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King IV: How much does it mean for M&A?

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The King IV Set of Corporate Governance for South Africa (King IV) premiered by the Institute of Directors in Southern Africa (IoDSA) on November 1, 2016.?

The King Committee, liable for the King Codes, thought it required to revisit King III, the predecessor of King IV going back 2009. This is considering various international developments regarding corporate governance, including integrated reporting (with all the turmoil the International Integrated Report Framework in December 2013) and responsible investing (using the issue of the Code for Responsible Purchasing South Africa (CRISA) in 2011).?

In substance, King IV is a refinement and repackaging of King III, although shorter in size and containing fewer principles. It retains similar underlying philosophies and ideas for example responsibility, accountability, fairness and transparency, and borrows many principles and practices from King III, in some cases, verbatim. King IV also introduces newer concepts, and polishes certain of the earlier principles, hoping to supply a more refined help guide to corporate governance.

Like King III, King IV addresses all organisations, whatever their form of incorporation or establishment and whether inside the public, private or non-profit sectors. In practice, mainly large and listed companies applied the principles of King III. The proclaimed goal of King IV should be to broaden acceptance of corporate governance by designing it accessible and fit for application for many, across sectors, organisations and entities of diverse sizes, resources and complexity of strategic objectives and processes. Accordingly, King IV refers to “organisations” instead of “companies”, to “governing bodies” as opposed to “boards” and then to “members of governing bodies” rather than “directors”.

Although King IV provides that all organisations should aim at apply the principles in the code to quickly attain its governance outcomes, it acknowledges that each from the recommended practices should not be equally applied to all organisations. The practices recommended by King IV are designed to be applied “proportionally”, making an allowance for how large turnover and workforce, resources as well as extent and complexity of activities within the organisation, as well as the effect on the context that it operates. King IV also introduces sector supplements adapting the recommended practices for state-owned entities, retirement funds, small and medium enterprises, non-profit organisations and municipalities.

Another notable boost King IV may be the get off the King III “apply or explain” principle into the “apply and explain” principle.? “Apply” means the principles, which King IV considers fundamental to get affordable corporate governance and assumes that every one organisations apply. “Explain” refers to the practices, the operationalisation which organisations are necessary to disclose. To put it differently, the disclosure requirements can be more onerous, entities must explain both how they have applied the recommended practices and in case they haven’t applied such practices, inform you of that the foundations were achieved differently or which other practice is implemented.??

Dealmakers could be interested in the influence of King IV on M&A. King IV retains the same status as the predecessors, namely some voluntary principles and good practices, save regarding listed companies, for the purpose those recommended practices that had been incorporated from the JSE Listings Requirements must be complied with. King IV will therefore threaten listed M&A in the JSE Listings Requirements. As IoDSA launched King IV, the JSE published proposed amendments to the JSE Listings Requirements for public comment, which incorporate absolutely clear on the King IV recommended practices. As well as others, the proposed amendments on the JSE Listings Requirements incorporate the new “apply and explain” approach, and would require listed companies to reveal in their annual report which recommended or other practices they already have implemented to achieve the foundations of King IV, the application of that is certainly assumed in the new approach.

Of interest specifically to institutional investors is a new principle 17 on responsible investing. Principle 17 of King IV provides that “the governing body of institutional investor organisation should guarantee that responsible investment is practiced by the organisation to advertise the great governance as well as the coming of value with the companies that invests.” Institutional investors are thought as any juristic person or institution as referenced from the Financial Services Board Act towards the extent that such entities include the holders of shares inside of a company. King IV encourages institutional investors to integrate sustainability considerations, including environmental, social and governance factors, of their investment analysis, and makes note from the responsible investing principles and practices contained in CRISA and international codes on responsible investing. King IV includes a given sector supplement, addressing and applying certain King IV principles to retirement funds including pension, provident, preservation and retirement annuity funds.

King IV offers a refinement of corporate governance principles for many organisations, the outcome from the Code on M&A will, however, probably remain limited, rather than indirectly through the JSE Listings Requirements and so on institutional investors, who may not also be convinced, and aren’t bound by principle 17.

Mc Intosh (pictured below) is definitely an keep company with Webber Wentzel in alliance with Linklaters.

This article first appeared in DealMakers, SA’s quarterly M&A publication.

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