Financing A Share Purchase - Is It That Simple

Prospective investors wishing to buy the assets of a company

lock, stock and barrel could buy all of the shares from the seller

and there would, ordinarily, be no difficulty in arranging such a

transaction. The assets of the company are valued by the owner of

the shares and the purchaser, and the shares are bought for the

valuation arrived at. The purchaser who can pay cash for the shares

simply pays the purchase price and the shares are transferred which

avoids any expenses of having immovable property registered in the

name of the company transferred to the purchaser. But, what if the

purchaser does not have cash on hand to finance the purchase, which

is more often the case. Would it be possible, for example, to

secure payment of the purchase price by passing a bond over the

assets of the company or to look to the company for some other form

of finance?

Traditionally, purchasers had to persuade banks or some other

financier to finance a purchase of shares in South African

companies. The ways in which one could finance deals was, until

recently, restricted by our company laws which generally prohibited

a company from providing loans, guarantees and other forms of

security for the purchase of its own shares. The thinking behind

this restriction was that the resources of a company should not be

used to the detriment of minority shareholders and creditors of the

company.

However, in recent years, this prohibition also had the effect

of hampering black economic empowerment in South Africa in that

empowerment partners could not look to the company for financial

assistance to take up shares in the company. It also became

questionable whether other tactics could be used in order to

protect creditors and minority shareholders.

At the end of last year, our Companies Act was at long last

amended to provide that a company may now provide finance to a

purchaser to take up shares in the company provided that the

directors of the company are satisfied that following the

transaction, the assets of the company will exceed its liabilities

(the solvency test), and the company will be in a position to pay

its debts as they become due in the ordinary course of business

both subsequent to, and for the duration of, the transaction (the

liquidity test). The shareholders must also pass a special

resolution approving the terms upon which the assistance is to be

given. It may now be possible for our purchaser mentioned in the

example above to secure payment of the...