable): Needed to protect creditor interests.
- Competition Commission Approval (if applicable): Required for transactions exceeding specific thresholds.
- Takeover Regulation Panel Notification (if applicable): Necessary for 'regulated companies'.
- Industry-Specific Approvals (if applicable): May be required in certain sectors.
- Transaction Documents:
- Share Purchase Agreement (SPA) or Asset Purchase Agreement (APA): Defines the legal framework.
- Closing Documents: Include transfer documents, escrow agreements, and closing certificates.
- Tax Clearance Certificates: Required by the South African Revenue Service.
- Closing and Post-Closing:
- Transfer of ownership or assets.
- Post-closing adjustments (if applicable).
3. Key Considerations for Participants
- Due diligence is crucial for informed decision-making. Its scope and depth depend on the transaction's specifics.
- Confidentiality agreements are essential to protect sensitive information shared during the process.
- Experienced legal and financial advisers can guide the process, interpret findings, and identify deal breakers.
- Regulatory compliance is vital throughout the transaction.
- Clear communication and mutual respect between buyer and seller foster trust and expedite transactions.
Understanding deal structures, transaction processes and regulatory requirements are key considerations driving successful outcomes for private M&A in South Africa.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
