Both the Income Tax Act and the Companies Act No. 71 of 2008 (“the Companies Act”) provide for the amalgamation (or merger) of two companies. From a tax perspective, an amalgamation involves the process whereby one company (known as the “Amalgamated Company”) transfers all its assets to another company (known as the “Resultant Company”), usually in exchange for shares in the Resultant Company, after which the Amalgamated Company is deregistered or liquidated.
The parties to the amalgamation would need to enter into an agreement setting out the terms and conditions of the amalgamation. Although it is not a requirement for a valid section 44 amalgamation transaction (unless immovable property is being transferred), a written agreement will also assist in addressing any queries by SARS. Outside of the tax considerations and ensuring compliance with section 44 of the Income Tax Act, there are also various provisions that regulate the amalgamation from a company law perspective.
A written resolution by the board of directors of the Amalgamated Company is required to approve the disposal of all its assets to the Resultant Company. The shareholders of the Resultant Company will further, in terms of section 115(2)(a) of the Companies Act, need to approve the amalgamation by way of a special resolution.
A written resolution by the board of directors of the Resultant Company is required to approve the acquisition of all the assets of the Amalgamated Company and the issue of shares to the Amalgamated Company (and assumption of debt if necessary). The shareholders of the Resultant Company will further, in terms of section 115(2)(a) of the Companies Act, need to approve the amalgamation by way of a special resolution.
In terms of section 116(1) of the Companies Act, both the Amalgamated Company and the Resultant Company would need to provide notice to their creditors of the proposed amalgamation transaction.
Further, in terms of section 116(5)(b) of the Companies Act, notice needs to be given to the Companies and Intellectual Property Commission of the amalgamation and requesting the deregistration of the Amalgamated Company.
It is further important to note that depending on the nature and size of the amalgamation, compliance with the competition commission and takeover panel regulations will be required.
Amalgamations are typically intricate transactions to execute in compliance with the various regulations, however, if properly executed can afford the significant tax and commercial benefits for entities at large. That notwithstanding, it is advisable that companies obtain the necessary professional assistance when executing transactions of this nature.