15 October 2010 by

Minority shareholder protection - appraisal rights remedy

The goals identified in the consultation process leading to the adoption of the new Act included achieving corporate efficiency by avoiding locking-in of minority shareholders in inefficient companies, promoting transparency by protecting shareholders' rights, advancing shareholder activism and providing enhanced protection for minority shareholders.

The new Act maintains some minority protections found in the current Act, such as the rights of relief from oppressive or prejudicial conduct. It also introduces new remedies, the most pertinent of which is the appraisal right remedy which is a relatively new concept in South African law.

A company is required to inform shareholders of their right to appraisal on taking one of the following triggering actions:

  • adoption of a resolution altering its Memorandum of Incorporation that has the effect of altering the rights of shareholders;
  • disposal of all or the greater part of its assets or undertaking in terms of section 112;
  • a merger or amalgamation in terms of section 113; or
  • a scheme of arrangement in terms of section 114.

The appraisal remedy is not available where such actions are taken during business rescue proceedings or if they are taken by non-profit companies.

The shareholder is then required to give written notice of his objection to the resolution at any time prior to it being voted on and thereafter to vote against such resolution.

If the company successfully adopts the resolution, then the company must:

  • give notice of such outcome to each person who gave notice of objection and who has not withdrawn or voted in favour of such resolution;
  • the dissenting shareholder may demand in writing within 20 business days that the company acquire his shares for their fair value; and
  • the company should then send a written offer to the dissenting shareholder, offering to pay the shareholder an amount considered by the directors to be the fair value of the shares, accompanied by a statement of how the value was determined.

The dissenting shareholder can either accept the fair value determined or apply to Court to value its shares. Note that section 166 of the new Act allows (provided all parties consent thereto) for the use of alternative dispute resolution or the Companies Tribunal as an alternative to applying for relief to a Court. One could therefore use these alternative means to determine the fair value in accordance with the powers available to a Court in terms of section 164. In making its decision, the Court (including the alternative dispute resolution or the Companies Tribunal) may appoint one or more appraisers to assist it in determining the fair value and may allow a reasonable rate of interest on the amount payable.

The appraisal remedy (although not without its technical faults) certainly adds value to the protection of minority shareholder interests. It serves as a check on bad business decisions causing directors and controlling shareholders to reconsider proceeding with triggering actions where there are many dissenting shareholders. It also expedites the exit of dissenting shareholders from transactions, thereby facilitating the speedy conclusion of transactions and also ensuring liquidity to such exiting shareholders. A potential criticism, however, is that the remedy could in effect amount to a veto resulting in a situation in which minority shareholders hold a company at ransom.

Although there are those who are of the opinion that a similar version of the remedy does not work in the USA, it shall be interesting to see the remedy at work in our own jurisprudence.

Andre de Lange, Director
Corporate and Commercial

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