In many cases this results in a fundamental change to the company’s capital and control structures. In this regard, the drafters of the Companies Act 71 of 2008 (Companies Act) included sections 48, 114, 115 and 164, which prescribe strict procedural requirements for these transactions.

The intricate interplay between these provisions led the Supreme Court of Appeal (SCA), in the recent case of Capital Appreciation Ltd v First National Nominees (Pty) Ltd and Others [2022] 85 ZASCA 280, to clarify their application. The judgment is significant for minority and dissenting shareholders who feel aggrieved by share buy-backs.

Background

The matter came before the SCA on appeal from the Gauteng Local Division of the High Court, Johannesburg. Capital Appreciation Ltd (Capprec) sent out a circular in terms of section 48(2)(a) of the Companies Act, which sought authority from shareholders for Capprec to repurchase a number of its own shares in terms of a specific buy-back transaction. However, because this proposed repurchase exceeded 5% of the total issued share capital in Capprec, section 48(8)(b) subjected this proposal to the requirements of sections 114 and 115 of the Companies Act.

Sections 114 and 115 deal with “fundamental transactions”. Section 114(1)(e) allows this kind of proposal to also be made at board level. However, section 115(1)(a), read with section 115(2)(a), requires this to be approved by way of a special resolution. Importantly, section 115(8) entitled First National Nominees (Pty) Ltd (the dissenting shareholder) to relief under section 164 (appraisal rights), provided it (i) notified the company of its intention to oppose the special resolution; and (ii) was present at the meeting and voted against that resolution. The special resolution was passed, and it was common cause that the dissenting shareholder complied with these procedural requirements, thereafter invoking its right under section 164(5) to demand that the company purchase its shares at fair value.

Unhappy with the offer made by Capprec, the dissenting shareholder launched an application in terms of section 164(14) to have the fair value determined by the High Court. Section 164 was central to the dispute in both courts. In short, it was argued by Capprec that appraisal rights are intended for fundamental transactions referred to in the operative section, namely section 164, and not transactions under section 48 involving a “voluntary seller”. It further contended that section 48(8)(b) only subjected the proposed repurchase to the procedural requirements under sections 114 and 115 and did not grant the dissenting shareholder an avenue for relief in terms of section 164.

Court’s interpretation

The central question before the High Court was whether a “one-on-one” contractual repurchase, exceeding the 5% threshold in terms of section 48(8)(b), should be considered a “scheme of arrangement” as contemplated in section 114, or whether it ought merely to be subject to the requirements set out in the section.

The High Court considered the historical approach to share buy-backs, noting that, regardless of how it was effected, such transactions have been subject to many forms of abuse. In this regard, by including a 5% threshold in section 48(8)(b), the legislature recognised that not all repurchase transactions should be subject to further conditions, but only those which involved “a significant and substantial repurchase”. Similarly, the SCA found that section 114 was drafted for those repurchases that amount to “wholesale fundamental changes to the company’s capital structure”.

The High Court found that reference in section 48(8)(b) to “the requirements” of sections 114 and 115 was a reference to those provisions as a whole. By implication, the legislature intended for all the procedural conditions and rights set out in these sections to apply, particularly section 115(8) entitling the dissenting shareholder to exercise appraisal rights in terms of section 164. To find otherwise would create an unsatisfactory situation whereby minority shareholders are entitled to appraisal rights when the board effects a substantial reacquisition in terms of section 114, but not if the board decided to do so in terms of section 48. Consequently, the practice of excluding certain protections in sections 114 and 115 when contemplating transactions in terms of section 48(8)(b), would render this threshold superfluous.

Both the High Court and the SCA recognised that this inclusive interpretation aligns with the legislature’s intention to protect minority shareholders, allowing those

“who do not approve of certain triggering events, to opt out of the company by withdrawing the fair value of their shares in cash”.

Conclusion

The SCA acknowledged that there is a direct connection between section 48(8)(b) – via sections 114 and 115 – to section 164 and the appraisal rights contended for by the dissenting shareholder.

In this regard, section 48(8)(b) deems repurchases above a particular threshold to be “fundamental transactions” and subject to the same procedural requirements and remedies. In other words, it does not matter which avenue the board pursues in giving effect to a share buy-backs; if the 5% threshold is crossed, this will invoke the requirements of sections 114 and 115, allowing dissenting shareholders to obtain a judicial determination on the fair value of their shares as provided in section 164.

The SCA, however, left open the question of whether such a buy-back is in fact a “scheme of arrangement”; it did not expressly overrule the High Court’s reasoning that this was not a scheme of arrangement. A “fundamental transaction” is actually not a defined term in the Companies Act (although it is accepted that it refers to the transactions in sections 112 to 114), and categorisation as a “fundamental transaction” is, textually at least, not enough to bring it within the list of “affected transactions” in section 117(1)(c). This remains an issue of importance insofar as “regulated companies” undertake specific buy-backs, the essential issue being whether the takeover laws apply to such a transaction. It is notable in this regard that the Takeover Regulation Panel’s firm view remains that such transactions, when undertaken by regulated companies, do indeed fall under the panel’s jurisdiction.