When it comes to structuring private M&A transactions in South Africa, there are three primary options available to the parties: selling the shares of the target company from the vendor shareholders to the acquirer, selling the business of the target company (or a portion of it) to the acquirer, or pursuing a merger/amalgamation.
When assessing these choices, parties typically prioritize simplicity, speed, and tax efficiency.
The sale of a business transaction is possibly the most common choice in South Africa because it allows the purchaser some latitude to selectively acquire the desired assets while assuming specific, well-defined liabilities.
It also allows the purchaser to take the assets in at its cost of acquisition, but it can result in recoupments for the seller on assets that have been tax depreciated to below their market value.
While cash is the typical form of consideration in business acquisitions, it's not unusual for shares of the purchaser to be included as part of or an alternative to a cash consideration.
Provisions tying a portion of the consideration to future profitability, known as "earn-outs," are also frequently seen.
South African acquisition agreements often also include holdback arrangements, where a portion of the purchase price is withheld as security against potential claims the purchaser may have under the agreement.