(A re-post based on my previous article titled “DOING BUSINESS IN AN
ECONOMY COLLAPSING UNDER THE COVID-19 PANDEMIC)

In the very short space of time between birth and death (generally referred to as “life”) things often do go wrong and in many cases change becomes inevitable and unavoidable. The Covid- 19 pandemic is demonstrably one catastrophe which brings with it many physical and social changes to what we have hitherto known or experienced. And we are rightfully concerned about the future, both at a social relationship level and in our businesses.

Author Christopher J Roederer “Wrongfully Conceiving Wrongful Conception; Distributive v Corrective Justice” 2001 SALJ 347, writing on a completely different aspect had the following to say about change and reality :-

Sometimes reality does not suit us; we are often confronted with painful events that do not easily fit into our current mental  framework. In some cases we are able to face reality to reassess our values and priorities, and even to change our very selves when confronted with such events. Yet we often manage to avoid this
confrontation by reassessing reality, by rationalizing it away or by cutting it down – making the mountain into a manageable molehill so it will fit into our familiar categories, values, beliefs and priorities. Sometimes this strategy works, at least temporarily; but often reality persists in struggling and straining against the categories that confine it like a badly tailored suit on a growing young man. The pain and discomfort multiply until either the seams burst or one is left disabled or as is most probably desirable, one accepts that change has come and let go of the past with its values, beliefs and priorities. [Quotation modified]

The current economic environment and the state of businesses in South Africa, if not in the entire world, can rightly be described as collapsing under the reality of the current Covid -19 Pandemic and as I said above, we rightly entitled to be concerned and uncertain.

This collapse and disintegration however presents an opportunity to reorganise, restructure (and even to exit) our current arrangements both at a social level and in business according to our personal and organizational circumstances and requirements. The reality of the current pandemic is therefore not and should not be viewed as spelling doom.

In my earlier article I briefly discussed, from a business perspective, how the current state of disaster presents an opportunity for 'mergers or amalgamations' as a traditional mechanism for restructuring especially in a collapsing economy. I did emphasise however that this is not a one-fit all solution because different businesses are faced with different challenges and hence require different solutions. It is advisable right from the onset that clients must seek competent legal advice and avoid a DIY approach to legal challenges. Myself as a lawyer and many other lawyers are available to render much needed corporate legal support when sourced and briefed.

Hereunder I repost the same article for further reflection.

THE CONCEPT OF MERGER / AMALGAMATION.

A merger or amalgamation merely entails two or more corporate entities merging or amalgamating into one combined entity or entities. The merging entities have wide latitude to restructure the merger transaction in a manner best suiting their peculiar requirements and circumstances.

Traditionally mergers merely entailed shares in the merging companies being converted into shares in the merged entity.

There may however be other forms for consideration in view of the peculiar requirements of the target and targeting entities like outright squeeze out mechanisms through cash payment to the merging entities.

BASIC PROCEDURE & REQUIREMENTS.
The procedure in a nutshell requires:-

1. conclusion of a merger agreement,
2. That the surviving entity will satisfy the solvency and liquidity tests after
   the merger,
3. Notice to all known creditors of the companies involved,
4. Approval of the transaction by shareholders of the merging entities.

DISSENTING MINORITY PROTECTION.

Like in all transactions it is unlikely that all concerned shareholders and stakeholders will approve the transaction. There will necessarily be dissenting minority shareholders requiring legal protection and the law provides, in the event of a dissent as follows:-

1. In the event of shareholders having 15 % + dissenting, then court approval is required before implementation of the transaction.
2. At any rate any dissenting shareholder, even not passing the 15 % + threshold may apply to court for review of the intended transaction.
   NB. However the court will only interfere and set aside the resolution to merge if it determines that the resolution is 'manifestly unfair to any class of holders of the company's securities or in the event of a significant and material procedural irregularity'
   The bar for judicial review and set aside of the transaction is set high because the basic premise of company law is that company decisions are taken by majority rule in the boardroom and not the courtroom (see Foss v Harbottle (1843) 67ER 189) which underscores the “majority rule” in company administration).
3. Dissenting minority shareholders may require the company to buy their shares at fair value (as agreed or set by the court).

CREDITOR PROTECTION.

One of the requirements for a lawful merger is that creditors of all the parties must be notified of the intended merger.

A creditor concerned about material prejudice is entitled to apply to court for a review of the transaction.

Again the court will interfere in very limited circumstances and where material prejudice is actually shown. The court remains mindful of the premise that company decisions are taken by majority rule in boardrooms aforesaid.

It is also possible to work in a further additional creditor protection mechanism which will entitle a creditor to demand immediate payment of any liquidated claim which it may have against the company even if such claim would only become due and payable at some future date. (a position similar to what is envisaged by the South African Insolvency Act, 1936)

NB In the absence of creditor or shareholder objection the merger transaction approved by the majority of the company will proceed.

In the face of the current economic challenge it is really worth considering restructuring and re-organizing in order to withstand the economic challenges (and more specifically to retain or recoup value)

Companies intending to go this route must however seek competent legal advice and guidance in the implementation of such transactions. Similarly, minority shareholders in companies going this route must seek competent legal advice to protect their interest, however small their shareholding may be.

At VYS-M Consulting, we wish all our clients well during these
unprecedented and difficult times and, till we physically meet again, we
remain at your virtual service in navigating these turbulent waters.

By Counsel : Adv I Mureriwa.
Advocate of the Superior Courts of South Africa
Attorney of the Superior Courts of Zimbabwe
+27 71 151 9000
advmureriwa@yahoo.com
PRETORIA.