Transcript Document

Business in Distress
Making it Attractive
and Bargain Hunting
GIBS – 5 MARCH 2015
Eric Levenstein - Director
Insolvency and Business Rescue Department
Jared Nickig – Director
Commercial Department
OVERVIEW
GENERAL OVERVIEW
> Introduction
> The Business Rescue Landscape
> Roles, Responsibilities and Liabilities of Directors
> Early Warning Signals for Financial Distress
> Bargain Hunting in Business Rescue
> Transactions in Business Rescue – Practical Examples
> Takeaways
3
BUSINESS
RESCUE
LANDSCAPE
BUSINESS RESCUE – A NEW MECHANISM FOR
RESTRUCTURING FINANCIALLY DISTRESSED
COMPANIES
> Judicial Management replaced by business rescue
> Mirrors the mechanism for restructuring found in the USA
(Chapter 11) and the UK (Administration)
> Brings South Africa into line with international corporate
rescue regimes
> A new playing field for venture capitalists, hedge funds,
private equity firms and distressed funds
> Opportunity to pick up distressed assets at discounted
prices
> China, USA and the UK – private equity see South Africa
as an “unsaturated market” for distressed debt investing
5
DEFINITIONS
> Definitions relevant to the business rescue provisions of
the Act
> Affected Person – shareholder, creditor, registered
trade union representing employees of the company or if
any of the employees of the company are not
represented by a registered trade union, each of those
employees or their respective representatives
> Business Rescue - proceedings to facilitate the
rehabilitation of a company that is financially distressed
by providing for –
> temporary supervision of the company, and of the
management of its affairs, business and property;
DEFINITIONS
> development and implementation, if approved, of a
plan to rescue the company by restructuring its
affairs, business, property, debt and other liabilities,
and equity in a manner that –
> maximises the likelihood of the company
continuing in existence on a solvent basis; or
> results in a better return for the company’s
creditors or shareholders than would result from
the immediate liquidation of the company
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ROLE PLAYERS IN BUSINESS RESCUE
POST
DIRECTORS
SHAREHOLDERS
COMMENCEMENT
FINANCIERS
BUSINESS
RESCUE
EMPLOYEES
PRACTITIONER
COMPANY
CREDITORS
COURT/CIPC
SECURITY
ATTORNEY
TRADE
HOLDERS
UNION
8
TEST FOR BUSINESS RESCUE
> Financially Distressed - 6 month forward looking test –
> it appears to be reasonably unlikely that the company
will be able to pay all of its debts as they fall due and
payable within the immediately ensuing six months
(commercial insolvency test); or
> it appears to be reasonably likely that the company will
become “insolvent” within the immediately ensuing six
months (factual/balance sheet insolvency).
> Clear distinction between “insolvent” and “financial distress”
> Business rescue test –
> forward looking test
> contemplates impending insolvency (commercial
insolvency or factual insolvency)
9
WHEN TO BEGIN BUSINESS RESCUE
> Welman v Marcelle Props 193 CC & Another (2012)
JOL 28714 (GSJ)
“business rescue proceedings are not for terminally
ill close corporations. Nor are they for chronically ill.
They are for ailing corporations, which given time
will be rescued and become solvent”
> First signs of financial distress – company must apply
for business rescue
> If more than just “financially distressed” the company
must consider other options such as a liquidation
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PRE-ASSESSMENT AND SUITABILITY
OF BUSINESS RESCUE
> Investigation (at instance of company or creditor/s) into
the business, dealings and affairs of the company, while
not regulated by the Act, may be necessary
> Type of company is determinative of suitability of
business rescue (i.e. retail v investment property
company)
> Prior to the board or an affected person placing a
company into business rescue, consideration should be
given to –
> the nature and business of the company;
> extent to which business rescue is the appropriate
procedure for that company; and
> extent to which business rescue would be more
beneficial for the company than a liquidation
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ENTRY INTO BUSINESS RESCUE
Voluntary Business Rescue
Board resolution passed by a simple majority
Practitioner is nominated in the resolution
Company is financially distressed (ie will not be solvent on its balance
sheet or will not be able to pay its debts when they fall due within the
next six months)
Reasonable prospect that the company can be saved.
