Hostile takeovers are as close to Hollywood-worthy action and drama as M&A gets. They usually involve a bidder seeking control over a listed company without the support of the target’s board, with a recent example being the Netflix-Paramount-Warner Bros. matter. In this article, we consider whether a similar high-stakes transaction could occur in South Africa.
Legally possible, but far from easy
South African law does not prohibit hostile takeovers and they are theoretically possible. However, there are limited viable mechanisms to effect a hostile takeover, particularly one where 100% of the shares are successfully acquired.
A scheme of arrangement (the preferred route in friendly arrangements) may only be proposed to the shareholders by the target board, effectively taking this option off the table for the hostile bidder. A hostile bidder is therefore left with one principal tool: a general offer made directly to shareholders. While this allows the hostile bidder to bypass the target board, success remains heavily dependent on the actions of the board, alongside other uncertainties.
The board’s defences
Once a firm offer is made, the target board has a duty to adopt a passive stance and allow shareholders to consider the offer on its merits. This prevents the board from outright frustrating the offer. However, it is not a case of absolute passivity. The board retains several lawful defensive measures, including:
•encouraging opposition of the offer;
•soliciting a more welcome, competing offer;
•providing critical commentary on the merits of the offer, including price; and
•ensuring strict compliance with the letter of the law and all regulatory requirements.
These measures can stifle even the most well-planned of hostile bids.
Timing mismatches
A significant challenge faced by a hostile bidder is the misalignment between the competition law approval process and the takeover timetable.
According to the Takeover Regulations, a hostile bidder must declare an offer unconditional as to acceptances within 45 business days of the offer’s opening date. In other words, it must declare that it has received sufficient acceptances for it to proceed. However, if a general offer does not become wholly unconditional within 65 business days of the opening date, shareholders are entitled to withdraw their acceptances. In contrast, merger approvals under competition law often take far longer than this. The full process, often including frequent extensions, can take months.
This mismatch creates fundamental transaction uncertainty. Because shareholders can withdraw acceptances while awaiting competition approval, a hostile bidder cannot gauge its offer’s success before the deal goes fully unconditional.
In a hostile environment, where the target board may create additional hurdles for the competition process, including being lawfully obstructive in the provision of necessary information, delays and uncertainty persist.
Impediments on garnering support
Another key constraint lies in the strict confidentiality regime governing takeover activity. Before a firm intention announcement is made, negotiations between the bidder and the target board remain confidential. Even thereafter, the bidder’s ability to engage directly with shareholders is limited. While guidelines permit approach to a limited number of major shareholders under controlled conditions, broader engagement is restricted and subject to non-disclosure requirements and market abuse rules.
This creates a practical challenge, as a hostile bidder has limited opportunity to build shareholder support or publicly advocate for the transaction. Institutional investors may be reluctant to engage early, as doing so could restrict their trading in the target’s shares.
Added complexity in share-based offers
A hostile bidder may offer shares in itself as part of the purchase consideration, but such transactions may trigger additional corporate and regulatory requirements, including shareholder approvals, stock exchange disclosures and, in some cases, the preparation of a prospectus. These requirements can introduce further delays and increase execution risk, particularly where the target board limits access to target company information.
A cash offer is accordingly easier in the hostile context, but requires being able to raise sufficient capital, a challenging requirement in current economic conditions.
The challenge of achieving 100%
Often, the ultimate objective of a takeover is acquiring 100% of the shares – a difficult outcome to achieve if a scheme of arrangement is unavailable.
A bidder needs to acquire at least 90% of the voting rights (excluding those it may already hold) to initiate a “squeeze-out” of minority shareholders and acquire full ownership. Larger shareholders often delay accepting an offer without a certain prospect of success, making this threshold objectively challenging in a hostile environment. As mentioned, acceptances may also be withdrawn if the regulatory approval process drags on.
If a bidder falls short of the squeeze-out threshold, it will not achieve its full ownership goal. While it may consider acquiring a lesser number and then trying again, it is tough to achieve a squeeze-out on the second bite. The hostile bidder’s own shares in the target are excluded from the calculation of the squeeze-out threshold, making it difficult to obtain sufficient take up from the remaining shareholders to hit the 90% threshold.
If it does not acquire 100% of the shares, the bidder must deal with having minority co-shareholders, and faces practical difficulties and inconveniences in fully integrating with the target: often an unappealing prospect.
Will we ever see a hostile takeover in South Africa?
It is easy to see why hostile takeovers remain rare and seldomly successful in South Africa. The regulatory framework places significant practical constraints on unsolicited bidders; constraints which become near impossible to overcome with a target board that actively opposes the transaction at every procedural stage. Should the regulatory toil be overcome, the hostile bidder also holds no certainty in achieving the desired outcome of its bid.
While possible, hostile takeovers are far from easy. Any bidder may be better served by saving the hostilities and focusing on getting the target board on board.
Ian Hayes is Practice Head, Yaniv Kleitman, is a Director and Keagan Hyslop is an Associate | Corporate & Commercial at Cliffe Dekker Hofmeyr
This article first appeared in DealMakers, SA’s quarterly M&A publication.
DealMakers is SA’s M&A publication.
www.dealmakerssouthafrica.com
