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The impact of the new Companies Act on debt capital market issuances

24 June 2011 Nathisha Maharaj, Director, Finance, Projects and Banking Practice, Cliffe Dekker Hofmeyr

New company laws in South Africa present a number of opportunities and challenges for the finance industry. The new Act will have an impact on almost all financing transactions and careful consideration must be given to the structuring of such transactions in future. One area of interest relates to the impact of the provisions of the new Act on debt capital market issuances.

In terms of the new Act, the definition of "securities" means "any shares, debentures or other instruments, irrespective of their form or title, issued or authorised to be issued by a profit company."

The Securities Services Act, 2004 defines "securities" as, among others, shares, stocks, notes, derivative instruments, bonds and debentures. Currently, the issue of bonds, notes and commercial paper is regulated by the Banks Act, 1990 (the Banks Act), in particular the commercial paper regulations published under Government Notice 2172 in Government Gazette 16167 of 14 December 1994 (Commercial Paper Regulations).

There are a number of specific aspects to consider in determining whether or not the provisions of the new Act impact on debt capital market issuances.

Public offers

Unlike the old Act, where the regulation of offers in the primary and secondary markets respectively are contained in separate chapters, the new Act deals with both primary and secondary offers in Chapter 4 of the new Act.

A primary offering is an offer to the public made by or on behalf of a company of securities to be issued by that company or its subsidiary. A secondary offering is defined as an offer for the sale to the public of any securities of a company or its subsidiary made by any person other than the company or its subsidiary.

The definition of an offer to the public remains a key definition. The meaning of "public" appears in the definition of "offer to the public". The public includes a section of the public, whether selected as clients of the issuer of the securities, or as holders of the issuer's securities, but it does not include an offer made in any of the circumstances contemplated in section 96 of the new Act.

Section 96 of the new Act sets out those offers which will not be regarded as offers to the public. Section 96, which is similar but not identical to section 144 of the old Act, provides that offers made to, among others:

banks;
authorised financial service providers;
financial institutions;
the Public Investment Corporation;
persons whose ordinary business is to deal in securities whether as principals or agents; or
persons or entities regulated by the Reserve Bank of South Africa will not be considered an offer to the public for purposes of the new Act.

In addition, an offer will not be considered an offer to the public if the total acquisition costs of the securities is equal to or greater than R100,000.

Debt capital market issuances

Debt capital market issuances and in particular commercial paper issuances (which includes bond issuances and note issuances in accordance with the Commercial Paper Regulations), refer to the acceptance of monies from the general public against the issue of, among others, bonds, notes and commercial paper. The issuance of commercial paper has been declared an activity which falls outside the meaning of "the business of the bank". The Banks Act prohibits any person from conducting the business of a bank unless that person is a public company and is registered as a bank in terms of the Banks Act. The phrase "the business of a bank" means, among other things, the acceptance of deposits from the general public as a regular feature of its business. In terms of the Commercial Paper Regulations, commercial paper may only be issued or transferred in minimum denominations equal to or greater than R1 million. As a result, only a select few entities, such as those entities referred to in section 96 of the new Act will be able to participate in an issue of commercial paper.

Due to the sizeable acquisition costs of commercial paper and the large investor requirement, the issue of commercial paper, in accordance with the Commercial Paper Regulations cannot be considered an offer to the public as defined in the new Act and will fall within the ambit of section 96 of the new Act, in particular section 96(1)(b). An issuer of a debt capital market instrument will continue to be bound by the Commercial Paper Regulations and will not be required to comply with the prospectus requirements as set out in the new Act.

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