Cannot adopt a resolution is liquidation proceedings have been initiated
Compulsory Business Rescue
Affected person (shareholder, creditor or employee) makes application to court
Company is financially distressed
Company has failed to pay over any amount in terms of an obligation
under or in terms of public regulation, or contract, with respect to
employment related matters
Just and equitable to do so for financial reasons
There is a reasonable prospect of rescuing the company
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SNAPSHOT OF PROCESS AND TIME
PERIODS
10 Days from Date of Appointment
Practitioner Appointed
As soon as
practicable
Delivery up by
Directors of all
books and
records
5 Days
Inform regulatory
authorities of
commencement
Approved and plan
Implemented
If Rejected - Vote on Revised
Plan/Apply to Court to Set
Aside Inappropriate
Vote/Offer to Purchase Voting
Interests of Dissenting Parties
If Rejected & No Steps
Taken – BRP to File
Termination Notice & Place
Company in Liquidation
Directors to
provide
statement of
Affairs
First Meeting
of
Creditors/Employees
25 Days from Date of
Appointment
Section 152
Meeting to consider
and vote on plan
10
days
Preparation and
publication of
plan
Section
150(5)
Note: Business Rescue should generally end within
three months, or an extended time as granted by
Court on application by Practitioner
(Days = Business Days)
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IMPORTANT FEATURES OF BUSINESS
RESCUE
Moratorium
Stay on Legal Proceedings & Enforcement Action Against
the Company and in respect of Property Belonging to the
Company or Lawfully in its Possession
PostCommencement
Finance
That which becomes due and owing to employees during
business rescue proceedings for rendering services to the
company and funding which is provided to a company,
during the company’s business rescue, by means
unrelated to employment (including the provision of credit
or services during business rescue)
Management
of Company
Business rescue practitioner has full management control
of the company in substitution for the board of directors.
The board maintains its powers and duties but all
decisions must be taken with the approval of the business
rescue practitioner – otherwise all transactions are void!
Contracts
Certain provisions/the whole contract may be suspended
or cancelled by the business rescue practitioner.
Cancellation can only be done following an application by
the practitioner to court
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IMPORTANT FEATURES OF BUSINESS
RESCUE
Employees
Remain employed unless they are retrenched in accordance
with labour legislation (Section 189 of the Labour Relations
Act)
Stakeholders
Continuously engaged by the business rescue practitioner in
the process. Creditors get a vote on the plan at the value of
their claim (unless their claim is subordinated by agreement).
Shareholders vote on the plan if their rights are affected by the
plan
Voting on
Plan
Plan will be approved if more than 75% of the creditors, voting
at value, vote in favour of the plan and 50% of the
independent creditors vote in favour of the plan
Binding
Offer
A creditor or shareholder may buy the voting interest of
another creditor or shareholder who voted against the adoption
of a plan if such vote results in the plan not being adopted
Cram Down
An adopted business rescue plan is binding on all creditors
whether or not they voted in favour of the plan, against the
plan, were present at the meeting or proved a claim
Discharge of
Debt
Unless a business rescue plan provides otherwise, creditors
and/or shareholders whose claims are compromised by the
business rescue plan are prohibited from enforcing the balance
of their claims after the adoption of the plan (even against
sureties) – does not apply to guarantees!
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DUTIES OF DIRECTORS BEFORE
BUSINESS RESCUE
> Directors have an obligation to consider the financial state of the
company from time to time
> If company is financially distressed, the directors have two choices –
> pass a resolution to commence business rescue; or
> send out what is commonly referred to as a “section 129(7) notice”
> notify affected persons of the nature of the company’s financial
distress (ie impending commercial or balance sheet
insolvency); and
> reasons for not adopting a resolution to commence business
rescue
> Notice needs to be carefully considered – could constitute an “act of
insolvency”, cause suppliers to stop supplying the company or
precipitate a compulsory business rescue
> Failure to comply may result in personal liability for directors
16
DIRECTORS’ RESPONSIBILITY
> Section 129(7)
“If the board of a company has reasonable grounds
to believe that the company is financially distressed,
but the board has not adopted a resolution
contemplated in this section, the board must deliver
a written notice to each affected person, setting out
the criteria referred to in section 128(1)(f) that are
applicable to the company, and its reasons for not
adopting a resolution contemplated in this section.”
