DealMakers - Q1 2021 (May 2021)
Did the First National Nominees judgment hit all the right notes?
by Brian Jennings and Nikhil Sham
While the ink was still drying on the Gauteng High Court's judgment in the First National Nominees (Pty) Ltd v Capital Appreciation Limited (19/41679)  ZAGPJHC 18 (First National case) matter, Zoom and Teams meetings were being scheduled to analyse the Court's interpretation of section 48(8)(b) of the Companies Act, No. 71 of 2008 (Companies Act). The Court sided with, we dare say, the majority of practitioners’ views that a repurchase in terms of s48(8)(b) of the Companies Act does not constitute a scheme of arrangement in terms of s114 of the Companies Act.
Despite this welcome relief, the central issue that the Court had to determine in the First National case was whether or not the first applicant was, in the circumstances, entitled to exercise its appraisal rights in terms of s164 of the Companies Act. The Court found that the first applicant was within its rights to exercise such appraisal rights and made an order accordingly. We analyse below whether this decision was entirely correct, namely whether the Companies Act intended to vest the benefit of appraisal rights on shareholders if a company repurchases its own shares in terms of s48(8)(b) (S48(8)(b) Repurchase).
In the First National case, the Court reasoned that the correct interpretation of the wording of s48(8)(b), requiring such a transaction to comply with s114 and s115, is not to deem a S48(8)(b) Repurchase to constitute (or be required to be implemented by way of) a scheme of arrangement, but rather to afford such transaction "the ready-made protections afforded and provided to minority shareholders in sections 114 and 115 of the Act".
Consequently, the Court accepted that if there was compliance with s115(8), which there was in the First National case, shareholders of a company wishing to undertake a S48(8)(b) Repurchase were entitled to exercise their appraisal rights in terms of s164 of the Companies Act, if they so wished.
S48(8)(b) of the Companies Act states:
"48(8) A decision by the board of a company contemplated in subsection (2) (a) –
(a) …; and
(b) 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% of the issued shares of any particular class of the company’s shares."
The first requirements that spring to mind when one reads the reference to s114 and s115 in s48(8)(b) are that one must obtain an independent expert report, and that the repurchase must be approved by way of special resolution. However, in our view, the pertinent "requirement" appears in s115(8), which reads:
"115(8) The holder of any voting rights in a company is entitled to seek relief in terms of section 164 if that person –
(a) notified the company in advance of the intention to oppose a special resolution contemplated in this section; and
(b) was present at the meeting and voted against that special resolution."
S115(8) allows shareholders to exercise their appraisal rights in terms of s164, if the conditions in subsections (a) and (b) are met. The trigger for appraisal rights applying to a S48(8)(b) Repurchase is that the relief sought must be "in terms of s164". This is fundamental. S164(2) provides as follows:
"164(2) If a company has given notice to shareholders of a meeting to consider adopting a resolution to –
(a) amend its Memorandum of Incorporation by altering the preferences, rights, limitations or other terms of any class of its shares in any manner materially adverse to the rights or interests of holders of that class of shares, as contemplated in section 37(8); or
(b) enter into a transaction contemplated in section 112, 113, or 114, that notice must include a statement informing shareholders of their rights under this section."
We focus on s164(2)(b) for present purposes. On a plain, literal interpretation of s164(2)(b), the only circumstances where appraisal rights are triggered would be when the transaction is contemplated in s112, s113 or s114. S112 contemplates a disposal of all or the greater part of the assets or undertaking of a company; s113 contemplates an amalgamation or merger and s114 contemplates the board of a company proposing and implementing any arrangement between the company and holders of any class of its securities. At no point do these sections expressly contemplate a S48(8)(b) Repurchase.
One may argue that s114(4) refers to s48 and, therefore, as a S48(8)(b) Repurchase is included as a sub-paragraph thereof, it contemplates it. This may not be entirely correct. S114(4) provides that "Section 48 applies to a proposed arrangement contemplated in this section to the extent that the arrangement would result in any re-acquisition by a company of any of its previously issued securities." What s114(4) does is exactly the opposite – it does not contemplate s48 as a stand-alone transaction in the manner that s164(2)(b) does, but rather its purpose is merely to clarify that a scheme of arrangement that involves a repurchase of securities must comply with the requirements of s48, in addition to those of s114 and s115. This is because a repurchase which is subject to s48(8)(b) is a stand-alone repurchase – if not, then there would be no need to state that it is "subject to the requirements of s114 and s115".
From our conclusion above, it appears to us that a S48(8)(b) Repurchase may not be contemplated in s164(2)(b) and, therefore, on our literal reading, and assuming that our view on s114(4) is correct, s115(8) cannot apply to it, as a S48(8)(b) Repurchase is not "in terms of section 164".
In summary, while the Court reasoned that it must have been the intention of the legislature to extend the application of s115(8), and consequently s164 of the Companies Act to S48(8)(b) Repurchases in the First National case, the text of the Companies Act may not reflect that, for the reasons set out above. As there is no ambiguity, one cannot adopt an interpretation that would remedy the failure to include express language linking a S48(8)(b) Repurchase to the triggering of appraisal rights under s164(2)(b).
As such, while we are bound to follow the Court's decision in the First National case, an argument against s164 applying to S48(8)(b) Repurchases may be a song worth singing in the future.
Jennings a Director and Sham is an Associate | Cliffe Dekker Hofmeyr.