New act simplifies regulation of public stock offers
July 8, 2009
By Etienne Swanepoel
The provisions contained in the 1973 Companies Act relating to offers to the public are complex. It requires substantial effort to understand these provisions.
Though the regulation of such offers in the 2008 Companies Act achieves similar objectives to those of the 1973 act, the legislature has succeeded in simplifying the conceptual framework contained in the new act, which is expected to come into force in the middle of next year.
From a regulatory perspective, offers to the public are typically regulated by a combination of underlying enabling legislation, such as the Companies Act, and the rules of the exchange on which the shares are to be listed or are already listed, in our case the JSE. The former typically takes account of the latter in regulating offers.
As good a starting point as any for regulating an offer of shares is to distinguish between an offer for the subscription of shares in a company and an offer for the sale of shares in a company. The former is an offer by the company; the latter is an offer by persons other than the company whose shares are the object of the offer.
The applicable legislation usually includes both types of offers in the same definition of an offer.
In the case of a subscription offer, one can generally identify three different types of offers. First are those offers by the company in question, properly speaking. In other words, a person applies or subscribes for shares in the company directly.
Second are those instances where the company issues shares to an intermediary in circumstances where the intermediary will thereafter offer those shares for sale to others. In form, offers of this nature fall into the category of an offer for the sale of shares, not an offer for the subscription of shares.
By now it should be clear that a subscription is a transaction between the company and a prospective shareholder, while a sale is a transaction between someone other than the company and a prospective shareholder.
However, in substance in the second case, a sale is the same as an offer for the subscription of shares by the company. For the purposes of regulating offers, therefore, company legislation typically deems such offers to be an offer by the company itself. In other words, these are deemed subscriptions and are not treated as sales in law.
Third are those cases where the company makes a rights issue. These can take place by way of renounceable letters of allotment (RLAs).
This is where the company makes an offer for the subscription of its shares to its shareholders in a form such that shareholders, if they choose to do so, can dispose of the right to subscribe for the shares in question (in other words, the right to participate in the rights issue) to others. RLAs can therefore be traded by shareholders.
Company legislation typically divides a subscription into three distinct phases: a person applies to the company to subscribe for shares; the company agrees to such an application and advises the applicant by way of a letter of allotment; and the applicant pays for the shares against which the company issues the shares and provides the applicant with a share certificate or evidence thereof.
Share certificates are now rarely printed in hard copy; they are usually issued in soft copy, otherwise known as dematerialised share certificates.
The subscription price in the case of RLAs is typically lower than the market price at which the shares of the company then trade. Inasmuch as these rights (represented by the RLAs) are valuable (amounting to the difference between the subscription price applicable to the rights issue and the market price), shareholders who do not wish to participate in the rights issue can sell these rights at a price that is less or even equal to the difference, depending on investor appetite for the shares in question.
Company legislation regulates all of the steps outlined above.
The penultimate building block in the construction of regulation applicable to share offers is to distinguish between offers made to the public; offers made to the public that are exempt from requirements applicable to public offers; and offers that are not offers to the public.
A typical exemption is the so-called sophisticated investor exemption. This is where offers, for example those in excess of R100 000, are exempt from the public offer requirements, as one is presumably in such cases dealing with sophisticated investors who are quite capable of taking care of themselves in the absence of regulation.
The objective of making a distinction between public and other offers is simply to craft rules that are more onerous in cases where offers will be made to the public. It is in the public interest to do so. The latter is a term that is allied to the meaning of the public in law and is the domain of administrative lawyers, or public law lawyers as they are now better known.
Then, where offers will be made to the public, a distinction is usually drawn between offers by way of subscription and those by way of sale. The requirements applicable to the former are typically more onerous than those applicable to the latter.
The two deemed cases of subscription referred to earlier are deemed as such inasmuch as doing so makes these two cases subject to the more onerous provisions applicable to subscriptions; rather than for these two cases, notwithstanding their form, to be subject to the less onerous provisions applicable to the sale of shares.
The last building block in the construction of regulation applicable to offers is, of course, to take note of those cases where the Companies Act takes account of where the shares in question are listed or to be listed. So, in our case, one must take account of the listings requirements of the JSE applicable to offers.
One of the more nebulous concepts relating to offers is the meaning of persons who form part of the public and those who do not. The 2008 act contains a definition of an "offer to the public", as does the 1973 act. Nonetheless, what applies as an offer to the public still hinges on the meaning of the word "public".
The word is regrettably incapable of definition in these circumstances. The legislature could never define a word whose meaning ultimately is reliant on the ordinary grammatical meaning thereof.
It would be interesting to attempt an analysis of the word with reference to the public interest -hence the earlier reference to public law lawyers, who would have the required expertise to do so.
In the next column we'll compare the provisions of the 1973 act and the 2008 act in regard to offers.
Etienne Swanepoel is a partner at Webber Wentzel. The opinions expressed are his own
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