> This will focus directors’ minds in any financially
distressed company
> Sending out notice must be carefully considered as it
can have serious consequences
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IDENTIFYING
A DISTRESSED
ASSET
LOOMING FINANCIAL DISTRESS
> Dishonesty – fraud at management or employee level;
failure to highlight problem areas
> Ineffectual leadership by the board – inability to
make decisions; irregular or no contact with executive
staff; absence from board meetings; worsening of
relationships between directors and management
> Neglect and incompetence of management –
negative cash flow/insolvent balance sheet; failure to pay
creditors as and when they fall due; lack of financial
controls; high staff turnover & poor staff morale;
disagreement among management on material issues;
delays in settling accounts; failure to independently
verify and safeguard the integrity of financial reporting
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LOOMING FINANCIAL DISTRESS
> Inability to adapt to changing market conditions -
growth rate less than inflation rate; inadequate review
and analysis of mistakes; significant loss of market
share; exchange rate and commodity price fluctuations;
risk of adverse market exposure
> Loss of key personnel – losing critical staff can be the
downfall of the business
> Deterioration in relationship with financiers monitor levels of credit and overdraft facilities
> Regulatory and legal compliance - environmental or
corporate governance; contingent liabilities; uncertainty
created by law suits; change in government policy;
opinions of auditors; unforeseen security and national
catastrophes
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SIGNS OF IMPENDING DISASTER
> Downward trend in entity’s share price (listed company)
> Dishonored cheques
> Artificial valuation of assets
> An increase in fraud
> Cash on delivery terms with suppliers
> Receipt of letters of demand and summons
> Continued injection by shareholders of working capital
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SIGNS OF IMPENDING DISASTER
> Increased need for long term financing for short terms
needs
> Management insisting on the reduced working week
> Forcing employees to take unpaid leave
> Industrial action
> Inability to make important strategic decisions at critical
times
22
BARGAIN
HUNTING
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BARGAIN HUNTING
> Identify the distressed asset or company
> Determine if there is real or tangible value in the asset?
> Often there is a good asset, but cash flows make it
impossible for the company to continue trading
> Can the workforce be better aligned to the needs of the
company (retrenchment packages and work size
reduction is easier in business rescue – under controlled
circumstances)?
> Have potential buyers been identified (third party
offerors, shareholders, management buy outs and foreign
parties)?
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BARGAIN HUNTING
> Is there PCF available to “prop” the asset up while the sale
transaction is being bedded down?
> Can the asset be “kept alive” in the business rescue period?
> Will key management leave?
> What conditions precedent need to be set and will the
transaction be dependent on the business rescue plan being
adopted by the support of creditors and/or shareholders?
> How quickly can the company exit the business rescue
process?
> Will the market continue to have confidence to continue to
do business with the “rescued company”?
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CHALLENGES
AND
OPPORTUNITIES
IN BUSINESS
RESCUE
DISTRESSED DEBT CYCLE
Exit With Good Value
F
I
N
A
N
C
I
A
L
D
I
S
T
R
E
S
S
Identify Opportunity
for
Post-Commencement Finance
Acquire
Company
Out of
Business
Rescue
Flat Trading Years
Financial Distress
Trade out
on a
Solvent
Basis
Acquisition Transaction
Profitable Business Grows
Approval of
Business Rescue
Plan
Commencement of Trading
YEARS OF TRADING
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PRACTICAL EXAMPLES OF BUSINESS
RESCUE
> Pearl Valley Golf Estate – share sale (golf estate)
> Advanced Technologies & Engineering Proprietary
Limited – share sale (aeronautical)
> B & J Meltz Proprietary Limited – share sale (retail
industry)
> On Digital Media t/a Top TV – share sale (digital tv
offering)
> Southgold Proprietary Limited – share sale (gold mine)
> Gootspa Proprietary Limited – share sale (Moyo
restaurants)
> Econo-Heat Energy Efficient Appliances Proprietary
Limited – trade out
29
SOUTHGOLD PROPRIETARY LIMITED
> Southgold was a member of the Great Basin Gold (GBG)
group of companies with its main business of mining
exploration
> GBG was a Canadian company listed on the Toronto
Stock Exchange
> Company is the owner of the Burnstone mine –
Mpumalanga
> Southgold was placed under business rescue on
14 September 2012, pursuant to a voluntary resolution
passed by the board of directors and Peter van den
