Primary and secondary markets - equity and debt
In terms of the Companies Act, an offer of securities (including equity and debt securities) to the public can only be made by a South African public company or a foreign company (incorporated outside South Africa) that has lodged its constitution and details of the board of directors with the Commission.
An offer to the public must usually be accompanied by a prospectus that is registered with the relevant exchange, in the case of offerings of listed securities; or with the Commission, in the case of offerings of unlisted securities. If the document is a prospectus, then the JSE also requires proof that it has been registered with the Commission. Detailed disclosures must be made in the prospectus in accordance with the relevant provisions of the Companies Act and, in the case of listed securities, the Listings Requirements.
The ‘public’ includes any section of the public, whether selected as holders of the company’s securities, clients of the person issuing the prospectus concerned, or holders of any particular class of property. The latter phrase appears to be the legislature’s response to a criticised decision of the Supreme Court of Appeal in 2005, where the court held that an offer to subscribe for equity securities made by a listed company to shareholders of another listed company on a particular date was not an offer to the public. The Companies Act also contains safe harbours from ‘offers to the public’ so that offers can be made without a prospectus to, inter alia, persons whose ordinary business it is to deal in securities, or persons who fall into certain categories of institutional investors, or persons who are paying more than a prescribed amount (at present 1 million rand) for the securities to be acquired by them.
The Companies Act contains the requirement that a prospectus must contain all the information that an investor may reasonably require to assess the assets and liabilities, financial position, profits and losses, cash flow and prospects of the company in which a right or interest is to be acquired and to assess the securities being offered and rights attached to them. Permission to exclude information will, in the case of offers of listed securities, need to be obtained from the relevant exchange and, in the case of offers of unlisted securities, from the Commission. In addition, the Companies Act provides that the prospectus must comply with the detailed disclosure requirements set out in the Regulations to the Companies Act.
The Companies Act envisages three types of offerings: primary, secondary and initial public offerings (IPOs). These terms are specifically defined. In a primary offering, the offer is made by the issuer itself or a member of the same group of companies. In a secondary offering, the offer is made for investors to purchase (not subscribe for) securities already in issue from a seller that is not the issuer or a subsidiary of the issuer. An IPO is an offering (primary or secondary) by a company whose shares have never been offered to the public before or, where they have been offered before, all of those that were offered have been reacquired by the issuer. The securities offered under an IPO need not be listed. In this article, these terms will only be used in the manner defined in the Companies Act where specifically mentioned.
Primary offers - equity
Listings and additional listings of equity securities are subject to the provisions of the Listings Requirements and JSE approval. All applications for listing are to be submitted to the JSE through a sponsor. In accordance with the Listings Requirements, applicants seeking to list any securities are required to submit a number of documents to the JSE for review. Comprehensive pre-listing statements must be prepared and distributed. Sometimes a circular, rather than a pre-listing statement, must be prepared and distributed. A circular has less comprehensive disclosure requirements than a pre-listing statement. In practice, if a prospectus is required in terms of the Companies Act, it will be the same document as the pre-listing statement or circular and will need to be registered with the relevant exchange. The content requirements of a pre-listing statement and prospectus are largely the same. An announcement containing an abridged pre-listing statement must also be published. Depending on which market on the JSE the proposed listing will occur, certain profit history and public shareholding is required in respect of the issuer.
Primary offerings of securities to the public include IPOs, issues for cash or rights offers.
Historically in South Africa, an IPO involved an offer to the public to take up securities in a company that is not yet listed but which will be listed if the offer is successful. In terms of the Companies Act, an IPO is a more specific concept (as noted above) and will always require a prospectus (which will be lodged with the Commission in the case of unlisted securities or with the relevant exchange in the case of listed securities).
The JSE recognises a non-pre-emptive primary offering, being an issue of equity securities (or securities convertible into equity) for cash. The issuer can make such offer on a non-pre-emptive basis if the terms of the issue are:
- Specifically approved by 75 per cent of equity securities holders present and voting in a general meeting in respect of that particular issue excluding any parties and their associates participating in the issue (known as a ‘specific issue for cash’). Full details of the proposed issue of equity securities must be included in a circular to shareholders convening the meeting to waive their pre-emptive rights and for issues to related parties at a discount, and the board must obtain a fairness opinion.
- Alternatively, approved under a general authority by 75 per cent of equity securities holders present and voting at a general meeting by their giving of a renewable mandate to the directors of the issuer, to issue up to 15 per cent of equity securities for cash (although, in practice, shareholders will often only approve a lower percentage) subject to the Listings Requirements and to any other restrictions set out in the mandate (known as a ‘general issue for cash’). In a general issue of shares for cash, the equity securities must be issued to public shareholders and not to related parties (broadly defined to include, among others, shareholders holding at least 10 per cent of the equity securities, directors and connected persons) and may not be issued at a discount of more than 10 per cent. No regulatory filings are required when the authority for a general issue of shares is sought but announcements are required if shares are issued in terms of such authority.
