Section 48 of the Companies Act makes provision for the reacquisition by a company of its shares. Section 48(8)(b) provides that a decision by the board of directors of a company to acquire its own shares is subject to “the requirements of” sections 114 and 115 of the Companies Act if, considered alone or together with other transactions in an integrated series of transactions, it involves the acquisition by the company of more than 5% of the issued shares of any particular class of the company’s shares. In a CDH alert titled “Some good news and not so good news for companies undertaking share buy-backs” published on 26 February 2021, we explored how the phrase “the requirements of” in section 48(8)(b) has led to vast uncertainty, and we also explored the finding of the Johannesburg High Court in the case of First National Nominees Proprietary Limited and Others v Capital Appreciation Limited  (4) SA 516 (GJ) regarding whether a transaction falling within the ambit of section 48(8)(b) would be deemed a “scheme of arrangement” as contemplated in section 114, or whether the repurchase would merely be subject mutatis mutandis to the requirements of a scheme of arrangement.
The judgment settled the position that a contractual, “one-on-one” share buy-back in terms of section 48 does not in fact constitute a “scheme of arrangement” and therefore would not constitute an “affected transaction” under section 117(1)(c)(iii), which is regulated by the Takeover Regulation Panel. The judgment maintained, however, that although such buy-backs may not constitute schemes of arrangements, they still trigger the dissenting shareholder appraisal rights set out in section 164 of the Companies Act as these repurchases are subject to section 115(8), which cross-references section 164. Section 164 of the Companies Act affords a dissenting shareholder appraisal rights. In the event that the dissenting shareholder complies with the procedural requirements in objecting to certain categories of special resolutions, the company will be required to make a written offer, at fair value, for the dissenter’s shares. Should the dissenter reject the company’s offer, it may then approach the court requesting a judicial appraisal, or determination, of the fair value of the tendered shares. The appraisal remedy is aimed at maintaining an equilibrium between minority shareholders and controlling shareholders in that it empowers minority shareholders to withdraw from a company while obtaining fair value for their shares, in cases where the company proposes a fundamental transaction or materially and adversely alters share class rights. It is thus evident that the current position is that the appraisal right component is, by virtue of section 115(8), the common element of share buy backs in terms of section 48(8) and buy backs (by way of a scheme) in terms of section 114.
Separating the two
The Draft Amendment Bill seeks to finally cut the tie between the two sections, as the proposed amendments to section 48(8) contemplate the complete removal of the requirement set out in section 48(8)(b), which would result in a company undertaking to buy back more than 5% of its shares no longer having to comply with “the requirements of” sections 114 and 115 of the Companies Act.
Although the wording needs to be refined, the Draft Amendment Bill will bring about a regime whereby all share buy-backs in terms of section 48 must be approved by a special resolution of the shareholders (but no independent expert’s report would be required). Section 48(8)(b) is amended by the proposed deletion of the existing section 48(8)(b) in its entirety and it introduces an exception to the requirement for the special resolution in the event that the shares to be acquired are as a result of (i) a pro rata offer made by the company to all shareholders of the company or a particular class of shareholders of the company; or (ii) transactions effected on a recognised stock exchange on which the shares are traded. It is not entirely clear what a “recognised” stock exchange would be, but presumably this would include any duly licenced exchange in South Africa.
The Draft Amendment Bill takes heed of and confirms the position in the Capital Appreciation judgment in so far as it relates to a section 48 buy-back not being a “scheme of arrangement”, as the proposed amendment makes it very clear that there is a distinction between a “voluntary” share buy-back in terms of section 48 and an expropriation share buy-back in terms of a scheme of arrangement contemplated in section 114 by virtue of the fact that there is no longer any mention of compliance with section 114 and 115. This is certainly a welcomed amendment as it removes a substantial layer of compliance such as the requirement to prepare an independent expert’s report as set out section 114(2) and the appraisal right provisions set out in section 164 (read with 115(8)).