Abstract
This paper analyses the statement made by the South African Appeal Court Judge Holmes in the Phame v Paizes (1973) case and, using economic and unique South African legal principles, it examines the true legal nature of a contract to regulate company acquisitions.1 Two solutions are offered for financial managers in South Africa: (1) the contract to regulate company acquisitions is a forward contract and (2) the difficulty in identifying latent defects should not be grounds for reducing the price paid for a company or enterprise in the South African legal system.
Highlights
The contractual or legal nature of company acquisitions has until recently not attracted much legal or economic interest in South Africa, nor has it been the subject of any deep controversy, because company acquisitions are generally regulated by the Securities Regulation Code onTake-overs and Mergers (‘the code’)
The focus of this paper is on quanti minoris defects relevant to company acquisitions, and it is argued that the quanti minoris defects should be avoided from an economic perspective
Within the framework established by the Phame v Paizes (1973), reference will be made to financial statements to illustrate the problem of how to record value within an accounting perspective relevant to company acquisitions
Summary
The main focus area of this paper is the term ‘latent defect’, generally known as a ‘defect’. In order to rectify the imperfection or shortcoming, the aggrieved person employs actions or remedies (Hiemstra & Gonin, 2000). The initial development of these ideas came from Phame v Paizes (1973), and propounds the criterion that there should be no legal difference between tangible or intangible things. The focus of this paper is on quanti minoris defects relevant to company acquisitions (intangible things), and it is argued that the quanti minoris defects should be avoided from an economic perspective. Within the framework established by the Phame v Paizes (1973) (that is, assuming there is no legal difference between defects relevant to tangible and intangible things), reference will be made to financial statements (balance statement and income statement) to illustrate the problem of how to record value within an accounting perspective relevant to company acquisitions. The disclosure of the shortcomings is currently known as nonfinancial indicators
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