SOME COMMENTS ON THE SCHEME OF ARRANGEMENT AS AN "AFFECTED TRANSACTION" AS DEFINED IN THE COMPANIES ACT 71 OF 2008

A scheme of arrangement involving a regulated company and its shareholders is defined as an "affected transaction" in the Companies Act 71 of 2008. Although scheme of arrangements, which can be used to achieve a takeover of a company, are a common occurrence, the Act provides no definition of such schemes. The importance of knowing what actually constitutes a scheme of arrangement becomes apparent when it is noted that section 121 of the Actprovides that any person making an offer which if accepted would result in an affected transaction is obliged to comply with all the relevant reporting and approval requirements in the Act, as well as the Takeover Regulations, unless the Takeover Regulation Panel has granted an exemption. Giving effect to an affected transaction is prohibited, unless the Panel has issued a compliance certificate or granted an exemption. The article comments generally on the definition of a scheme of arrangement as an affected transaction, highlighting the elements of a scheme of arrangement. Specific consideration is given to transactions which include a re-acquisition by the company of its own previously issued securities and when such a re-acquisition on its own would be considered to be a scheme of arrangement and an affected transaction. Comment on the obligation to appoint an independent expert to report on the scheme and the relevance, if any, of the solvency and liquidity of the company embarking on a scheme of arrangement is included. Finally, consideration is given to the need to have a scheme of arrangement approved by a special resolution and the potential exclusion of certain voting rights. The article exposes a number of difficulties with the interpretation of the applicable provisions and suggests that these need to be revisited by the legislature for clarification.


SOME COMMENTS ON THE SCHEME OF ARRANGEMENT AS AN
In re National Bank Ltd [1966] The word "offer" was defined as including an offer in respect of an affected transaction, however

/ 638
The Companies Act 2008 has adopted a different approach to affected transactions.
The definition of "affected transaction" 12 focuses (at least initially) on specific types of transactions. For example, a disposal of all or the greater part of the assets or undertaking of a regulated company as contemplated in section 112 is defined as an affected transaction, as well as an amalgamation or merger as contemplated in section 113, provided it involves at least one regulated company. 13    The purpose of this article is therefore to comment generally on the definition of a scheme of arrangement as an affected transaction, highlighting the elements of a 17 As a scheme of arrangement between a regulated company and its shareholders as contemplated in s 114 is now specifically defined as an "affected transaction" (see s 117 (1)

/ 638
scheme of arrangement. In this context specific consideration will be given to transactions which include a re-acquisition by the company of its own previously issued securities and when such a re-acquisition would on its own be considered to be a scheme of arrangement and an affected transaction. Comment will be included on the obligation to appoint an independent expert to report on the scheme and the relevance, if any, of the solvency and liquidity of the company embarking on a scheme of arrangement. Finally, consideration will be given to the need to have a scheme of arrangement approved by a special resolution and the potential exclusion of certain voting rights.