Steen was appointed as the business rescue practitioner
> Provision of post-commencement funding by secured
lenders
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SOUTHGOLD PROPRIETARY LIMITED
> Wits Gold –
> identified Southgold as an opportunity
> engaged and negotiated with the business rescue
practitioner and other stakeholders (the receiver of
GBG, the secured lenders and other creditors) in order
to establish if the company could be acquired out of
business rescue
> Negotiated and formulated a business rescue plan which
incorporated the acquisition transaction
> Business rescue plan was approved by creditors and
shareholders on 11 July 2013
> The transaction was subject to a number of suspensive
conditions and ultimately closed and was implemented on
1 July 2014
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SOUTHGOLD PROPRIETARY LIMITED
> Acted for a group of noteholders (holders of unsecured debentures)
comprising hedge funds based in the United States and Canada having a
claim of CAD129 486 229.51 (capital and interest)
> Challenges faced in the process –
> status as a creditor – were the noteholders creditors? As creditors
they would have had a substantial interest in the business rescue
plan
> voting – whether the secured lenders’ votes were tainted due to
cession as they may have been held to be related parties (can’t be
counted in the vote of independent creditors)
> dispute as to whether or not claims had been subordinated
> contractual undertakings precluding Southgold’s holding company
from selling the shares in Southgold without the noteholders’ consent
> Bidding process run by the business rescue practitioner and his advisors
for the sale of the mine
> Wits Gold was appointed the preferred bidder
> Uncertainty facing the parties in relation to above challenges resulted in a
“settlement” between the secured lenders and the noteholders
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SOUTHGOLD PROPRIETARY LIMITED
> Conclusion of a restructuring and support agreement
between the business rescue practitioner, the secured
lenders and the noteholders
> Transaction structured as a –
> restructure of Southgold’s shares in certain
subsidiaries
> transfer of intra-group assets to Southgold
> sale of the shares in Southgold to Wits Gold for R1
> restructure of Southgold’s debt and security to the
secured lenders. Debt to be repaid over time
> payment by the secured lenders and Wits Gold of
amounts to be made available for payment to
noteholders and trade creditors upon closing of the
transaction
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ON DIGITAL MEDIA T/A TOP TV
> Top Tv > company granted a pay television license in September
2007
> began broadcasting on 1 May 2010
> Top Tv - coverage to Sub-Saharan Africa
> set top box is available from local retailers
> offered a variety of channels – including a mix of local and
international programmes
> StarTimes (Chinese) –
> strategic shareholder for On Digital Media trading as Top Tv
> already operate in 13 other African countries
34
ON DIGITAL MEDIA T/A TOP TV
> Placed in business rescue, by resolution of the board, on
31 October 2012
> Peter van den Steen was appointed as the business rescue
practitioner
> We acted for the majority shareholder & funder of the three
other BEE shareholders
> Challenges faced in the process –
> ranking of claims
> voting on the plan and the subordination of claims
> the application and effect of a binding offer
> shareholder disputes and the exercise of shareholder
rights during business rescue (managing litigation
against the business rescue practitioner and the
company)
35
ON DIGITAL MEDIA T/A TOP TV
> post-commencement finance and securing the
continued provision of services by service providers of
the company
> regulatory approvals including challenges from
competitors
> protection of confidential information within the
business rescue process
> managing conditions precedent in the adopted plan
and balancing the rights of affected parties during the
implementation of the plan process
36
ECONO-HEAT ENERGY EFFICIENT
APPLIANCES
> Father and son invented the world’s first original wall panel heater
and started Econo-Heat based in Cape Town
> Econo-Heat Wall Panel Heater won the Most Innovative Product
award for the Design for Living Exhibition – Cape Town’s premier
consumer lifestyle exhibition
> Over fourteen years the Davis family built the company into an
exciting business with a well-recognised and trusted brand
> Econo-Heat Wall Panel Heater sold in 38 countries worldwide
> Client conducted a due diligence on the company and
consummated a transaction
> Shareholder made application to court to place Econo-Heat in
business rescue on 10 December 2013
> Bernard Jongen appointed as the business rescue practitioner
> Business rescue plan adopted on 19 March 2014
37
GOOTSPA PROPRIETARY LIMITED MOYO
> African-themed restaurant under the name and style of “Moyo”
