This post aims to briefly analyse the development to our company legislation following the decision in First National Nominees (Pty) Ltd v Capital Appreciation Ltd (19/41679) [2021] ZAGPJHC 17, as well as to briefly consider the possible impact that the new Companies Bill, 2021 may have on the statutory formalities for this type of transaction.

If a company propose to repurchase more than 5% of the total shares in issue, whether in a single transaction or series of integrated transactions, an approval by shareholders with a special majority of voting rights is required.  These corporate approvals can often be passed by means of written round robin resolutions, however, in the case of a share buy-back this would need to be done at a shareholders' meeting to comply with prescribed formalities.  The board of such a company is further obliged to retain an independent expert to compile a 'fair and reasonableness' report and issue this together with a circular containing prescribed information to all shareholders prior to the meeting calling for approval of the transaction.   

Section 164 of the Act entitles a dissenting shareholder to a share buy-back transaction above the 5% threshold to be exited from the business at fair value.  The rationale for this statutory “appraisal right” is to provide relief to a minority shareholder who becomes obliged to accept a majority decision to have certain other (potentially key) shareholders disinvested from the business.  To trigger the appraisal remedy, a shareholder will need to actively oppose the share buy-back before a shareholders' meeting and then vote against the relevant corporate actions at such a meeting.  If sufficient shareholders who alone or together hold 15% of the total voting rights object to the decision, they are also entitled to seek judicial relief by requiring that the transaction also obtain court approval. 

There has been some uncertainty on the proper interpretation of section 48(8) of the Act which has led to two opposing views in practice as to whether a repurchase of shares above the 5% threshold would constitute a “scheme of arrangement” for purposes of the Act, or whether such transactions need only follow required formalities in section 115 alone.   This has been a burning question for many corporate attorneys as it affects whether such transactions are subject to regulatory clearance by the South African takeover authorities (the Takeover Regulation Panel, commonly abbreviated the “TRP”).

The application of the appraisal right in the context of share buy-back transactions was tested in First National Nominees (Pty) Ltd v Capital Appreciation Ltd.

Capital Appreciation Ltd sent out a shareholder circular advertising an agreement reached with specific shareholders to buy out more than 5% of the shares by way of a share buy-back.  The JSE-listed company subsequently learned there was opposition to the deal from a group of minority shareholders, following which it backpedalled on its circular taking a view that on its reading of the Act it was only required to comply with the procedural formalities and did not need to follow the "fair value" right to shareholders in section 164 of the Act.  

After considering the intention of the legislature and underlying purpose of the provisions, the court found that the wording in the Act clearly cross-refers to section 164.  So companies must comply with the requirements to offer a “fair value” exit to shareholders in terms of section 164 in such circumstances.

The court further analysed section 48 and found that a share buy-back above the 5% threshold does not itself constitute a scheme of arrangement for purposes of the Act, but is merely required to comply with the statutory formalities reserved to give effect to a scheme of arrangements.  

This is an important development as it now provides certainty on regulatory requirements when executing such transactions.  The result of this decision is that if a regulated company concludes an agreement to give effect to a share buy-back with certain of its shareholders, it should not be seen to have executed a “scheme of arrangement” and therefore will not be obliged to obtain clearance from the TRP unless otherwise governed in the company’s constitution.  This makes it far simpler for businesses to assess formalities to validly give effect to transactions of this nature and prevents unintended oversights invalidating internal business restructures. 

At the time of writing, a new Companies Amendment Bill, 2021 ( “Draft Bill”) has been made available for public comment and is being considered by Parliament.  

The Draft Bill proposes to remove section 48(8)(b) of the Act entirely, which would have the net effect that companies undertaking a share buy-back of more than 5% of its shares no longer even have to comply with the requirements of sections 114 and 115 of the Companies Act.  This would remove a further layer of regulation around share buy-back transactions. 

The proposed amendment seems aligned with the recent judgment in First National Nominees (Pty) Ltd v Capital Appreciation Ltd as detailed above as these proposed amendments to the Act will now clearly separate share buy-backs from the requirements reserved for schemes of arrangements.

 

The Draft Bill proposes to further simplify the corporate approvals needed for a share buy-back by empowering the board without special approval of shareholders to give effect to such transactions where the repurchase is  pro rata for all shareholders for the same class of shares. 

The Draft Bill remains in draft form and accordingly the wording is still subject to possible change before final promulgation.

Share buy-backs are a useful method to restructure a group of companies, consolidate shareholding interests or to exit an employee from a share scheme.  Such transactions can also be used to allow for an orderly disinvestment of specific shareholders without requiring shareholders to fund the purchase of such shares from the exiting shareholder/s.  Instead, the company itself buys out such interests from such shareholder/s directly.  

Our courts, however, still have a wide discretion to prevent the implementation and interdict such transactions on suitable grounds, including where it finds: (i) the terms unfair to any class of shareholder; (ii) there was an inadequate disclosure of material facts; (iii) votes were tainted by a conflict of interest; (iv) the transaction fails to fully comply with provisions of the Act; or (v) other procedural irregularities in the execution of the transaction.  

Although the recent decision and planned amendments in the Draft Bill remove some of the regulatory hurdles relating to share buy-backs, there remain a number of key corporate approvals and statutory formalities to be navigated to ensure such transactions become valid.  Directors may become personally exposed to claims for liability by stakeholders if such legal requirements are not properly handled.