CHECKLIST FOR SHARE TRANSFER TRANSACTIONS DURING RESTRUCTURINGS, REORGANISATIONS, AND MERGERS AND ACQUISITIONS
Life and matter all around us are composed of different building blocks. In biology, we learn that a cell is the single most unit of life. Depending on its organization and composition, you can have a single-celled being for instance bacteria or a multi-celled organism such as a human. In physics and chemistry, we understand that an atom is the smallest unit of matter. It can be organized and arranged in a variety of ways to create different products or attain certain results.
The share is to the company what the cell and atom are to life and matter. A share is the single most unit of proprietorship or right of action, entitling its owner to a certain interest in a company, its assets and dividends. Using a share, companies can evolve, grow and survive. Some may decide to join forces with other companies in a merger; or purchase other businesses in an acquisition; reorganize the company to avoid insolvency; or simply restructure the set-up of several companies within a group or otherwise.
To that end, this paper will run through some of the general and fundamental points to consider when entering into share transfer transactions during restructurings, reorganizations, and mergers and acquisitions. It will do so by briefly describing the nature of a share; definition of restructuring; reorganization; and mergers and acquisitions; and provide a checklist of the things to consider.
- Nature of a Share
As earlier on indicated, a share is essentially a bundle of rights that one has in a company: the right to share in the profits of the company; its assets; decisions, etc. The corresponding duties that come with holding shares are mainly to stand by the Memorandum and Articles of Association (Memarts). The Memarts are essentially the Constitution of the Company. They, subject to the Companies Act and any other relevant legislation, contain the rules and regulations that govern all of the affairs of the company. From the decision-making process, through sharing of profits, all the way to the dissolution of the company. They further contain provisions on shares and shareholding. Shares can be divided into different classes for instance ordinary and preferential shares. They are attached with proprietary rights and can therefore be used as security for loans under the Companies Act and Personal Property Securities Act, and they can be sold, transferred, or otherwise disposed of as personal or moveable property. This ability to be transferred or otherwise disposed of is the bedrock of this article
- Restructuring, Reorganization and Mergers and Acquisitions Defined
In separate publications, we looked at these three in a bit more detail. Restructuring and reorganization (though somewhat conceptually differently) are similar and will for the sake of simplicity be used interchangeably in this paper. They can be defined as the “process through which the financial well-being and viability of a debtor’s business may be restored so that the business can continue to operate, through means that may include debt forgiveness, debt rescheduling, debt equity conversions and sale of the business (or parts of it) as a going concern.” Through Restructuring and/or Reorganization, shares can be valued and a creditor can then choose to convert their debt into equity or shareholding. In essence, instead of liquidating or winding-up the company, the creditor can simply turn into an owner or member of the company. Alternatively, part of the company can be sold as a going concern to cover the debt or part of it.
On the other hand, Mergers and Acquisitions are basically the joining or combining of two or more companies into one or a wholly new entity altogether. Shares can be swapped, combined, sold or transferred amongst the different entities or simply rearranged to suit a particular purpose.
- The Checklist
- Compliance with Memarts and Legislation
It is imperative that before transferring shares, the provisions relating to the transferability of shares in the Memarts must be looked at. There must be assurance for example that the shares are not subject to any rights of first refusal; or restrictions on transfer of shares under the Memarts or any other agreements e.g. shareholders’ agreements and that the persons transferring the shares have requisite authority etc.
It is also essential to know whether there are any encumbrances or third-party interests on the shares for instance beneficiaries under a trust or security interests or debentures and of course, all of the transfers must not offend any laws.
The shares must be valued. They can be valued internally within the organization or by using external auditors. The valuation determines the price and/or amount that will be paid or exchanged for the goods. It is also required by tax authorities when assessing tax payable.
A list of all of the assets of the companies and how they will be dealt with. Again, if there are any encumbrances on them such as charges, mortgages, security interests etc.
These include leases, sub-leases, partnership agreements, shareholder’s agreements and any other agreements that will affect the shares whether in value or otherwise.
Whether pending or on-going litigation, it is necessary to find out the value and type of litigation. A company can, for example, be subject to insolvency proceedings before a court. Such proceedings would ultimately result in or affect control of shares in the company.
When structuring the transaction, regard must be had to its tax implications. The goal should ultimately be finding means of avoiding taxes. For instance, transferring at par or nominal value for affiliated companies or companies within the same group.
Of utmost importance is to ensure that the transaction does not go against statute. The primary pieces of legislation to look out for are: The Republic of Malawi (Constitution) Act, 1994, Companies Act; Insolvency Act; and Competition and Fair Trading Act. Other pieces of legislation may be looked at contingent upon the industry and sector you are dealing with.
- The Share Purchase Agreement
A transfer of shares rises and falls on the Share Purchase Agreement (SPA). It sets out the terms of the transfer for instance the consideration; what happens to the litigation; contracts; assets; taxes if any etc.
In general, shares are a small but useful business tool. They can be structured and arranged in a variety of ways to ensure that companies grow and sustain their business. This article looked at some of the things to consider when undertaking share transfers. The list is in no way exhaustive.
 Cilliers and Benade, Corporate Law, Third Edition, Durban (2000), at page 224.