SAA Takatso Deal: The Legal Road Ahead

Corporate Commercial Law
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The SAA Takatso deal is evidently in its infancy and a lot of detail remain to be disclosed and finalised.  In the real mergers and acquisition world, calling it a deal at this stage is in fact a misnomer. From what has been reported so far, the process seems to be at a stage where the suitor has expressed a non-binding interest subject to a satisfactory due diligence investigation typical in transactions of this nature.  Following this in-depth investigative process, the suitors may still change their minds should the deal not meet expectations.

Given the thorn that SAA has been to South African taxpayers, it is understandable why the government would be eager to announce this milestone to keep the public abreast of any sign of good news on the problem child that SAA has been to the taxpayers.

Several questions have arisen from all quarters and the interest on the matter is high.  The fact that SAA is a state-owned company and that is governed by the PFMA seems have heightened curiosity and interest on how the process has unfolded thus far.

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Some have questioned whether due tender process has been followed in identifying and securing the potential partner.  This question deserves some consideration.  The South African open tender system derives its life from section 217 of the Republic’s constitution which enjoins government departments and organs of state to follow a fair and transparent process in procuring goods and services.  The process at play goes to the core and existence of the company and is not to be mistaken for SAA’s daily procurement of goods and services.  A process of this nature is not one contemplated in section 217 of the constitution and all legislation meant to actualise this constitutional imperative such as the Preferential Procurement Policy Framework Act.  The legal player here is the DPE in its capacity as a shareholder of the company. Company law has more bearing than procurement law.  Whereas the deal may involve disposal of assets, the typical procurement framework for many reasons does not apply in this instance.  The process cannot be handled in the same way as procuring chicken and beef inflight meals.  The outcry for a typical  open tender process is misplaced. SAA has been publicly looking for a new partner. Anyone of means was at liberty to approach the government.

Takatso has publicly declared that they would not have done the deal if SAA were to remain governed by the PFMA, understandably so as the PFMA is seen to prescribe many hoops to be jumped for corporate activities which would be constrain for an investor such as Takatso.  Section 3 of the PFMA regarding who the Act applies to, is rather ineptly drafted.  Closer to the topic, it provides that the PFMA applies to entities listed in schedule 2 thereof in which SAA is listed.  The test for application is not substantive as many erroneously believe that it is based on whether the government controls the entity or not ,which would have been a more logical provision.  Given the text of section 3, SAA will remain subject to the PFMA for as long as it is listed in schedule 2.  Its removal from schedule 2, involves a process which may take time.  There are several defunct entities of the government which remain listed in the PFMA schedules to date . The most expeditious process to follow would be a ministerial exemption from the PFMA in terms of 92 of  which empowers the Minister of Finance who is the custodian of the PFMA to exempt institutions or categories of institutions from application of certain parts of the PFMA.  To date Telkom remains listed on the PFMA but exempted from pertinent sections in terms of a ministerial exemption first granted on 13 December 2013 and a few more times thereafter.  Takatso would need to ensure that this aspect is carefully regulated in its agreements with the government and within governance instruments of the new venture.

It is reported that the parties will hold shares on a 51% and 49% proportion respectively.  On the same breath, it is also  reported that the government will no longer inject any capital into SAA.  In a company structure that SAA is, this is not feasible in the normal course in the absence of some bespoke structuring such a golden shares or the like. The business of a company is typically funded through resources generated by the company or from lenders with shareholders as funders of last resort.  Given SAA’s well published financial position and its recent emergence from business rescue, the first two options are unlikely sources.  This means that the shareholders must come to the party.  Takatso has announced that the business requires approximately R3billion to get off the ground.  Barring a golden share which would inevitably have many strings attached, the government stand to lose its 49% holding over time due to dilution.  Simply put, should the government not continue to fund SAA as announced, it will have to give up significant parts of its shareholding over time and may eventually be left with no shares in the company.

It has also been announced that Takatso shall not take over any historical liabilities of SAA. The classic way to achieve this, will be through a sale of assets deal as opposed to sale of shares.

This means that a new entity will need to be set up, it will in turn cherry pick the assets of the old SAA including the name and associated brands for possibly a nominal price or simply put for free.  In return, the government will receive 49% of the total issued shares shares in the new company.  From the look of things, the most valuable asset is the SAA name and brand which is world renown despite the airline well documented financial woes.

There remains a myriad of financial, legal and regulatory aspects to be contended with for the deal to take off.  All involved have some work to do.   The taxpayers’ optimism should remain cautious.

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