Selling a company, shareholding, or prized piece of equipment can feel like handing over the keys to your car while you wait for the buyer’s EFT to clear. In the South African market – where purchase prices are often staggered or deferred – smart sellers don’t just trust; they insure the transaction with watertight legal safeguards. From pledging the very shares being sold to locking down the buyer’s book debts or movable assets, the law offers a toolkit of practical protections that ensure the cash actually lands where it belongs: in your account. Below is a quick tour of five proven mechanisms you can weave into your next sale agreement to sleep easier once the ink is dry.
During a sale transaction, there is always the risk that the buyer of shares, business, or other assets may not comply with its obligations under the sale agreement. One of the main obligations usually placed on the buyer is the due and actual payment of the purchase price for the relevant asset. The risk of non-payment is especially present when the payment of the purchase price is deferred or paid in instalments. However, South African law provides certain options to the seller to ensure recourse if the buyer fails to perform all its obligations under the Sale Agreement. A few of these options are briefly discussed below.
Cession and pledge of shares
Firstly, as part of the transactional documents of the acquisition, the seller, the buyer, and/or a third party can conclude a cession and pledge agreement. In this agreement, the pledgor(s), usually the buyer and/or a third party, cedes, transfers, and makes over in securitatem debiti all their right, title, and interest in and to the pledged shares and loans to the pledgee (the seller) as continuing general covering security for the due, proper, and timely discharge of each of the obligations that the buyer has under the Sale Agreement.
The pledge serves as a continuing covering security in favour of the seller for all the obligations that the buyer has under the Sale Agreement. If a secured obligation is not successfully discharged, such as if the buyer fails to pay the purchase price on time, the seller may take over full right and title of the pledged shares and loans. The seller may then sell the shares to limit its loss or choose to retain the shares as an asset with the possibility of future earnings.
Cession and pledge of book debts
As a second option, similar to the cession and pledge of shares, the seller can conclude a cession and pledge of book debts with the buyer and/or a third party. In this agreement, the buyer and/or a third party cedes, transfers, and makes over its entire debtors’ books (both present and future) to the seller as security for the performance of the buyer’s obligations under the sale agreement.
If the buyer defaults on its obligations under the sale agreement, the seller becomes the owner of the cedent’s entire debtors’ books and may recover the amount owing by each debtor. This will limit the loss and damages suffered by the seller as a result of the buyer’s non-performance.
Special and general notarial bond
The Deeds Registries Act, No. 47 of 1937, defines a notarial bond as a bond attested by a notary public hypothecating movable property generally or specially. This means the bond can encompass all movable property of a debtor, including items acquired in the future (general notarial bond), or it can apply solely to particular movable assets (special notarial bond). The seller can request a bond to be registered over the movable assets of the purchaser or a third party, either a special notarial bond covering a specific asset or a general notarial bond over trading stock, for example.
Surety and guarantee
Another security option available to the seller to secure the buyer’s obligations under the sale agreement is to conclude a surety or guarantee agreement with the buyer and/or a third party. The court in Nedbank Limited v Xanita (Pty) Limited (885/2019) ZAWCHC 144 (12 June 2023) clarified the key difference between these two agreements.
The guarantor’s obligation, which could be a natural person related to the buyer and/or a third party, is independent of the buyer’s and involves indemnifying the seller for losses incurred due to the buyer’s non-performance. In contrast, the surety is only liable for losses arising from the buyer’s breach of contract. Therefore, if the seller suffers significant losses because the sale of shares agreement is invalid, the guarantor must still cover those losses, whereas the surety’s obligation ceases, and they will not have to pay anything. Another distinction is that a surety undertakes that the buyer will perform, and only if the buyer fails to perform does the surety step in. On the other hand, with a guarantee, the guarantor agrees to pay upon the occurrence of a specific event but does not promise that the event will occur.
If a sale agreement is concluded between Company S, as the seller, and Company B, as the buyer, a good option to secure the seller’s interest if Company B breaches any of its obligations under the sale agreement is to conclude a guarantee with the natural person who wholly or majority owns Company B.
Restrictive conditions
Lastly, as part of the suspensive conditions of the sale agreement, the parties can agree to amend the target company’s memorandum of incorporation to include certain restrictive conditions and register the amendment with the CIPC. For example, this can include a list of decisions or matters that require the seller’s approval before the target company can proceed with same. This measure is designed to protect the seller, particularly during the period when the buyer is still paying the purchase price in instalments.
By implementing these restrictive conditions, the seller retains some control over the target company until the full purchase price is received. This reduces the risk of the target company’s value diminishing before the buyer has fulfilled all its obligations under the sale agreement. The restrictive conditions can be recorded in an addendum to the memorandum of incorporation, which can be removed and registered with the CIPC once the buyer has discharged all its duties under the sale agreement, including full settlement of the purchase price. However, there are several important steps to be taken before this form of security can be used to ensure that it is valid and compliant with the law.
When selling equity, including shares, and the seller must perform obligations under the sale agreement over a period of time, there are certain forms of security that can be put in place to protect the seller’s interests. The applicability and relevance of each form of security will depend on the particular circumstances and the negotiation position of the parties. The above options are not a conclusive list. It is important that the transactional documents are properly and correctly drafted and registered (if applicable) to ensure they are enforceable under South African law.
