A recent court judgement upheld the rights of dissenting minority shareholders in situations where a company intends to repurchase more than 5% of its own shares.
Regulation of repurchases under the Companies Act 2008 (Act)
The provisions of sections 48 (which regulates the acquisition by a company of its own shares) and 114 (which regulates schemes of arrangement) of the Act have often given rise to interpretation issues, as both sections apply to situations in which a company seeks to repurchase its own shares.
The Act provides that if a repurchase, considered alone or together with other transactions in an integrated series of transactions, involves the acquisition of more than 5% of the issued shares of any particular class of shares, then the company must comply with the requirements of sections 114 and 115 (section 48(8)(b)). Section 114 regulates schemes of arrangement, which include the acquisition by a company of its own shares pursuant to a shareholder-approved arrangement (section114 (1)(e)), and requires the preparation and issue of an independent expert report (section 114(2)). Section 115 sets out, among other things, the procedural requirements applicable to schemes of arrangements (among other fundamental transactions), which include the approval of the transaction by special resolution and, in addition, provides various other mechanisms aimed at protecting minority shareholders. A dissenting shareholder may exercise its appraisal right if it objects to the transaction being implemented and complies with the detailed procedure set out in section 164 of the Act. In terms of section 115, the proposed transaction is also subject to court review if more than 15% of the shareholders vote against it and, within 5 business days after the vote, any person who so voted against it requires the company to seek court approval.
It is trite that if a company wishes to acquire its own shares by way of a scheme of arrangement, all the requirements of sections 114 and 115 will apply, including the minority protection mechanisms mentioned above.
However, it is less clear whether the same applies to a scenario where a company wishes to acquire its own shares other than by way of a scheme of arrangement, in terms of section 48(8)(b). This was the subject of a recent High Court case discussed below.
The case of the acquisition by a company of more than 5% of its own shares in terms of section 48(8)(b)
In the reportable judgment of the High Court of South Africa (Gauteng Local Division, Johannesburg) in First National Nominees (Pty) Ltd and others v Capital Appreciation Limited and Others, delivered on 5 February 2021, the Court had to consider whether the repurchase by a company of more than 5% of its issued shares triggered appraisal rights where the repurchase was not effected by way of a scheme of arrangement.
In this case, Capital Appreciation Limited (the company), a company listed on the JSE Limited, proposed to repurchase the shares in the company held by specific shareholders. The circular issued to shareholders advised that the repurchase involved the re-acquisition of more than 5% of the issued shares of the company and was subject, in terms of section 48(8)(b), to the requirements of sections 114, 115 and 164 of the Companies Act, 2008.
Before the general meeting, First National Nominees (Pty) Ltd (the dissenting shareholders) gave written notice to the company in accordance with sections 164(3) and 115(8) that it objected to and intended to oppose the resolution to approve the repurchase. At the general meeting, the dissenting shareholders voted against the special resolution which was nevertheless approved by the required majority of shareholders. The dissenting shareholders then issued a demand to the company in terms of section 164(5) and (7) requiring the company to pay to it the fair value of its shares. The company made a written offer in terms of section 164(11) to acquire the shares for an amount of R0.80 per share. The dissenting shareholders rejected the section 164 offer as inadequate and brought an application within the time limit contemplated in section 164(12)(b) of the Act. In answer to the application, the company indicated that "the provisions of section 164 of the Companies Act had not been triggered" and that while the company had previously suggested in its circular to shareholders that the repurchase was subject to sections 114, 115 and 164, that position was based on a misunderstanding of the legal position.
The company proceeded to oppose the dissenting shareholders' exercise of their appraisal rights. The company submitted that section 164 is only triggered in very specific circumstances, namely sections 112 ,113 or 114. While it was common cause that the proposed transaction did not fall within section 112 or 113, the company argued that the proposed repurchase also did not constitute a scheme of arrangement as envisaged in section 114 and therefore the repurchase was not subject to section 164. The company contended that the legislature, in section 164(2)(b), only included repurchase transactions contemplated in section 114 and did not include repurchase transactions contemplated in section 48. It argued that although section 114(1)(e) specifically deals with a re-acquisition of shares by the company itself, it is different from section 48 in that a re-acquisition in terms of section 48 involves a voluntary seller. It further submitted that although section 48(8)(b) requires that the proposed transaction be subject to the requirements of sections 114 and 115, it is only a reference to the procedural requirements of sections 114 and 115. It does not deem a transaction which is not a scheme into a scheme. The company contended that section 48(8)(b) only makes reference to sections 114 and 115 and no reference is made to section 164. If the legislature had intended that section 164 would be triggered in the circumstances referred to in section 48(8)(b), express reference would have been made to it in section 48.
Court's finding
The Court considered the following two questions: (i) does section 48(8)(b) apply to consensual repurchases (i.e. other than by way of a scheme), and if so, (ii) what is contemplated by the words "subject to the requirements of sections 114 and 115" in section 48(8)(b)?
With regard to question 1, the Court held that "given the legislative history behind the section … and given the potential abuses, particularly of minority shareholders, which share repurchases can facilitate, the express wording of section 48(8)(b) is, in my view, clear". It was held that section 48(8)(b) does not have the effect of deeming a re-acquisition of securities in excess of 5% to be an arrangement if, by nature, the transaction is not an arrangement as this term is interpreted in terms of our common law. However, the legislature saw fit to impose particular and further conditions on the type of transaction identified in section 48(8)(b). It recognised that not all transactions involving a repurchase by the company of its own shares should be subjected to further conditions, but those which involved a significant and substantial repurchase (more than 5%) should be. The legislature also recognised that, in transactions of this nature and of this magnitude, it was minority shareholders which required protection and this was best achieved by imposing on the transaction, the ready-made protections afforded and provided to minority shareholders in sections 114 and 115 of the Act.
Regarding question 2, the Court held that by making reference to sections 114 and 115 as a whole, the legislature intended for all the procedural conditions and rights set out in sections 114 and 115 to apply. From a practical procedural perspective this would, among other things, involve (i) the appointment of an independent expert as contemplated in section 114(2), (ii) the proposing and passing of a special resolution as contemplated in section 115(2)(a) and, (iii) the entitlement of dissenting shareholders to exercise appraisal rights as contemplated in section 115(8).
Accordingly, the Court found in favour of the dissenting shareholders. The Court's order provides that the appraiser to be appointed in terms of section 164(15)(c)(iii)(aa) to help the court determine the fair value of the shares held by the dissenting shareholders, must be (i) nominated by agreement between the dissenting shareholders, (ii) . independent and (iii) a chartered financial analyst with at least 10 years post-qualification experience. The Court also ordered that a reasonable rate of interest on the amount payable to each affected dissenting shareholder be applied from the date of implementation of the repurchase until the date of final payment of the fair value of the shares as determined by the appraiser.
We understand that the company intends to appeal the judgment.
Proposed amendments to section 48(8) in terms of the draft Companies Amendment Bill
The interpretation issues dealt with in this case may soon become academic as the draft Companies Amendment Bill, 2019 (Bill) proposes substantial amendments to section 48(8). The Bill proposes that all repurchases (regardless of whether above or below the current 5% threshold) (other than a pro rata repurchase or a repurchase effected in the ordinary course on a recognised stock exchange on which shares of the company are traded) will require approval by special resolution.
The proposed amended wording makes no reference to either section 114 or 115 of the Act. There would therefore be no requirement to comply with the requirements of section 114 (independent expert report) and 115 and the question as to whether section 164 appraisal rights come into play, would not be applicable.
Written by Madelein Burger, Leslie de Bruyn, Elodie Maume from Webber Wentzel