A how-to-guide for M&A transactions

15 April 2024 ,  Ahmed DhupliJohnny DavisSian Angus 273
A merger or acquisition (M&A) can be a complex transaction that can be effected in a number of ways depending on the nature of the transaction as well as the scope and intent of the parties. In this article, we look at some of the most common methods for affecting an M&A.

Before unpacking the various methods in which an M&A can be effected, it is worthwhile to revisit the concept of what is an M&A. Typically a merger or acquisition takes place where one or more companies merge or are acquired to form a single entity or consolidate their operations into a single unit. 

The Companies Act 71 of 2008 (“Companies Act”) primarily governs the statutory processes which must be followed in order to successfully conclude an M&A, which includes the approval of the Competition Commission, a statutory body tasked with regulating, among others, the conclusion of M&As.

Acquisition and subscription for shares
An acquisition of shares in another company is a typical way in which an M&A may be effected. An acquisition must be in compliance with the provisions of the Companies Act insofar as the Companies Act governs the required minimum shareholder approval, disclosures in respect of the transaction and ensuring the protection of the rights of shareholders. In the event that an acquisition takes place, the existing shareholders of the company may be consulted in order to acquire additional shares in the company, or alternatively, the available shares of the company may be made available to and purchased by the open market. An acquisition by the acquiring company of the securities of the target company entails that the acquiring company essentially becomes the ‘owner’ of the target company, however, the business of the target company remains unaffected post-acquisition.

A subscription for shares usually requires the issue of available shares in a company to the subscriber in exchange for payment of a subscription consideration, as agreed upon between the parties. A subscription entails an introduction of new shareholders in the company and, subsequently, an increase of the issued share capital of the company. Subscriptions do not have any effect on the business of an entity and, therefore, the day-to-day operations of the entity in which the shares are issued remain unchanged.

A takeover occurs when the acquiring company obtains control of the target company through the purchase of a significant portion of the target company’s shares. Both hostile and friendly takeovers are possible depending on the cooperation of the target company’s board of directors or management with that of the acquiring company. In South Africa, the Takeover Regulation Panel is responsible for ensuring that takeovers are conducted transparently and fairly.

Joint ventures
A joint venture entails a collaboration between two or more entities to acquire a specific business opportunity while ensuring that each of the participating entities can retain their separate legal identities. A joint venture may be achieved through, among others, the formation of new entities, contractual agreements or partnerships. It is important that such ventures require careful transaction structuring to allocate risks, responsibilities, and profits equitably among the participating entities.
Asset purchase
In some cases, a company may opt for an asset purchase instead of acquiring shares or merging with another company. An asset purchase involves the acquisition of specific assets and liabilities of another company, allowing the buyer to choose desirable assets while avoiding acquiring any unwanted liabilities. In South Africa, asset purchases are strictly governed and require that a comprehensive due diligence be conducted to assess the value and risks associated with the proposed acquisition of the assets.

Management buyouts (MBOs and Leveraged Buyouts (LBOs)
Management buyouts involve the acquisition of a company by its existing management team and is often achieved with the support of external investors or financial institutions. Leveraged buyouts, on the other hand, involve the acquisition of a company using a significant amount of debt, with the assets of the target company often being used as security for the debt. While management buyouts and leveraged buyouts are less commonly used in South Africa compared to more developed economies, both are viable options for restructuring ownership and management control of an entity.

Given the diverse methods available and the myriad options for structuring a transaction to suit the unique nature of each M&A transaction as well as the extensive regulatory requirements that must be considered in respect of each transaction, it is important to engage an experienced M&A advisory team early in the process to establish the risks, objectives, approvals and transaction structure options that are appropriate to the deal.

Visit our M&A Team page

Disclaimer: This article is the personal opinion/view of the author(s) and is not necessarily that of the firm. The content is provided for information only and should not be seen as an exact or complete exposition of the law. Accordingly, no reliance should be placed on the content for any reason whatsoever and no action should be taken on the basis thereof unless its application and accuracy have been confirmed by a legal advisor. The firm and author(s) cannot be held liable for any prejudice or damage resulting from action taken on the basis of this content without further written confirmation by the author(s). 

Related Sectors: Mergers & Acquisitions