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Rights of the Minority Shareholders in a Share re-purchase

A Share buy-back a repurchase of its own shares, involves a transaction whereby a company buys back issued shares from shareholders, these transactions are regulated by section 48 of the Companies Act 71 of 2008 (“Companies Act’), which is further subject to the company meeting the solvency and liquidity requirements (section 4 of the Companies Act).

Following the recent case of Capital Appreciation Ltd v First National Nominees (Pty) Ltd and Other [2022] ZASCA 85 (“Capital Appreciation”), compliance with sections 48,114,115 and 164 of the Companies Act should be considered.

The Companies Act (i.e. section 48(8)(b)) provides that if a repurchase, considered alone or together with other transactions in an integrated series, involves the acquisition of more than 5% of the issued shares of any class of shares, then the company must comply with the requirements of sections 114 and 115 of the Companies Act.

Section 114 of the Companies Act specifically regulates a scheme of arrangement (including the repurchase of a company’s own shares) requiring the preparation of an independent export report. Section 115 of the Companies Act, among other things, sets out the procedural requirements applicable to schemes of arrangement. These include the approval by special resolution, as well as allowing for a court review if more than 15% of the shareholders vote against the transaction within five business dates after the vote.

In the recent Capital Appreciation case, the Supreme Court of Appeal (the “SCA”) considered whether the reference to the requirements of section 114 and section 115 of the Companies Act in s48(8)(b) means that the appraisal rights in section 164 of the Companies Act were triggered when a company proposed to repurchase more than 5% of its issued shares.

The facts of the case could be summarised as follows: Capital Appreciation issued a circular to its shareholders in which it notified them of its intention to repurchase shares from specific shareholders, and that due to the number of such shares, the transaction was subject to sections 48, 114 and 164 of the Companies Act. The special resolution for this transaction was passed by a large majority of shareholders.

The minority shareholders in Capital Appreciation approached the High Court, in terms of section 164 of the Companies Act, for an order that an appraiser be appointed to assist the court in determining a fair value of their shares in Capital Appreciation. The minority shareholders exercised their appraisal rights in terms of section 164 due to Capital Appreciation’s proposed repurchase of shares from specific shareholders. Capital Appreciation argued in court that section 164 did not apply, with the result that First National Nominees, one of the minority shareholders, had no right to an appraisal of the fair value of its shares by the court.

The High Court, held that the inclusion of the requirements of sections 114 and 115 in section 48(8)(b) incorporated all the requirements of these sections into a repurchase in terms of section 48(8)(b), including the appraisal rights in section 164, irrespective of whether the transaction qualifies as a scheme of arrangement or not.

The SCA, in dismissing the appeal by Capital Appreciation and confirming the decision of the High Court, held that the reference to sections 114 and 115 in section 48(8)(b) establishes a direct link between section 48(8)(b) and section164. The SCA held that First National Nominees was, therefore, entitled to be paid the fair value of its shares by Capital Appreciation.

It is noteworthy that the proposed Companies Act Amendment Bill was recently introduced to parliament, proposed changes to section 48 of the Companies Act which would simplify how share buy-back are conducted.

 

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