The role of shareholders in business rescue proceedings
The role of shareholders in business rescue proceedings
One of the stated purposes of the Companies Act 71 of 2008 (Companies Act) is to promote innovation and investment in South African markets and provide for the efficient rescue and recovery of financially distressed companies, in a manner that balances the rights and interests of all relevant stakeholders, including shareholders. Business rescue is therefore widely accepted as an alternative to liquidation for financially distressed companies, with the intention of giving such companies the opportunity to reorganise and restructure their affairs for them to regain their solvency. To this end, the definition of “affected persons” includes creditors, employees (or their representative), a registered trade union and shareholders. The role played by each “affected person” is unique in many ways but can have an impact on the failure or success of any business rescue proceedings.
At a glance
- The role of shareholders is often overlooked in successful business rescue proceedings, but shareholders enjoy two categories of rights in this context: the right to participate in business rescue proceedings and the right to be consulted in the preparation of the business rescue plan.
- However, where a business rescue plan has no effect on shareholders’ rights, they are precluded from voting for its adoption (or rejection).
- Although creditors remain the most influential stakeholders in a business rescue process, shareholders should jealously guard their rights and consult with the business rescue practitioner at the first available opportunity in the development of the business rescue plan.
While the role of creditors, employees (or their representative) and registered trade unions cannot, and should not, be devalued, the role of shareholders is often overlooked in successful business rescue proceedings. In the main, shareholders enjoy two categories of rights in business rescue proceedings, namely the right to participate in the business rescue proceedings and the right to be consulted in the preparation of the business rescue plan.
The rights of shareholders to participate in business rescue proceedings are codified in section 146 of the Companies Act. This provision provides that during business rescue proceedings, shareholders are entitled to some of the following rights: notice of any relevant event concerning the business rescue proceedings; participation in the company’s business rescue, as provided for; voting to approve or reject a proposed business rescue plan, if the plan would alter the rights associated with the class of securities; and, if the business rescue plan is rejected, proposing the development of an alternative plan and presenting an offer to acquire the interests of any or all of the creditors.
The fulcrum of these rights remains that shareholders are permitted to vote on the business rescue plan only when the plan seeks to change the rights associated with the class of securities they hold or as creditors in instances where they have made loans to the company. During proceedings, any alteration in the classification or status of any of the issued securities of the company except by way of transfer of securities in the ordinary course of business is invalid, unless a court otherwise directs or such alteration has been approved in the business rescue plan.
When it comes to the adoption of a business rescue plan, shareholders are permitted to vote only when the plan purports to alter rights associated with the class of securities they hold, or as creditors in instances where they have made loans to the company. However, they will not be construed as independent creditors.
In addition to the above rights, it is arguable that perhaps the most important role of shareholders lies in the fact that they are required to be consulted (as with all other affected persons) by the business rescue practitioner in preparing the business rescue plan for consideration and possible adoption. This right is codified in section 150(1) of the Companies Act. The provision provides that the business rescue practitioner, “after consulting the creditors, other affected persons, and the management of the company, must prepare a business rescue plan for consideration and possible adoption”. As stated above, affected persons are defined to include shareholders.
So what does this consultation envisage? In the context of administrative justice, consultation has been described as entailing a genuine invitation to give advice and a genuine receipt of that advice. It is not to be treated perfunctorily or as a mere formality, and that engagement after the decision-maker has already reached their decision, or once their mind has already become unduly fixed, is not compatible with true consultation. Shareholders should therefore jealously guard their consultative rights and consult with the business rescue practitioner at the first available opportunity before the preparation of the business rescue plan, as this is one of the few ways shareholders can possibly influence an outcome that is favourable to them, and ultimately to the company in business rescue.
The diminished role played by shareholders in business rescue proceedings has been subject to some heavy criticism in the past in that even though shareholders are seen as affected persons and have a right to participate in the business rescue proceedings, they have restricted rights in that where the business rescue plan has no effect on shareholders’ rights, they are precluded from voting for its adoption (or rejection).
There is no doubt that creditors remain the most influential stakeholders in a business rescue process due to their ability to vote on a business rescue plan, thus entrenching the long-held view that corporate insolvency remains a creditor-driven regime that is very much still controlled by creditors. Shareholders should, however, jealously guard their rights and consult with the business rescue practitioner at the first available opportunity in the development of the business rescue plan.
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