2 November 2021 by , and Dispute Resolution Alert

A time old tale of minority protection and majority pushback

Although repurchase appears to have the virtue of a voluntary transaction, in reality, because it is both a distribution and a reorganisation, it has a significant element of coercion … [Shareholders] are forced to decide whether to ‘participate in profits and relinquish their shares or forswear the distribution and increase ownership participation. It is always possible that a shareholder may wish to do neither’”.

This is a quote by Yeats et al. in their Commentary on the Companies Act referred to by the court in First National Nominees (Pty) Limited and Two Others v Capital Appreciation Limited and One Other heard in the Gauteng High Court, Johannesburg.

The court had to consider the regulation of repurchases of shares by a company under the Companies Act 71 of 2008 (Companies Act). Specifically, the court was called upon to decide whether the repurchase by a company for more than 5% of its issued shares triggered appraisal rights. Section 164 of the Companies Act concerns the exercising of appraisal rights, which is afforded to dissenting shareholders in certain circumstances.  Essentially, it allows shareholders who disagree with certain transactions by a company, to request that the company buy back such shareholders’ shares in the company at fair value. The requirements for this remedy are threefold – firstly, the dissenting shareholder has to object in writing to the adoption of the resolution regarding such transaction before the meeting to vote on such resolution, secondly, the dissenting shareholder has to attend said meeting, and thirdly, they have to vote against the adoption of such resolution. In the event that the resolution is still adopted, the dissenting shareholder may demand that its shares be repurchased by the company at fair value. Only then will the company be obliged to make the dissenting shareholder an offer in writing, which the dissenting shareholder may then accept or reject. If rejected, the dissenting shareholder may approach the court for an appropriate order.

The facts before the court were that First National Nominees (Nominees), the applicant in this matter, duly followed the steps set out above, but hit a snag when Capital Appreciation Limited (Capprec), the respondent, made them an offer which they deemed to be unacceptable. Capprec had announced an intention to buy back 5% of its own shares, which would be voted on at a special shareholders meeting. In its announcement, Capprec advised shareholders that the buy-back was subject to sections 48, 114 and 164 of the Companies Act. Nominees duly gave written notice of their intention to object, subsequently voted against the adoption of the resolution and thereafter demanded the fair value of their shares. Capprec offered Nominees R0.80 per share, which they deemed to be unfair.

When is section 164 triggered?

After the application was launched, Capprec adopted a new position, namely that section 164 of the Companies Act had not been triggered and that the announcement made to shareholders advising otherwise, had been made in error. Capprec’s simplified reasoning was the following:

Section 164 is only triggered under the very specific circumstances set out in section 164(2)(b).

In terms of section 164(2)(b), appraisal rights are triggered if a transaction in section 112, 113 or 114 is intended to be entered into.

The buy-back of shares contained in section 48(2)(a) of the Companies Act does not trigger any of these sections, and any references in section 48(8)(b) to section 114 and 115 of the Companies Act merely refer to the procedural requirements set out therein.

Section 48(8)(b) of the Companies Act states that:

A decision by the board of a company contemplated in subsection (2)(a) … is subject to the requirements of sections 114 and 115 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.” [emphasis added]

It is common cause that the contemplated corporate action fell within the scope of section 48(2), which would necessarily mean that the action is subject to sections 114 and 115 of the Companies Act. However, Capprec’s argument was that the reference to section 114 only referred to repurchase transactions set out in that section itself, and not to those contemplated in section 48. The argument hinged on the contention that a re-acquisition of shares in terms of section 114 is different from that in terms of section 48, as the latter involves a voluntary seller. Thus, although section 48 refers to section 114 and 115, it does so only to the extent that the procedural requirements of section 114 and 115 must be followed.

Crossing the 5% threshold

Nominees argued that the requirements of section 114 are made applicable precisely because the transaction crosses the 5% threshold (as contemplated in section 48(8)(b)) and not because it constitutes a scheme of arrangement (as contemplated in section 114).

The court agreed with Nominees and found that while section 48(2) allows a company to buy back its own shares without triggering the requirements of section 114, it is specifically when this buy-back crosses the 5% threshold in section 48(8)(b), that section 114 is triggered. This is because section 48(8)(b) deals with a situation that would not ordinarily be subject to section 114 requirements, but due to the potential prejudice to minority shareholders, the legislature deemed it reasonable to include additional protection in these circumstances. It is only when a transaction involves a considerable repurchase that the requirements in section 114 are triggered and the subsequent appraisal rights in section 164 become available. The court further held that the reference to section 114 and 115 as a whole meant that both the procedural requirements and the substantive rights in these sections became applicable precisely because the legislature wanted to afford proper protection to minority shareholders and empower them to obtain the fair value for their shares.

As a result, the court ordered that an appraiser be nominated to determine the fair value of the shares. The court’s order was quite extensive in that it set out the method whereby the appraiser should be nominated, the information to be provided by Capprec to assist the appraiser, the extent of the appraiser’s discretion and the time limits for the parties to file papers following the receipt of the appraiser’s report.

This is an extremely useful judgment in the sense that it clarifies the interaction between, and interpretation of, sections 48, 114, 115 and 164 of the Companies Act. The judgment further reaffirms the fact that our courts and the legislature are particularly concerned with the protection of minority shareholders’ rights and the prevention of abuse of corporate power by the majority shareholders in a company.

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