Private Companies, Share Transactions and Regulated Affected Transactions

Are you unknowingly a director or shareholder of a regulated private company? If so, what effect does this have on transactions involving the company’s shares?

The Companies Act, No 71 of 2008 (the new Companies Act) expanded the circumstances in which a private company may be regarded as a regulated company, having the effect that certain provisions of the new Companies Act and the takeover regulations, which would otherwise not be applicable to a private company, are unknowingly applicable to numerous private companies in South Africa. The application of these provisions may have adverse and unforeseen consequences in transactions involving the company’s shares.

In short, a shareholder increasing their shareholding in a regulated company is required to notify the company with each multiple of five percent of the shareholding that it acquires, is required to make a mandatory offer to purchase all remaining shares once its shareholding crosses the prescribed threshold, and may acquire the right to force minorities to sell their shares.

Having a share transaction reversed because the regulatory procedure was not followed, being unknowingly obliged to make a mandatory offer to all shareholders to acquire their shares, or unknowingly becoming a minority shareholder who can be squeezed out of a company, are situations which shareholders may best be advised to avoid. These risks can be amplified in long term share acquisition transactions, such as joint ventures which make use of shareholder earn-in provisions.

Regulated Private Companies in terms of the Companies Act

A private company becomes a regulated company in terms of the new Companies Act if the company expressly elects to be regarded as a regulated company in the company’s memorandum of incorporation, alternatively, if more than ten percent of the company’s issued securities have been transferred within the previous twenty four months other than by transfer between related or inter related persons.

Therefore, in the event that share transactions have taken place within the previous twenty four months a private company may potentially be classified as a regulated company. Once regarded as a regulated company the takeover regulations becomes applicable and the takeover regulation panel (TRP) becomes responsible for regulating all affected transactions, including any offer to enter into an affected transaction.

Share Transactions as Affected Transactions

The definition of affected transactions insofar as it relates to share transactions include compulsory disclosures on the acquisition of shares amounting to five percent, ten percent, fifteen percent or any further multiple of five percent of the company’s issued shares, mandatory offers requiring any shareholder who acquires enough shares to take its shareholding above thirty five percent of the shares in the company to make an offer to the remaining shareholders to purchase their shares, and compulsory acquisition and squeeze out of minority shareholders.

Affected transactions are further governed by the takeover regulations and regulated by the TRP, meaning that the parties cannot give effect to the share transaction unless the procedures set out in the takeover regulations have been complied with and the TRP has either issued a compliance certificate or granted an exemption for the transaction.

The compulsory disclosure provisions apply to any person who sells or purchases shares in a regulated company and as a result of that acquisition the person holds a beneficial interest amounting to five percent, ten percent, fifteen percent or any further multiple of five percent. The seller or purchaser must notify the company within three business days after the disposal or acquisition of the shares. Once the company has received the disclosure notice the company must file the notice with the TRP.

In addition to the compulsory disclosures a fundamental provision within the new Companies Act is the provision requiring a mandatory offer to all shareholders to acquire their shares in a company if a person acquires shares in a regulated company and as a result of that acquisition the persons shareholding increases from an amount of less than thirty five percent to an amount of thirty five percent or more.

Once this threshold is reached the shareholder is required to give notice to the remaining shareholders offering to acquire any remaining shares and must comply with the takeover regulations.

The mandatory offer provisions are designed to protect minority shareholders, however, the squeeze out provisions may work to the detriment of minority shareholders.

In terms of the squeeze out provisions minorities holding less than ten percent of the issued share capital of a company may be forced to sell their shareholding, or “squeezed out”, should an offer for the acquisition of the entire class of shares of a regulated company be made and that that offer has been accepted by holders of at least ninety percent of that class of securities.

These provisions allow an offeror to acquire the shares of a minority holding less than ten percent of the issued share capital on the same terms and conditions as the shareholders who had accepted the original offer.

A Word of Caution in Share Transactions Involving Private Companies

It becomes imperative that before shares in a private company are sold or purchased that it is determined that the private company has not elected to be a regulated company in its memorandum of incorporation and that no more than ten percent of the shares in the company have been transferred in the previous twenty four months. If so the company may be classified as a regulated company, requiring compulsory disclosures to be made with each five percent of the shares acquired, and once the threshold of thirty five percent shareholding is reached requiring a mandatory offer to acquire the remaining shares.

Caution must be taken to ensure that share transactions are structured in such a way to account for the company being classified as a regulated company.

