Funding an empowerment transaction

2010-04-21 00:00

EMPOWERMENT transactions can, like any transaction, be financed by either looking to the company itself for cash or sourcing finance from third-party financiers.

As far as finance by the company itself is concerned, the Companies Act provides that a company may provide funds to a purchaser to take up shares in the company if the directors are satisfied that, subsequent to the transaction, the assets of the company will exceed its liabilities and the company will be in a position to pay its debts as they become due in the ordinary course of business for the duration of the transaction. At least 75% of the shareholders are also required to pass a special resolution approving the terms upon which the assis­tance is to be given. Cash flush companies are, therefore, able to use their own funds to restructure without looking to financial institutions for assistance.

If the company does not have the funds to provide finance itself, partners will approach other finance houses for assistance.

The new Companies Act of 2008 will allow financial assistance to be provided to individuals who wish to take up shares in a company. Section 44 of the Act states that such assistance may be provided pursuant to a special resolution. In addition, the board will need to be satisfied that, immediately after providing the financial assistance, the company will satisfy the solvency and liquidity test and that the terms on which the financial assistance is proposed to be given are fair and reasonable to the company. It will also be the duty of the company’s board of directors that any specific conditions or restrictions contained in the company’s constitution dealing with financial assistance have been met.

A notable difference between the provisions of Section 38 of the present Companies Act and those of Section 44 of the new Companies Act relates to the requirement of special resolutions and, in particular, the requirements that need to be satisfied to pass a special resolution.

At present, for a special resolution to be approved it must be supported by at least 75% of the shareholders of the company. However, in terms of the new Act, a company’s constitution may permit a lower percentage of voting rights to approve any special resolution, provided that a margin of at least 10% between the requirements for the approval of an ordinary resolution and a special resolution is retained. It follows that, depending on the terms of the company’s constitution, it may not be necessary for 75% of the shareholders to approve such financial assistance in future.

Interestingly, the new law also provides that even if the company’s constitution prohibits the granting of financial assistance, the board can authorise financial assistance for an employee share scheme and can allow such assistance if it is backed by a special resolution of shareholders passed during the previous two years. The solvency and liquidity tests will need to be met in both instances.

Dealmakers will need to take these principles into account once the new Act comes into effect, which is likely to happen in 2010.

Stephen Kennedy-Good is an associate at Deneys Reitz Attorneys.

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