Elements of a scheme of arrangement
The definition of an "affected transaction" includes a scheme of arrangement between a regulated company and its shareholders "as contemplated in section 114". 19 Section 114(1) provides that the board of a company may propose and implement a scheme of arrangement between the company and the holders of any class of securities, provided the required approvals have been obtained. 20 It is also specifically stated that the scheme could include among other things one or more of which is specifically defined in section 1.) The only element that would seem to be required to make a scheme a scheme of arrangement as contemplated under section 114 is that it must be an arrangement between the company and holders of any class of securities in that company. The extent to which the company would need to be actively involved in the scheme to make it such an arrangement is debatable, but all of the methods listed would clearly involve the company in at least a number of administrative tasks.
Schemes of arrangement may be structured in many different ways and could include, for example, a consolidation of different classes of securities or a reacquisition by the company of its own securities. 24 However, the question arises whether, for example, any proposal by a company to re-acquire some of its shares in terms of section 48 would constitute a scheme of arrangement as contemplated in section 114. The answer is important, as it would determine the sections and rules that regulate the proposed transaction and the procedure that must be followed and the approvals that must be obtained.
If the proposed arrangement "contemplated in this section" (ie section 114) may have as a result the re-acquisition by the company of any (emphasis added) of its previously issued securities, section 48 (which regulates the re-acquisition by a company of its own shares) will apply to the proposed arrangement. 25   29 As the word "acquisition" is defined in s 117(1)(a) of the Companies Act 71 of 2008 to include an acquisition by a regulated company of its own securities as contemplated in s 48, it would seem that a re-acquisition by a regulated company of its own securities could potentially trigger the disclosure obligations of s 122. An acquisition of a beneficial interest in voting securities of a regulated company to the extent contemplated in s 122(1) is included under the definition of an affected transaction by s 117(1)(c)(iv). S 122(1)(a) is triggered when a person "acquires a beneficial interest in sufficient securities of a class issued by that company such that, as a result of the acquisition, the person holds a beneficial interest in securities amounting to 5%, 10%, 15%, or any further multiples of 5%, of the issued securities of that class". A re-acquisition by the company could potentially shift the relative holdings in the company and result in a holder of securities in the company acquiring a beneficial interest in sufficient securities of the company to trigger the disclosure obligations found in s 122. It seems strange that such a holder of securities would need to report the acquisition to the company when in fact it was the re-acquisition by the company that triggered the obligation. 30 See s 117(1)(c)(vi) rw s 123 Companies Act 71 of 2008. S 123(2)(a) requires an offer to be made to all of the holders of remaining securities to acquire those securities if a regulated company reacquires any of its voting securities in terms of s 48 or in terms of a scheme of arrangement, and the result is that before the acquisition a person or concert parties were able to exercise less than the prescribed percentage of all the voting rights attached to securities of that company (35 per cent (s 123(5)) and as a result of the acquisition, that person (and concert parties) taking into account securities already held can now exercise at least the prescribed percentage of voting rights attached to the securities of that company. The possibility that a re-acquisition by the company of less than 5 per cent of the issued securities of the company might impose the obligation on a holder of securities who had no vote on the matter in the first place to make mandatory offers to remaining holders of securities might be one reason why all re-acquisitions by a company should be subject to the approval of a special resolution. However, a consideration of the implications of a mandatory offer as an affected transaction is not part of this article. The possibility of applying for an exemption from the application of any provision in Part B or C Chapter 5 Companies Act 71 of 2008 or from the Takeover Regulations in terms of s 119 (6) should not be overlooked.

It is important that it is made clear by the legislature whether what the company is
proposing is a scheme of arrangement or not and also if it is therefore an affected transaction, as this clearly impacts on the procedure that must be followed and approvals that must be obtained by the company.

Appointment of an independent expert
Before a proposed scheme of arrangement can be put to the vote, the company proposing the arrangement is required to retain the services of an independent expert to prepare a report. 31 The appointment and report is required whether the proposed scheme of arrangement includes a re-acquisition by the company of its own securities or not.
This independent expert must satisfy the qualifications of competence, experience and independence set out in section 114(2)(a). If the scheme of arrangement involves a regulated company, regulation 90(3) 32 would also be relevant. This requires the independent expert to be able to demonstrate to the TRP that he is independent and would reasonably be perceived to be so and that he is competent to act in the circumstances. 33

/ 638
re-acquisition triggers the application of sections 114 and 115 because it involves more than 5 per cent of the issued shares of any class of shares of the company 36 such an appointment and report is required by section 114(2). Thus, it is important to know whether what is being proposed is a scheme of arrangement or not.

