The Companies Act, 2008, (“Act”) provides for two mechanisms through which a company can acquire its own shares. The first mechanism is the mechanism set out in section 48 of the Act. Section 48 essentially provides that a company may, to the extent that it is solvent and liquid, buy back its own shares. From an approval perspective, the requirements of section 48 are minimal. A share buy-back carried out in terms of section 48 only requires the approval (or decision) of the board.
The second mechanism for implementing a share buyback is through a scheme of arrangement on the basis of section 114 of the Act. Schemes of arrangement under the Act are part of a broader category of transactions referred to in the Act as “fundamental transactions”. The term “fundamental transactions” is not defined in the Act however, in general and as the name suggests, these types of transactions are transactions which have a fundamental effect in one way or another on the company. Unlike other transactions, fundamental transactions are characterised by, amongst other things, the relatively more stringent legislative requirements for their implementation. Common to all fundamental transactions is that they must be approved by a special resolution.
Accordingly, from an approval perspective, the difference between a share buyback implemented on the basis of section 48 and one implemented on the basis section 114 of the Act is that the former only requires board approval whereas the latter also requires approval by special resolution. A section 114 share buyback is also subject to appraisal rights and requires court approval if opposed by at least 15% (fifteen percent) of the shareholders.
It is often thought that a share buyback can be implimented on the basis of either sections 48 or 114. However, the reality is that the vast majority of share buyback transactions must comply with both the provisions of section 48 and 114 and it is only a small number of share bubyback transactions which can be implement without having to comply with both sections.
In terms of section 48 (8) (b) of the Act, a share buyback 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% (five percent) of the issued shares of any particular class of the company’s shares”. Accordingly, where a company acquires at least 5% (five percent) of any class of its shares in terms of section 48, whether in terms of a single transaction or otherwise, that acquisition is also subject to the requirements of sections 114 and 115.
From the wording of section 48(8) it can be inferred that where the shares in question constitute less than 5% (five percent) of any class of shares of that company, it will be sufficient for the company to comply only with the provisions of section 48 i.e. there’s no requirement under those circumstances to also comply with the provisions of sections 114 and 115.
In turn, section 114(4) of the Act provides that any share buyback implemented in terms of the provisions of that section is also subject to the provisions of section 48. Accordingly, all share buyback transactions implemented in terms of a scheme of arrangement must also comply with section 48
Therefore, a share buyback transaction implemented in terms of section 48 will require compliance with sections 114 (and 115) where the 15% threshold is met and a share buyback transaction implemented in terms of section 114 will always be subject to section 48.
Accordingly, there is only a small category of share buyback transactions which can be implemented without both sections 48 and 114 being applicable. These are the transactions implemented in terms of section 48, where the 5% threshold is not met. For all the other share buyback transactions, the provisions of both sections 114 and 115 will apply.
Written by Martin Mota, Partner: Corporate Commercial Department, Adams & Adams.