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Landmark case for availability of the appraisal remedy to dissenting shareholders

by Steven Stuart-Steer on 26 July 2018


Mr Abraham Albertus Cilliers (hereinafter "Cilliers") succeeded in a precedent setting claim against La Concorde Holdings Limited (KWV Holdings Limited as it was previously named) (hereinafter "La Concorde"), a public company listed on the JSE and forming part of the HCI group of companies, in the Western Cape High Court on 14 June 2018.  This landmark case held that dissenting shareholders of a disposing company's holding company are entitled to follow their rights for a statutory buyout at fair value in certain circumstances. 

A short overview of the relevant facts 

Cillers held a minority stake in La Concorde. During October 2016 one of the subsidiaries of La Concorde sold all its operational assets to a third-party purchaser in the sum of approximately R1.2 billion.  Cilliers together with certain other dissenting shareholders objected to the implementation of the proposed disposal and voted against the passing and adoption of the required corporate approvals.  

After a long-standing dispute, La Concorde offered to exit the dissenting shareholders based on a valuation for his shares as obtained from the company's auditors.  Cilliers rejected the offer as being inadequate consideration and instituted an application in the Western Cape High Court to follow his rights to a statutory buyout at fair value in terms of section 164 of the Companies Act, No. 71 of 2008 (hereinafter "Companies Act"). 

What the Companies Act requires for such a "fundamental transaction"

The Companies Act requires that certain corporate approvals be obtained in cases where a company wishes to give effect to a disposal of all or a greater part of its assets or undertaking as well as in the case of certain schemes or to give effect to a statutory merger (so-called "fundamental transactions").  A special meeting of the shareholders must be called for purposes of considering and voting on a special resolution to approve such a proposed transaction in accordance with the procedure set out in section 115 of the Companies Act.  This special meeting requires that at least 25% of shareholders entitled to vote on the matter be present in person or by proxy (or such higher percentage of voting rights if required by the memorandum of incorporation).

In the case of a disposal of all or a greater part of the assets or undertaking of the company there is an additional corporate approval required in terms of section 115(2)(b) of the Companies Act where the disposing company forms part of a larger group of companies.  The shareholders of the disposing company's holding company may also be required to approve the proposed disposal by way of the special meeting procedure in section 115 of the Companies Act.  This additional corporate approval would be required where: (i) the holding company is a South African company or a foreign company carrying on business within South Africa (e.g. a branch company); and (ii) having regard to the consolidated group financial statements, the disposal by the subsidiary will in turn constitute or can be deemed to be a disposal of all or a greater part of the assets or undertaking of the holding company.  

The relief provided to dissenting minority stakeholders by way of a statutory exit at fair value

During the approval process for a fundamental transaction (unless being implemented pursuant to a valid business rescue plan), shareholders are entitled to follow their appraisal rights under section 164 of the Companies Act and to be notified of the availability of such remedy by the company providing an extract containing the wording of the particular provision in its circular to shareholders calling for the special meeting to obtain the required corporate approvals.  

The appraisal remedy effectively creates a right for shareholders to exit the company concerned at fair value (i.e. a type of statutory put option against the company which is triggered by it proposing to enter into a fundamental transaction).  

To exercise this appraisal right dissenting shareholders must actively object to the company giving effect the proposed fundamental transaction, which requires that the shareholder: (i) deliver a notice of objection in writing; and (ii) be present at the special meeting of shareholders, whether in person or by way of proxy, and vote against the resolution/s to approve the proposed fundamental transaction. 

The precedent set by this landmark case  

The Court was posed with the question of whether or not an objecting shareholder with a stake in a holding company would also be able to follow his/her/its rights in terms of the statutory exit provisions under section 164 of the Companies Act in circumstances where it is only the company's subsidiary effecting the disposal of all or the greater part of its assets or undertaking, but that disposal would in turn be viewed as a disposal of all or a greater part of the assets or undertaking of the holding company when considered against the consolidated group financial statements.

The Court held that the language of the Companies Act is clear and leaves no room for ambiguity.  Where a holding company, like its subsidiary, is required to follow the special corporate approval process in terms of section 115(2)(b) of the Companies Act, such holding company is equally bound and required to afford its shareholders the right to be exited at fair value in terms of section 164 of the Companies Act if they object to the proposed transaction in the prescribed manner.  

It appears this case is likely to go on appeal and so further developments may follow.  Directors should nevertheless remain mindful of required corporate approvals in the case of a disposal of all or a greater part of the assets or undertaking the of company, including where the company forms part of a larger group of companies.  Such a disposal may allow shareholders to follow their statutory rights to be exited at fair value. 



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