The question of whether the mandatory offer requirement is triggered in circumstances where the memorandum of incorporation (MOI) of the regulated company places restrictions on the voting rights attached to the acquired shares arose in the much-publicised Multichoice Group Limited (MCG)/Groupe Canal + S.A. (Canal +) matter. In this case, the Takeover Regulation Panel (TRP) had to decide on the applicability of section 123 when Canal +’s holding of ordinary shares in MCG rose above 35% as a result of several acquisitions of MCG shares. The nuance here was that MCG’s MOI provides for limitations on the voting rights that may be exercised by foreign shareholders, in order to avoid a breach of the 20% foreign control restriction in telecoms legislation.

In terms of section 123 of the Companies Act, the test for the triggering of a mandatory offer is as follows: (i) there must be an acquisition of a beneficial interest in the voting securities of a regulated company; (ii) before that acquisition, the acquirer must have been able to exercise less than 35% of the voting rights attached to the securities of the regulated company; and (iii) as a result of the acquisition, the acquirer is subsequently able to exercise at least 35% of the voting rights attached to the securities of the regulated company.

Article 40 of the MOI

Canal + contended that despite it holding over 35% of the MCG shares “on paper”, it was not required to make a mandatory offer because, factually, it is not able to exercise 35% or more of the voting rights attached to MCG’s securities due to the limitations in article 40 of MCG’s MOI. Those limitations on voting rights have been included in the MOI as MCG’s chosen means of ensuring its compliance with the statutory restrictions imposed by the Electronic Communications Act 36 of 2005 (ECA).

More specifically, article 40.1.1 of the MCG MOI provides, inter alia, that if the number of MCG shares held by foreign shareholders exceeds the “Foreign Control Restriction” then limitations are placed on the foreign shareholders’ rights as follows:

“… the Foreign shareholders’ ability to exercise voting rights attached to each ordinary share held by such Foreign shareholders shall be limited such that (i) the ordinary shares held by Foreign shareholders do not, in aggregate, carry voting rights in excess of the Foreign Control Restriction, and (ii) the total number of voting rights cast by or on behalf of Foreign shareholders at such shareholders’ meeting do not exceed the Foreign Control Restriction. In the event that the Foreign shareholders’ voting rights are limited as contemplated above, then, in such circumstances only, the voting rights attached to each ordinary share held by South African shareholders shall be consequently increased proportionately in accordance with each South African shareholder’s shareholding.”

“Foreign shareholders”, in this case, may be loosely said to be non-South African persons, including entities controlled by non-South Africans. Furthermore, the “Foreign Control Restriction” is defined in article 1.1.13 of the MOI to mean:

 “…as set out in section 64(1) of the ECA, the restriction and limitation placed on the ability of a foreigner to directly or indirectly: (i) exercise control over a holder of a commercial broadcasting service licence in terms of the ECA; and (ii) have a financial interest or an interest in voting shares or paid-up capital in a holder of a commercial broadcasting service licence in terms of the ECA, from time to time, which restriction and limitation is currently placed at 20% (twenty percent).”

Applicable limitations

This raises an interesting debate around categorising MOI limitations as being “inherent/intrinsic to the class rights” versus limitations which are merely “external” to the shares and are applicable only to certain shareholders under certain circumstances. To be clear, this matter turned largely on the interpretation of the particular provisions of the MOI in question. The TRP undertook a considered analysis of article 40 of the MCG MOI and took the view that it was only triggered when both the “circumstances” and the need to ensure compliance with the foreign control restrictions in section 64 of the ECA, are present. Therefore, in the TRP’s view a blanket restriction on the part of any foreign shareholder to exercise their shares beyond the limits imposed in article 40 of the MOI, is unfounded.

The TRP noted that article 5.1 of the MOI provides that “the Company is authorised to issue 1,000,000,000 ordinary shares of no par value, each of which rank pari passu in all respects”, and section 37(2) of the Companies Act provides that each issued share of a company, regardless of its class, has associated with it one general voting right, except to the extent provided otherwise by the Companies Act or the preferences, rights, limitations and other terms determined by or in terms of the company’s MOI in accordance with section 36.

The TRP’s ruling

Ultimately, the TRP noted that on its reading of article 40 of the MOI, the provision does not create an intrinsic limitation in the rights attaching to the MCG ordinary shares: Each ordinary share in MCG has a general right to vote attaching to the share, except to the extent that the MCG board of directors, acting under the power envisaged in article 40, may scale back a shareholder’s voting rights or power at a shareholders’ meeting in circumstances contemplated in article 40 (i.e. in circumstances where the “Foreign Control Restrictions”, as defined, are likely to be exceeded should all shareholders (specifically foreign shareholders) be allowed to exercise their voting rights in accordance with the ordinary voting rights/powers attaching to their respective individual shares. Key to the TRP’s ruling was that it was common cause that MCG had other significant “non-ECA regulated” businesses, other than its subsidiaries that are ICASA licensees. Therefore, despite article 40, any MCG shareholder, even a foreign shareholder such as Canal +, could in theory exercise full voting rights at shareholder meetings generally when it comes to those non-ECA businesses.

As such, the TRP held that the Canal + argument that a foreign shareholder can never exercise full voting rights which exceed the threshold contemplated in the foreign control restrictions, does not hold. After all, the article does not provide, in plain text, that a foreign shareholder’s voting rights are restricted to 20%, but rather foreshadows this as a possibility if and when the ECA could be breached. Put another way, article 40 floats in and out of the picture depending on the subject matter of the MCG shareholders’ resolution, and is not a limitation that is intrinsic to the shares. The TRP did not, however, delve into specific examples of the kinds of matters that, on its argument, would trigger the applicability of article 40 and those which would not (an intriguing question for another day perhaps, if, of course, the TRP’s analysis is correct in law in the first place).

Therefore, in this case, the TRP ruled that the provisions of article 40 of the MOI did not relieve Canal + of its obligations to make a mandatory offer and, accordingly, Canal + had to take immediate action to comply with the requirements of section 123(3) and (4) of the Companies Act by making a mandatory offer to the remaining shareholders of MCG. Canal + has since done so and its mandatory offer is presently underway.

Ultimately, the MCG/Canal + scenario is quite a peculiar one as it is rare for listed companies to have such restrictions – the stock exchange’s general point of departure is that all shares must rank pari passu for all purposes – unless they are, for instance, in sectors that are legislatively regulated by ownership restrictions. Furthermore, there is no doubt the TRP did not seek to make any sweeping statements in general around MOI-imposed voting limitations and their interplay with section 123. The key takeaway therefore is that where they are present in a target company’s MOI, voting restrictions should be carefully considered by a would-be acquirer on a case-by-case basis to understand exactly how and when they apply, and whether they can be said to be “absolute” insofar as class rights are concerned. Given that the mandatory offer lies at the heart of minority shareholder protection in takeover law, a compelling case would have to be made to the TRP that a voting limitation deactivates section 123.