> There were 8 restaurants in the group situated at –
> Eden, Blouberg
> Fountains, Pretoria
> Kirstenbosch, Cape Town
> Melrose Arch, Johannesburg
> Pier, Durban
> Spier, Stellenbosch, Cape Town
> V&A Waterfront, Cape Town
> Zoo Lake, Johannesburg
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GOOTSPA PROPRIETARY LIMITED MOYO
> Board of directors of each of the entities in the Moyo
Group passed a resolution to place such entities in
business rescue on 1 October 2013
> Stephan Smythe and Alison Timme of PWC were
appointed as the joint business rescue practitioners
> Acted for the post-commencement financier and
interested offeror
> Form of PCF Agreement – term loan agreement or facility
agreement (depending on the needs of the company)
> Security Agreement – concluded in respect of
unencumbered assets
39
GOOTSPA PROPRIETARY LIMITED MOYO
> Provisions of the PCF Agreement - governed in part by
the legislation –
> during business rescue, PCF is repaid out of the free
cash flow of the company and after the business
rescue practitioners fees and expenses and the
remuneration of employees
> practitioner has a fiduciary duty akin to that of a
director and his or her hands cannot be tied by the
provisions of the PCF Agreement
> security can be taken over unencumbered assets
40
GOOTSPA PROPRIETARY LIMITED MOYO
> potential structure –
> payment of PCF to an independent entity (ie
attorney’s trust account)
> drawn down as and when needed by the company
> draw down notices to be prepared
> notification of draw downs to be given to the
funder (consent may or may not be an additional
requirement)
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RISK APPETITE OF INVESTORS
> Risk appetite for PCF investors?
> Consideration of the following > funds should be advanced on a draw down basis (as and when needed)
so as not to provide funding directly to the company. If this is done,
the funds will only be converted into PCF funding once a draw down
occurs
> once funds are converted (after a draw down) into PCF and a company
is either liquidated or the plan is voted down, such funds are at risk
and funders will become preferred creditors for the repayment of such
funds in the liquidated estate of the company
> if funds advanced to more than one company in a group, the PCF
provider runs the risk of certain entities being placed in liquidation and
the PCF provider becoming a preferent creditor in a liquidation (not
ideal)
> need to clearly define the use for which the funds may be used – i.e.
operation costs or general costs including the costs of advisors (legal,
business rescue practitioner or otherwise)
> PCF is “risk funding” and funders must understand the dangers of a deal
not being consummated!
42
FLOW CHART FOR THE ACQUISITION
OF A DISTRESSED COMPANY
Identify Distressed
Company and/or Good
Value Assets
Nominate Business
Rescue Practitioner
Pre-Assessment of the
Company – Test for Value
Offer R1 for Shares and
Something for Creditors
(better dividend than in
liquidation)
Negotiate Transaction
with Creditors,
Employees, Shareholders
an the Business Rescue
Practitioner
Directors file Resolution
for Business Rescue /
Affected Person Makes
Application to Court
Consummate Acquisition
Transaction, Subject to
Conditions Precedent and
Subject to Approval of
plan
Vote on Plan (75% &
50%) - Approve
Implement Plan
Company Exits from
Business Rescue with
New Owners (Investors)
43
TAKE-AWAYS
TAKE-AWAYS
> Business rescue has become a new mechanism for the
acquisition of distressed companies
> An early identification of the potentially distressed asset
is key
> Need to effectively engage with the business rescue
practitioner in the transaction process to ensure a value
driven outcome
> Need to take into account the status of PCF providers
versus secured creditors and their ranking in the
waterfall of payments in a business rescue and in a
liquidation
> Need to establish upfront whether or not taking cession
of shares taints their ability to vote as an independent
creditor
45
TAKE-AWAYS
> PCF is the life blood of a business rescue process
> Need to consider the parties providing PCF funding as it
could result in their security being watered down
> Need to consider selling their claims to third parties
(loan to own)
> Need to be open to possible approaches from distressed
funds
> Need to be aware of the business rescue process and to
use the process to their benefit
> Business rescue provides the opportunity to unlock
value and to allow a company to continue to trade on a
solvent basis
46
TAKE-AWAYS
> Key – preservation of value and the economic viability
of the company
47
THANK YOU
Legal notice: Nothing in this presentation should be construed as
formal legal advice from any lawyer or this firm. Readers are
advised to consult professional legal advisors for guidance on
legislation which may affect their businesses.
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