Rights offers are offerings by companies to their existing security holders in terms of which such holders have a right to subscribe for additional securities in proportion to their existing holding. The subscription price is usually below market price and accordingly the right to subscribe at that price may have value and may be traded. No prospectus is required for a rights offer (as this falls under one of the safe harbours), but a circular is required to be sent to existing security holders in terms of the Listings Requirements and a more detailed pre-listing statement (known as revised listings particulars) where the dilution will exceed 50 per cent. The Companies Act also requires the rights offer circular to contain prescribed information. Renounceable letters of allocation, conferring rights on the recipients to either subscribe for securities in terms of the rights offer or renounce and cede their subscription rights to existing security holders or third parties, must be approved by the JSE and conform to the applicable provisions of the Listings Requirements, in the case of listed securities; and the Commission and conform to the provisions of the Companies Act, in the case of unlisted companies.
The Companies Act, subject to the relevant company’s memorandum of incorporation (MOI), gives the board the authority to issue shares provided that (in the case of private companies) it is done on a pre-emptive basis. In the case of listed public companies, the Listings Requirements typically require that the MOI contain a provision requiring all issues of shares to be ordinarily on a pro-rata pre-emptive basis, except in certain limited circumstances (such as for the acquisition of assets) or unless otherwise approved by shareholders (eg, specific authority to issue shares for cash). However, in the case where any primary offer results in the voting rights of a particular class of shares issued or to be issued pursuant to the transaction being equal to or exceeding 30 per cent of the voting rights in respect of all the shares of that class held by shareholders immediately before the transaction, the issue of those shares will require approval by shareholders holding 75 per cent of the voting rights exercisable in that meeting in respect of that resolution (even if that issue is done on a pre-emptive basis).
Secondary offers - equity
Where a party acting independently of a company makes an offer to the public for the acquisition of securities in that company, the offeror is unlikely to be in a position to meet the requirements for the issue of a prospectus because such offeror is not privy to all the information required to be stated in the prospectus regarding the company. In these circumstances, the offeror is required, in terms of the Companies Act, to prepare a written statement, which must set out certain prescribed minimum information concerning the offeror, the securities offered, and the company concerned. If the offer is accompanied by a prospectus (eg, because there is a combined primary and secondary offering), then no written statement is required.
A copy of the written statement must be lodged with the Commission for registration before it is issued, distributed or published. No written statement is permitted to be issued, distributed or published more than three months after the date of registration thereof.
Where the securities to which the offer relates are or will be listed on the JSE or in respect of which permission to deal therein has been granted by the JSE, no such written statement is required and the person making the offer must state that fact in writing in the offer. Further, no written statement is required if the parties to whom the securities are offered or the material is published are persons whose ordinary business or part of whose ordinary business it is to deal in shares, whether as principals or agents, or who are at the time of the offer the holders of shares of the same company.
Both primary and secondary offerings are subject to the same safe harbours in relation to the categories of person to whom the offer can be made without it being considered to be an offer to the public.
Generally, there are no disclosure requirements under the Listings Requirements applicable to secondary offerings of equity securities.
Primary offers - debt
The issue of debt securities to the public may necessitate the registration of a prospectus in accordance with the provisions of the Companies Act where such an issue constitutes an ‘offer to the public’ (see ‘Primary and secondary markets - equity and debt’ above).
Each issue of debt securities, regardless of whether such issue constitutes an ‘offer to the public’ as contemplated in the Companies Act, will, unless specifically exempted, have to comply with the provisions of the CP Regulations and, in the case of securitisations, the Securitisation Regulations. The CP Regulations mainly impose additional disclosure obligations on an issuer over and above the disclosures required under the Companies Act (if applicable) and Debt Listings Requirements. The CP Regulations also provide directions as to who can issue debt securities, the denominations that an issue of debt securities can be issued in and any restrictions placed on the purpose for which monies raised under an issue of debt securities may be applied.
Debt securities that are listed on the JSE will also have to comply with the Debt Listings Requirements.
Secondary offers - debt
In the same manner that secondary public offerings of equity securities require only a written statement under the provisions of the Companies Act rather than a prospectus, secondary public offerings of debt securities require only a written statement and do not require a prospectus. If the debt securities are listed, a written statement is not required either.
There are no disclosure requirements under the Debt Listings Requirements applicable to secondary offerings of debt securities.
Primary offer - inward listings by foreign entities
A foreign entity wishing to list securities on the JSE requires prior FSD approval. To the extent that such foreign entity is conducting business in South Africa, it may be required to register as an external company. Under the Companies Act, making or offering of securities should not, in and of itself, constitute ‘conducting business’.
Foreign companies with an inward listing are allowed to use shares as acquisition currency in South Africa and to include South African shareholders in a rights offer. As a result of recent relaxations of South Africa’s exchange control restrictions, all South African residents’ shareholdings in inward secondary listed securities are treated as the holdings of South African assets without any distinction between institutional and non-institutional investors. South African residents are now allowed to accept inwardly listed shares as acquisition currency in respect of acquisition issues and to exercise their subscription rights in terms of a rights offer.
A foreign entity with an inward listing that raises capital in South Africa must open a special bank account in South Africa for the duration of the listing for the purposes of receiving and recording the capital raised. The capital raised must be deployed as soon as possible but not later than one month after being raised and recorded in the special bank account. There are no additional registrations or filing processes for foreign companies raising capital in South Africa (over and above the prospectus or placing document required by any local exchange) other than the requirement to file its constitution and board composition with the Commission.
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