Report by the independent expert and a fair and reasonable opinion
The task of the independent expert (where one must be appointed) is to compile a report to the board that must be distributed to all of the holders of securities in the company. 37 This report is clearly to aid the holders of securities in the company in coming to a decision on whether or not to vote to support the special resolution proposing the scheme of arrangement.
Section 114(3) describes the minimum information that needs to be included in the report. As far as the securities and the holders of the securities affected by the proposed scheme are concerned, the report must identify the type and class of securities that would be affected and include the prescribed information relevant to the value of those securities, as well as describe the material effects on the rights of the holders. 38 The report must also weigh the disadvantages of the scheme against the compensation that would be received. 39 In doing this, the expert must explain the perceived benefits to the business and the prospects of the company. 40 4)) such a shareholder is entitled to demand that the company buy out his shares for fair value (s 164(5)-(8)) and, if he does not accept the value offered by the company, to bring a court application asking it to determine the fair value (s 164 (14)). 44 Included in the definition of an "offeree regulated company" is a regulated company that is itself the subject of an offer or the securities of which (either partially or entirely) are the subject of an offer: reg 81(o). See s 117(1)(f) Companies Act 71 of 2008 for the definition of "offer". 45 An independent board is defined by reg 81(j) as "those directors of an offeree regulated company whom that company has indicated are independent directors". 46 In the context of a scheme of arrangement which is an affected transaction, the offeror is considered to be a person other than the offeree regulated company concerned who, with the cooperation of the company, proposes to acquire securities of that company in terms of a scheme of arrangement contemplated in s 117(1)(iii): reg 81(p)(iii). Such an offeror may act alone or in concert with others. 47 Regulation 81(h) Companies Regulations 2011. 48 The fair and reasonable opinion of the independent expert and the independent board opinion would form part of the circulars which are required to be distributed in terms of reg 106. See reg 106(3) for who is responsible for the various circulars and regs 106(4)(g) and 106 (7)

/ 638
transaction, 50 although an independent expert would need to be appointed to compile a report, no fair and reasonable opinion is specifically mandated. Although much of the information required to be included in the report by the independent expert would obviously cover similar ground to that which would be covered by the fair and reasonable opinion, it is only if the application of the Takeover Regulations is triggered 51 that the independent expert's report must also specifically include a fair and reasonable opinion.

Independent board opinion and the solvency and liquidity requirement
Where the scheme of arrangement involves a regulated company (and thus is an 66 See s 125(2) Companies Act 71 of 2008 for when the obligation to make comparable offers to acquire the securities of each class of issued securities of that company is triggered by certain schemes of arrangement that involve a re-acquisition by a company of any of its voting securities where the company has more than one class of securities. Reg 87 further regulates comparable offers. See also reg 111(2), which stipulates the minimum consideration that must be offered to holders of the same class of securities in the event that an offeror (or concert parties) has acquired securities of the same class within the six months period prior to the commencement of the offer period. Section 115(1) stipulates that a company may not implement a scheme of arrangement unless inter alia it has been approved by a special resolution. Thus it is important to know whether a proposed transaction is a scheme of arrangement or not. This is because if, for example, a company embarks on a re-acquisition outside the context of a scheme of arrangement, it is only if the re-acquisition involves acquiring shares from any director, prescribed officer or related person, and/or 74 the re-acquisition exceeds the five per cent threshold, that the requirement of a special resolution to authorise the re-acquisition is specifically triggered.
within a period of 12 months, involve the same parties, and involve the acquisition or disposal of an interest in a particular company or asset, or taken together they lead to a substantial involvement in a business activity that did not previously form part of the company's principal activity. is unclear if it should be taken to suggest that "the greater part of a company" in the definition of "acquiring party" means more than 50 per cent of the company.
The second issue relates to the question of when it can be said that a person acquires or establishes "control" over all or the greater part a company, or all or the greater part of the assets or undertaking of a company.
Section 2(2) of the Companies Act 2008 stipulates when it would be considered that a person controls a juristic person or its business. If the juristic person is a company, a person can be said to control the company if the juristic person is a subsidiary of the first person as determined by section 3(1)(a) or that first person (together with related or inter-related persons) can exercise the majority of the general voting rights 121 / 638 associated with the securities of the company or has the right to appoint or elect directors who control the majority of the voting rights on the board. 79 However, it is important to note that this definition of "control" is specifically stated in section 2(2) to be "[f]or the purpose of subsection (1)" of section 2. Section 2(1) explains how, for the purposes of the Act, it is determined whether an individual is related to another individual, whether an individual is related to a juristic person, or a juristic person is related to another juristic person. In the context of the latter two relationships, reference is made to the concept of control. So, strictly speaking, it is only for the purposes of deciding whether an individual is related to a juristic person or a juristic person is related to another juristic person that the specific definition of "control" in section 2(2) is relevant. This definition of "control" would therefore be relevant in determining if a person is related to an acquiring party, as their votes are also excluded from the calculations by section 115(4).
However, the question arises if this definition of "control" is relevant in deciding if a person is an acquiring party 80 in the sense that the person (as a result of a transaction) acquires or increases "control" over all or the greater part of a company or all or the greater part of the assets or undertaking of a company. Can it be said that a person acquires control over a company (and thus becomes an "acquiring party" as defined) if as a result of a transaction he is able to exercise a majority of the voting rights associated with the securities of that company, or he acquires the right to appoint or elect directors who control the majority of the votes on the board?
Further, is there any difference then between acquiring control over all of a company or its assets/undertaking and acquiring control over only a greater part of the company or its assets/undertaking?

