Introduction
Mergers & acquisitions (M&A) promise executives the allure of instant scale, market dominance, and leapfrogging competitors but beneath the glossy deal sheets lie legal quick-sands that can sink even the most strategic ambitions. For every success story, there’s a cautionary tale of reckless trading, regulatory blowback, or a balance sheet gutted by poor due diligence. This article explores M&A as a capital allocation strategy, examining its benefits, inherent risks, and the legal safeguards necessary to mitigate potential pitfalls.
Capital Allocation as a Strategic Imperative
Capital allocation is the process of deploying financial resources to maximise long-term shareholder value. It requires disciplined decision-making by executives, balancing competing priorities such as growth investments, operational efficiency, and shareholder returns.[1]
Key Capital Allocation Strategies
Companies typically allocate capital across several strategic areas:[2]
- M&A – Accelerates growth by acquiring competitors, technologies, or market access.
- Capital Expenditure (CapEx) – Funds physical assets (e.g., property, equipment) to enhance operations.
- Research & Development (R&D) – Drives innovation and competitive differentiation.
- Working Capital Management – Ensures liquidity for day-to-day operations.
- Divestitures – Streamlines operations by shedding non-core assets.
- Shareholder Returns – Includes dividends and share buybacks to reward investors.
Among these, M&A, CapEx, and R&D are the top three capital deployment strategies, with M&A offering the highest potential returns but also the greatest risks if mismanaged.
M&A as a Growth Strategy: Opportunities and Risks
M&A provides companies with a faster alternative to organic growth, allowing them to enter new marketsimmediately rather than building from scratch, acquire cutting-edge technologieswithout lengthy R&D cycles, and achieve economies of scale through operational synergies.[3]
However, these benefits come with substantial risks such as overpayment for acquisitionsleading to value destruction, integration failuresdue to cultural mismatches, and regulatory non-compliance, triggering legal consequences.
When M&A Becomes a Liability
Poorly executed M&A can expose directors to legal liability, particularly section 76 of the Companies Act 71 of 2008 (“Companies Act”) and the Exchange Control Regulations.
Section 76 of the Companies Act requires directors to:
- Act in good faith and in the company’s best interests.
- Exercise reasonable care, skill, and diligence.
Further, avoid reckless trading lest they fall foul of section 22 of the Companies Act.
Failure to conduct proper due diligence or structure deals appropriately may breach these duties, resulting in personal liability.
With respect to Exchange Control Regulations, cross-border M&A transactions face additional hurdles including the following:
- SARB approval is required for capital outflows (Regulation 10(1)(c)).
- Strict reporting obligations apply to foreign payments (Regulation 3(1)(c)).
- Non-compliance can lead to heavy fines or deal cancellation.
Additionally, M&A transactions that meet the merger thresholds under the Competition Act 89 of 1998 (‘Competition Act’) must be notified to the South African Competition Commission. Failure to do so may result in severe consequences, including the reversal of the transaction and penalties.
Mitigating M&A Risks: Best Practices for Directors
To navigate this legal minefield, directors should heighten their due diligence exercises particularly when dealing with distressed assets, to assess financial, legal, and operational risks before proceeding and structure deals and mitigate exposure. Furthermore, directors should engage regulators early and proactively consult the South African Reserve Bank (SARB) to avoid compliance delays. Finally, it is recommended that directors should considerpost-merger integration planning to align cultures, systems, and leadership to maximise synergies.
Conclusion
M&A remains a high-stakes capital allocation strategy, offering rapid growth but demanding meticulous legal and financial oversight. Directors must balance aggressive expansion with strict adherence to section 76 fiduciary duties and exchange control regulations to avoid personal liability and ensure sustainable value creation.
By implementing robust due diligence, strategic deal structuring, and proactive regulatory engagement, companies can harness M&A’s transformative potential while minimising its inherent risks. In an increasingly complex business environment, disciplined capital allocation and governance are not just best practices, they are essential safeguards against corporate and personal liability.
[1] Lauren Saalmuller, The Importance of Proper Capital Allocation, 2022, available at: The Importance of Proper Capital Allocation | HBS Online accessed on: 04 May 2025.
[2] Dave Ahern, The 7 Types of Capital Allocation and What they Mean for Shareholders, 2023, available at: https://einvestingforbeginners.com/capital-allocation-daah/ accessed on 06 May 2025.
[3] Frederiksen L , Mergers and Acquisitions as Part of Your Growth Strategies, 2024, available at:Mergers and Acquisitions as Part of Your Growth Strategy – Hinge Marketing. Accessed on: 05 May 2025.