The acquisition of a business - is a statutory merger in terms of section 113 of the Companies Act 71 of 2008 preferable to a common law sale?

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University of Cape Town

Two or more companies may decide that their businesses should be combined for a number of reasons. This may, for example, be done in order for the companies to have access to new markets, to increase their market share, to increase their profitability by reducing the inefficiencies involved in the running of two or more companies in the same business area or to acquire technology, infrastructure, expertise and/or skill in new practice areas. Before the advent of the Companies Act 71 of 2008 South African law did not make provision for 'mergers' as that term is understood in many other jurisdictions. South African law did not recognise any mechanism by which one entity could be combined with another in terms of a statutory process, also referred to as a 'consolidation' in certain jurisdictions. One of the most significant changes proposed for the Companies Act was to make provision for a legal process by which companies could be combined. The concept of the amalgamation or merger of companies was accordingly introduced into our law, so as to enhance the efficiency of business combinations and to promote flexibility in this regard. It is significant that the statutory process of amalgamating or merging companies was adopted in addition to the existing forms of business combinations and/or acquisitions, such as the sale of a business as a going concern, the common law scheme of arrangement and offers to acquire the shares and/or other securities in a company. Companies therefore now have at their disposal an additional mechanism by which to engage in business combinations and/or acquisitions, and are required to consider in each proposed transaction the relevant circumstances to determine which mechanism will be most effective in giving effect to that transaction. This is in line with the move in the Companies Act towards self-regulation and the object of the Companies Act to encourage entrepreneurship. The main purpose of this work is to compare the requirements for, manner of implementation and consequences of an amalgamation or merger as contemplated in the Companies Act, referred to herein as a 'statutory merger', with that of the common law sale of a business.