In long term share acquisition transactions, such as joint ventures which make use of shareholder earn-in provisions, care must be taken in the drafting of the applicable contracts and the transaction should be structured to ensure that the intentions of the parties are not eroded should the company become a regulated company after the conclusion of the contracts and that both the rights of the acquiring shareholder is protected with each share tranche acquired, as well as the rights of minorities which may hold less than ten percent of the shares after the implementation of the transaction.


This work by Clinton Pavlovic is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

The Companies Act 2008 and Pre-Existing Shareholders Agreements

On 1 May 2013 will your company’s shareholders agreement be worth the paper that it is written on, as after this date most of what is contained in current shareholders agreements could automatically be rendered void.

This is an important corporate law consideration which must be addressed by all South African companies and their shareholders which rely on shareholders agreements concluded prior to the commencement of the Companies Act, No 71 of 2008 (the new Companies Act).

Historical Use of Shareholders Agreements

In terms of the previous Companies Act, No 61 of 1973 (old Companies Act) a company’s constitutional documents consisted of its memorandum of association and articles of association. In addition to these statutory documents, shareholders often concluded an additional shareholders agreement to regulate the internal affairs of the company.

A shareholders agreement typically provided that in the event of any conflict between the company’s articles of association and the shareholders agreement, the shareholders agreement would be the document that takes precedence. Shareholders therefore regularly used shareholders agreements to regulate important aspects of the company without the need to amend its articles of association and, by doing so, make the provisions public.

Shareholders Agreements Under the New Companies Act

The new Companies Act has, however, dramatically changed the possible scope and effectiveness of not only the new shareholders agreements concluded in terms of the new Companies Act, but also shareholders agreements which were concluded prior to the new Companies Act’s commencement date on 1 May 2011.

In terms of the new Companies Act, all shareholders agreements must be consistent not only with the provisions of the act itself, but also with companies constitutional documents, namely the memorandum of incorporation. Should there be any inconsistency between the shareholders agreement and a provision of the new Companies Act or memorandum of incorporation, the provision contained within the shareholders agreement shall be void.

A provision in a shareholders agreement which provides that the shareholders agreement will take precedence over the act or memorandum of incorporation shall itself be void and shall not provide any assistance to the shareholders.

Transitional Period

Companies which were incorporated under the old Companies Act and which had pre-existing shareholders agreements are, however, provided with a two year transitional period which ends of 30 April 2013.

During the transitional period, pre-existing companies may update their constitutional documents to comply with the provisions of the new Companies Act, and during such time should a shareholders agreement conflict with the provisions of the new Companies Act, or the company’s articles of association, the provisions of the shareholders agreement shall take precedence.

On 1 May 2013, any provision in a pre-existing shareholders agreement which directly conflicts with the new Companies Act or the company’s memorandum of incorporation will be void.

A company which takes no steps to align its current articles of association and shareholders agreement with the provision of the new Companies Act may find itself in a situation where most, if not all, provisions contained within the shareholders agreement are void as they conflict with the company’s articles of association which is automatically deemed to be its new memorandum of incorporation for the purposes of the new Companies Act.

Important provisions which are ordinarily contained within the shareholders agreement which may be void include provisions restricting or allowing the alteration or conversion of share capital, provisions regulating company meetings, provisions granting minority shareholders or specified shareholders rights to appoint directors to the company’s board, minority protection provisions including provisions which limit the board of directors powers, and provisions regulating borrowing powers and the determination and payment of dividends to shareholders.

Where to from Here?

What can be done to ensure that essential provisions contained within a shareholders’ agreement are not rendered void?

It will be necessary to determine where conflicts currently exist between the new Companies Act, articles of association and shareholders agreement.

Once conflicts have been identified, it will be necessary to determine which matters are now classified as alterable or non-alterable provisions in terms of the Companies Act.

Should any of these matters be classified as alterable or non-alterable provisions within the new Companies Act, it will not be possible for the shareholders to regulate these matters in a shareholders agreement, as non-alterable provisions cannot be altered at all, and alterable provisions can only be altered in the company’s memorandum of incorporation and not in a shareholders agreement.

Once this analysis has been done it will then be necessary to update the company’s memorandum of incorporation to deal with all alterable provisions which can only be altered in the memorandum of incorporation, and then draft an amended shareholders agreement relating to the remaining company matters.


This work by Clinton Pavlovic is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.