Cash flush companies proposing to make distributions to shareholders
It is trite that where the board of a company wishes to make any distribution to its shareholders the board will be required, prior to the company making such distribution, to acknowledge, by way of a resolution, that it applied the solvency and liquidity test in terms of Section 4 of the Companies Act, 2008 (“Companies Act”) and reasonably concluded that the company will satisfy the solvency and liquidity test immediately after completing the distribution.
However, it should be noted that where a company wishes to distribute to its diverse shareholders any asset (whether in the form of cash or otherwise) that is the only or greater part of its asset base, the provisions of Section 112 of the Companies Act will similarly apply to such proposed distribution.
In a nutshell, Section 112 of the Companies Act provides that a company may not dispose of all or the greater part of its assets or undertakings unless (i) the disposal has been approved by its shareholders by way of a special resolution and (ii) the company has satisfied the provisions of Section 115 of the Companies Act. The effect of the foregoing provisions is that, in addition to the adoption of a resolution acknowledging the application of the solvency and liquidity test and approving the distribution, the board will have to obtain the requisite shareholder approval prior to the implementation of the distribution.
If a company proposes to make a distribution of the greater part of its assets or undertakings to its shareholders and, at the time it proposes to make the distribution, it qualifies as a regulated company (i.e. a public company, state owned company or a private company of which 10% or more of its issued share capital has been transferred other than between related parties within a period of 24 months prior to the distribution), such distribution will qualify as an “affected transaction” and the company. In such case, unless the company is exempted from complying with the Takeover Regulations by the Takeover Regulation Panel, it will have to comply with the applicable provisions of the Takeover Regulations.
In terms of Section 119(6) of the Companies Act, the Takeover Regulation Panel may wholly or partially, and with or without conditions, exempt an offeror to an affected transaction from the application of any provision of Parts B and C of the Companies Act and the Takeover Regulations, if:
there is no reasonable potential of the affected transaction prejudicing the interests of any existing holder of a regulated company’s securities;
the cost of compliance is disproportionate relative to the value of the affected transaction; or
doing so is otherwise reasonable and justifiable in the circumstances having regard to the principles of Parts B and C of the Companies Act and the Takeover Regulations.
The Takeover Regulation Panel has on numerous occasions taken a conservative view in granting dispensation from complying with the Takeover Regulations (particularly where the regulated company is a public company), which has resulted in many companies merely complying with the Takeover Regulations, notwithstanding the factual circumstances.
This poses an unnecessary regulatory challenge for a company that generates cash which exceeds the value of its operating assets necessary to run the business if the board of such company decides to distribute all of the cash generated to its shareholders. That being said, the board of a cash flush company proposing to make a substantial distribution of its surplus cash assets should carefully consider whether or not the proposed transaction will constitute an “affected transaction” before finalising any decision to that effect.