/ 638
its assets or undertaking. Such a person would thus fall under the definition of an "acquiring party" in section 1. Further, it would suggest that a person who is already able to exercise at least 35 per cent of the voting rights (and thus has "control") but who as a result of the proposed scheme would be able to exercise more of the voting rights attached to the securities would be considered to have increased "control".
Such a person would thus become an "acquiring party" within the definition become an acquiring party as a consequence of a proposed scheme of arrangement to which he is opposed is not prevented from voting against the resolution. 84 It is important to know whose voting rights are excluded from the quorum and approval determination in order to ascertain what impact this might have on whether the scheme would be approved or not, and also to ensure that the vote is not tainted by a conflict of interest which would allow the court to set it aside. The uncertainty about whose votes would be excluded created by the lack of clarity as to the meaning of "the greater part of a company" and the meaning of "control" in the context of the definition of "acquiring party" needs to be resolved.
Another basis on which the court could set aside the resolution approving the scheme is where the vote was tainted by inadequate disclosure. In an attempt to ensure that those who are permitted to vote on a resolution to approve a scheme of arrangement receive sufficient information to allow them to make an informed vote, the Companies Act 2008 provides for the appointment of and a report by an independent expert, which report must be circulated to holders of the company's securities. 85

/ 638
approval requirements of the Act and the Regulations. 94 Thus, it is important to know if a proposed transaction actually constitutes a scheme of arrangement, because this will impact on the procedure to be followed and the approvals required.
However, other than to stipulate that the board of a company may propose and implement any arrangement between the company and holders of a class of its securities (subject to certain approval requirements) and to list a number of methods that may be included in such an arrangement, including the possibility of a reacquisition of its previously issued securities, section 114 (1)

/ 638
The obligation to retain an independent expert is also affected by whether what is being proposed is a scheme of arrangement. A proposed scheme of arrangement, whether it includes a re-acquisition of securities by the company or not, as well as a proposed re-acquisition which involves more than five per cent of the issued shares of any class of shares of the company, 98 triggers the obligation to appoint an independent expert to report on the transaction. 99 However, a proposed reacquisition in terms of section 48 outside the context of a scheme of arrangement or which involves a re-acquisition that does not exceed the five per cent threshold triggers no such obligation. 100 As a scheme of arrangement involving an offeree regulated company is an affected transaction as defined, the Takeover  Directors would, however, be required to consider the solvency and liquidity of the company or face the consequences.
All schemes of arrangement (whether they include a re-acquisition by the company of its own securities or not) require the approval of a special resolution 105 before they can be implemented. However, section 48 does not specifically require shareholders to approve all re-acquisitions by the company of its previously issued shares. It is only if the re-acquisition falls within the provisions of section 48(8) that approval by special resolution is required. Thus if the company embarks on a re-acquisition outside the context of a scheme of arrangement, it is only if the re-acquisition involves acquiring shares from any director, prescribed officer or related person, and/or 106 the re-acquisition exceeds the five per cent threshold that the requirement of a special resolution to authorise the re-acquisition is specifically triggered.
If the special resolution approving the scheme of arrangement was materially tainted by a conflict of interest, the possibility exists that a court could set the resolution 129 / 638 aside. 107 In an attempt to limit this possibility, the Companies Act 2008 specifically excludes the voting rights of an "acquiring party" from the calculation of the quorum and percentage approval requirements. 108 An interpretation of the definition of "acquiring party" is hampered by the lack of clarity as to the meaning of "all or the greater part of a company" and the definition of "control". The difference between "control" in the context of the definition of related persons in section 2(2) and "control" as understood in the Takeover Regulations raises questions as to whose votes are excluded. This could potentially have an impact on a decision regarding whether any vote to approve a scheme of arrangement is tainted by a conflict of interest or not.