15 June 2010

Shareholder involvement in business rescue proceedings

Shareholders are one of the categories of 'affected persons' in business rescue proceedings. As an affected person, a shareholder has significant influence over the course that is ultimately followed by a company in financial distress.

The board of directors of a company may commence business rescue proceedings by resolution. All shareholders are entitled to receive written notice of such resolution, the consequent appointment of a business rescue practitioner and of all relevant events leading up to and during business rescue proceedings. A shareholder may apply to court for an order setting aside such resolution on the grounds listed in section 130(1)(a) of the Companies Act (the Act). The grounds include that the company has failed to satisfy the procedural requirements of the Act.

Where the board has not resolved to commence business rescue proceedings, shareholders may apply to court for an order placing the company under supervision and commencing business rescue proceedings. Contrary to the entitlement of the board of directors, shareholders may bring this application even if liquidation proceedings have been instituted, resulting in the liquidation of the company being suspended. The shareholders are in a more influential position than the board of directors for which business rescue ceases to be an option once liquidation proceedings have been instituted.

Once proceedings have commenced, the business rescue practitioner is obliged to consult with, inter alia, shareholders prior to the formulation of the business rescue plan. The plan must contain sufficient information so that shareholders are able to decide whether to accept or reject it. Notably, the business rescue plan is not formulated in consultation with the shareholders but only after consultation with the shareholders. It is important for the shareholders to raise any issues, concerns or proposals, including any alteration in the classification or status of their shares at the initial point of consultation by the practitioner, as subsequent to the adoption of the business rescue plan each shareholder of the company (as well as the company and each creditor of the company) will be bound by the business rescue plan irrespective of whether or not such shareholder attended the meeting or voted in favour of the adoption of the plan.

Shareholders must consider whether the business rescue plan will result in the alteration in the classification or status of any issued securities of the company. The Act is clear that, subject to two exceptions, any such alteration, other than by transfer of securities in the ordinary course of business, is invalid. The first exception is if the court directs otherwise and the second is if it is so contemplated in the approved business rescue plan. Should the proposed business plan alter the issued securities, the shareholders are entitled to vote to approve or reject the plan. If the shareholders reject the plan they are further entitled to propose an alternative plan or present an offer to acquire the interests of any or all of the creditors or other holders of the securities.

Shareholders, as affected persons, are further entitled to approach a court with an application to have business rescue practitioner removed on the grounds listed in section 130(1)(b) of the Act. One such ground is that the practitioner lacks the necessary skills, having regard to the company's circumstances. They may also require the practitioner to provide security, on application to the court and to the satisfaction of the court, to secure the interests of the company and affected persons.

In summary, the Act envisages the intimate and formal involvement of the shareholders of a company in business rescue proceedings, ranging from the choice of method by which the proceedings are instituted to participation in court proceedings. Shareholders are advised to acquaint themselves with their entitlements in business rescue proceedings in order to ensure their interests are suitably protected.

Marc Friedman, Senior Associate
Corporate and Commercial

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