SOME POINTS FOR DIRECTORS TO BEAR IN MIND WHEN DISPOSING OF UNWANTED COMPANIES – BY FRANCOIS TERBLANCHE

Asset or Share Sale?
The first legal decision which needs to be made is whether the corporate entity itself is to be sold or whether the entity’s business is to be sold out of the entity. Selling a business entails a more extensive implementation process than is the case when simply selling the shares in the “unwanted” company. All of the business’ assets will have to be transferred to the buyer in a legally recognised manner. The buyer may prefer to buy the business, as opposed to its equity, as it will then take over only the agreed assets and liabilities. That obviously reduces its risk of being saddled with unwanted or unknown liabilities. The seller may prefer to sell the company’s equity, as the implementation process is simpler and speedier.
 
The ultimate decision whether to sell the business or its equity is normally also influenced by factors such as the preference of the willing and able buyer eventually identified and tax considerations. The real tax rate of selling the business or its equity needs to be determined and considered. So too the availability and usability of any assessed tax losses in the target company. On a practical level, it may be important to consider whether the business is a contract-intensive one, as the assignment of the various contracts from the seller to the buyer can be a time-consuming and laborious process. The transferability of any regulatory licences or consents required to conduct the business may also determine whether the business or the equity is ultimately disposed of.
 
Competition Approval
Depending on the South Afican assets and turnover figures of the target company and the buyer’s group, the disposal may also require the prior approval of the Competition Commission or Tribunal. The need to obtain this approval impacts on the timing of the transaction, since the parties may not implement the transaction until they have obtained the required approval. The transaction may require such an approval even though only some of the company’s assets are being sold. It is advisable to obtain specialist advice on the need for and timing of the approval, as the penalties for the implementation of an unauthorised transaction can be severe.
 
Exchange Control
If one of the parties is not a resident of South Africa, the approval of the Exchange Control Department of the South African Reserve Bank will normally be required for the transaction. It is sensible to obtain specialist advice on the prospects of obtaining the approval sooner rather than later in the negotiation process, as significant wasted legal and other fees can be incurred before the parties obtain an indication that the required exchange control approval will not be granted.
 
Insolvency Notice[1]
The seller of a business may be placed under pressure to publish a notice under section 34 of the Insolvency Act. 24 of 1936. The buyer’s exposure if a notice is not published is that if the seller is wound up within 6 months of the transfer of the business, the sale becomes voidable as against the seller’s liquidator and the creditors. This could significantly prejudice the innocent purchaser. However, publishing the notice prejudices the seller, since all liquidated debts of the seller in connection with the business automatically become due and payable once the notice is published.
 
Employment Considerations[2]
The sale of a business as a going concern has a number of important employment law consequences. 
 
Firstly, the contracts of employment of the transferring employees are automatically transferred to the purchaser. The purchaser must employ them on the same, or at least on the whole not less favourable, terms and conditions of employment to their existing ones.
 
Secondly, all the rights and obligations between the seller and the employees at the time of the transfer continue in force between the purchaser and the employees.
 
 Thirdly, anything done by the seller in relation to the transferring employees before the transfer of the business (e.g. dismissals or the commission of an unfair labour practice) is deemed to have been done by the purchaser. The purchaser will normally require an indemnity from the seller in this regard.
 
 
Fourthly, the transfer does not interrupt the transferring employees’ continuity of employment and their employment continues with the purchaser as with the seller.
 
It is, however, legally permissible for the seller and/or the purchaser to agree with the transferring employees that these employment law consequences will not apply.
 
Apart from these employment law consequences, section 197 of the Labour Relations Act imposes certain additional obligations on the seller and purchaser of a business and the parties would be well-advised to obtain comprehensive legal advice in this regard. Furthermore, the seller is, generally speaking, not permitted to retrench employees in anticipation of the sale. The purchaser should also be careful in retrenching employees post-sale, as this could potentially put it at risk. This is because if the reason for a dismissal is the transfer or a reason related to a transfer, the dismissal is regarded as automatically unfair.
 
Conclusion
Disposing of an unwanted company triggers the same pitfalls as disposing a  flagship one, and the disposer will be well advised to pay proper attention to the manner in which the transaction is legally regulated.

[1] With input from Claire Van Zuylen

[2] With input from Talita Laubscher