The following case discusses an Appeal before the Takeover Special Committee, with regards to a long running dispute between companies Aton GmbH and Aton Austria Holding GmbH (“Aton”), as well as the Board of Murray & Roberts Holdings Ltd (hereafter “M&R”).
According to section 119 of the Companies Act 71 of 2008 (hereafter “Companies Act”), one of the aims of the Takeover Regulation Panel (“TRP”) is to inter alia, “prevent actions by a regulated company designed to impede, frustrate or defeat an offer, or the making of fair and informed decisions by the holders of that company’s securities”. The actions by the board of directors of a regulated company are thus subject to specific restrictions once the company has received a bona fide offer or believes that such offer is imminent.
The board of the company may however take these actions, so long as it has received both the written approval of the TRP, as well as the approval of the holders of the relevant securities, provided such actions are taken in terms of a “pre-existing obligation or agreement entered into before it received the bona fide offer”. This is the basis of the dispute in M&R v Aton, as M&R applied to the TRP to allow their merger with Aveng, after having received the approval of their shareholders under section 126 of the Companies Act Aton however disputed that the actions by M&R constituted frustrating action, according to sections 119 and 126 of the Companies Act.
The first TSC ruled in support of M&R’s argument that Aton’s sale agreement; whereby it acquired an ordinary share capital in M&R which increased its shareholding above the 35% mandatory offer threshold, obliged Aton to make a mandatory offer to all M&R shareholders at the same price. The TSC ruling held that Aton was required to withdraw the voluntary offer and make a mandatory offer to all M&R shareholders. During this dispute however, the independent board of M&R at no time informed the Takeover Special Committee of its proposed Aveng merger transaction whilst the TSC was considering separate complaints by M&R and Aton. Aton thus argued that M&R designed such transaction simply for the purposes of frustrating their takeover bid.
M&R thereafter published a SENS announcement on 18 May 2018, advising its shareholders of the potential Aveng Transaction. On 21 May 2018 M&R issued a notice of general meeting to its shareholders containing a resolution to be passed in terms of section 126 of the Companies Act, granting the Board permission to undertake “any actions necessary” to achieve the potential Aveng merger and approve the frustrating action.
In order to prevent the potential merger between Aveng and M&R, Aton then bought a 25.42% stake in Aveng. M&R applied to the TRP for approval under section 126 of the Companies Act. The approval sought by M&R to approve the frustrating action was granted by the TRP on 20 June 2018. As a result of such approval, Aton then requested that the Takeover Special Committee (hereafter “TSC”) be convened; and a hearing was held on 11 July 2018. The final TSC ruling was held on 31 July 2018. In this TSC ruling, the Panel’s area of ‘discretion’ is discussed and the TSC has provided a wide range of factors which it may use in its discretion to consider future cases, on section 126 frustrating actions.
In casu, the court had to determine the question as to whether or not the actions of the board of M&R in proceeding with the Potential Aveng Transaction, amounts to ‘frustrating action’ in terms of section 126 of the Companies Act 71 of 2008.
The ruling by the Takeover Special Committee (hereafter “TSC”), thus overturned the June 2018 decision by the TRP which allowed the M&R Aveng merger transaction to proceed. According to Chris Ewing, Chairman of the TSC, “In exercising its discretion the Panel must take a broader approach which means that the interests of all stakeholders, not only the shareholders, must be given appropriate weight and proper consideration”.
The rationale for section 126 and the frustrating action regulations; is that shareholders should be able to make a decision as owners of the company regarding their shares and the future of the company. Therefore, the board should not ‘take’ from the shareholders the opportunity to make a decision. The shareholders, as owners, are entitled to make decisions that are in their best interests, and not necessarily in the best interests of the company. Directors on the other hand owe the company a fiduciary duty to act in the best interests of the company.
The Panel must “take into account the broad purposes of the Act as reflected in section 7, which specifies that the Act is intended to promote the development of the South African economy and to promote innovation and investment in the South African market.”
Further, the Panel must consider its obligations under section 119(1)(a) of the Act, “to ensure integrity of the marketplace and fairness to holders of the relevant securities, including the obligation to prevent actions by a company to frustrate offers, or the making of fair and informed decisions by the holders of the securities”;
Further, the Panel “must consider whether the shareholders were properly and fully informed, and whether the meeting to approve the frustrating action was properly held;
It was thus found by the Takeover Special Committee that the appeal by Aton must be upheld. The TSC thus refused the approval sought by M&R to proceed with the Potential Aveng Transaction; and ordered that the costs of the TSC be borne by M&R. The Chairman Mr Ewing further stated that the TRP must “give considerable weight to the fact that a majority of the shareholders approved the frustrating action, but the Panel is not bound thereby”.
The court held that the TRP cannot “act in a vacuum” and ignore the specific circumstances of the situation. The TRP must thus take note of the pre-existing offer made by Aton, and the impact of the frustrating action on it. In this instance the TRP must take note of, inter alia, the following:
“The manner in which the M&R independent board conducted itself in relation to its failure to disclose to the first TSC the potential Aveng Transaction”.
Secondly, the TSC must consider the overlap between the major shareholders in M&R and Aveng. “Whilst shareholders remain entitled to vote in their own interests, the overlap is nevertheless an issue for the TSC to take into account”;
Third, the TSC must consider the “potential impact of the Aveng transaction on the mandatory offer made by Aton.”
Lastly, the fact that there is “no legal imperative for the Aveng transaction to be continued with at the present time, must be considered.”
In July 2018, the TSC accordingly upheld the appeal by Aton and refused the approval sought by M&R to proceed or continue with the Potential Aveng Transaction. Further, the court ordered that the costs of the TSC be borne by M&R.
In the dispute between Aton and the M&R Board, as well as the Independent Board of M&R, the court discussed the principles relating to frustrating action in accordance with s 126 of the Companies Act. The Takeover Special Committee is established in terms of section 202 of the Companies Act to consider appeals of decisions by the TRP. In 2018, the TSC issued only four rulings, three of which have involved the hostile bid for control of Murray & Roberts (M&R) by German engineering group Aton.
The implications of this TSC ruling have precedent-setting implications that may influence future hostile takeovers. In the final TSC ruling, the Panel’s area of ‘discretion’ has been discussed and the TSC has provided a wide range of factors which it may use in its discretion to consider future cases on section 126 frustrating actions.
According to section 126(1) of the Companies Act, a frustrating action is required to be approved not only by the holders of the relevant securities, but the company must also receive the written approval of the Panel. The Panel has now been vested with the discretion as to whether or not to approve a frustrating action, regardless of whether or not the shareholders passed such a resolution.
Therefore, the use of section 126 of the Companies Act and the restrictions on frustrating actions may become a problematic provision in the future, due to the fact that the Takeover Regulation Panel’s decision and reasoning may not necessarily be aligned with the views of the shareholders.
Written by Ashleigh Butler and supervised by Jasvir Sewnarain, 1 February 2019