DealMakers - Q1 2022 (released May 2022)
A scheme of arrangement proposed to holders of a class of shares – shareholders’ approval rights
by Julius Oosthuizen, Prince Mathibela and Olwethuthando Ndlovu
A company may reorganise its shares/securities by implementing a scheme of arrangement if approved by a supermajority of at least seventy-five percent of the shareholder votes exercised on the scheme, provided that other statutory requirements are satisfied.
Once shareholders approve a scheme of arrangement by a supermajority, it is binding on all shareholders. The dissenting shareholders, however, are not left without recourse. They may approach the court within ten business days after the date on which the shareholders voted on the arrangement, as contemplated in section 115(3), or exercise their appraisal rights in terms of s164.
Generally, when proposing an arrangement to holders of all shares ranking pari passu, all shareholders will be entitled to vote on such a proposition. However, which class of shares is entitled to vote on an arrangement proposed to holders of only one class of shares in a company with different share classes that do not rank pari passu? We will briefly respond to this question.
The Companies Act 71 of 2008
S114(1) of the Companies Act 71 of 2008 (the Act) provides that a company’s board may propose and implement an arrangement between the company and the holders of any class of shares. In other words, a proposition between a company and holders of one class of shares in a company with varying share classes is legally sound. Transactions in respect of consolidation of class securities, division of class securities, expropriation of class securities, exchanging securities in the company for other securities, reacquisition of securities, or a combination thereof may be implemented by way of a s114 arrangement.
Before a proposed arrangement is implemented, shareholder approval must be obtained in compliance with s115(2), read with s115(4) of the Act. S115(2) requires the proposition to be approved: (i) by a special resolution adopted by persons entitled to exercise voting rights on such a matter; (ii) at a meeting called for that purpose; and (iii) at which sufficient persons are present to exercise, in aggregate, at least 25% of all the voting rights that are entitled to be exercised on that matter, or a higher percentage as may be determined by the company’s Memorandum of Incorporation. Furthermore, the voting rights that are controlled by the acquiring party, a person related to the acquiring party, or a person acting in concert with either of them must not be included in calculating the requirements of a quorum or a special resolution for purposes of s115(2).
Share classes that do not rank pari passu
While s311(2) of the Companies Act 61 of 1973 (the 1973 Act) expressly provided that an arrangement proposed between a company and any class of its members must be agreed by a majority representing three-fourths of the votes exercisable by that class of members present and voting either in person or by proxy at the meeting, such expressive language regarding class resolutions does not form part of the wording in s115(2) of the Act. S311(2) of the 1973 Act also provides that if a class arrangement is approved, it will be binding on that class.
In Verimark Holdings Limited v Brait Specialised Trustees (Pty) Ltd NO and Two Others (2009) ZAGPJHC 45, Malan J held, for the purposes of s311(2), that an arrangement that is proposed to class members entitles those members “to whom the offer is made” to vote on such arrangement. In paragraph 10, Malan J confirmed that categorisation of a class of members for purposes of s311(2) involves a determination of the “similarity of rights and not the similarity of interests”. In a recent case, Sand Grove Opportunities Master Fund Ltd and Others v Distell Group Holding Ltd and Others (6378/2022) (2022) ZAWCHC 46, Binns-Ward J endorsed the approach adopted in the Verimark case on the issue of categorisation of classes of shareholders when observing that, for the purposes of differentiating shareholders into separate classes, the focus is on dissimilarity of shareholders’ rights, not interests. According to Binns-Ward J, the shareholders’ rights should be sufficiently similar to make it feasible for them to consult together regarding, for example, a proposed arrangement.
Unlike s311 of the 1973 Act, s115(2) of the Act requires, inter alia, approval by a special resolution adopted by “persons entitled to exercise voting rights on such a matter”. The Distell case in paragraph 81, states that “section 115 provides for a company meeting and not a meeting of classes of shareholders as used to be the case under section 311”. Binns-Ward J goes on to state that “it is incumbent on the directors, presumably following the advice of the independent board and with due attention to the content of the independent expert’s report, to consider and determine on the most appropriate manner in which to comply with section 115(2)”. Furthermore, Binns-Ward J states in paragraph 88 that “any company concerned with convening a meeting in terms of section 115(2) must conduct itself mindful of the same considerations that the court used when deciding an application in terms of section 311 of the Companies Act 61 of 1973”.
Being mindful of the above principles, we submit that the determination of the approval procedure required with regard to an arrangement proposed to holders of a share class must begin by establishing whether any existing share classes have distinguishable rights in relation to the arrangement or not. If so, it is such class that is entitled to vote on the arrangement. Put differently, the shareholders to whom the same proposition is made, and whose rights will be affected in the same manner by the proposed arrangement, will constitute the scheme participants and should be allowed to consult on common rights. General votes – for example, of all shareholders whose interests are affected in some manner by the arrangement, rather than those whose rights are affected in the same manner – would otherwise have the potential of leading to absurd results, in that a particular class of shareholders may have their shares reorganised in circumstances where none of them has consented thereto. By way of example, if the share class of the scheme participants constitute only 10% of the issued shares, a resolution approved by all shareholders, including those to whom a classification arrangement was not proposed, would result in the reorganisation of the share class of the scheme participants only.
The Distell case also establishes (correctly, we submit) that the responsibility to make the determination of whether a special resolution from a particular class of shareholders is required rests with the company’s board. In doing so, it should follow the advice of the independent board and have due regard to the content of the independent expert’s report.
The role of the TRP in respect of regulated companies
The Distell case also reaffirmed the mandate of the Takeover Regulation Panel (TRP) in relation to schemes of arrangement. In paragraph 81, the court held that the TRP is permitted “to direct the holding of an appropriately constituted separate meeting” by class shareholders for purposes of s115(2). Binns-Ward J cited s119(2)(b)(ii) of the Companies Act, in terms of which the TRP needs “to ensure that all holders of ‘voting securities of an offeree regulated company are afforded equitable treatment, having regards to the circumstances’”.
As a result of this case, we believe that the TRP will be more vigilant in ensuring the equitable treatment of shareholders where an arrangement is proposed to a particular class of shareholders in a company with varying classes of shares, and that the principles set out in the Distell case are likely to be considered in the exercise of its mandate.
While all shareholders of a company may be entitled to vote on an arrangement that is proposed to all shares of the company for purposes of s115(2) read with 115(4), it might be difficult to determine whom the “persons entitled” to vote on a class scheme should be for the purposes of s115(2). In light of the Distell case, we submit that all circumstances, including the rights attached to the class of shares, the identity of the holders of such shares, the advice of the independent board, and the independent expert’s report should be taken into consideration when deciding on whether or not a special resolution passed by a specific class of shareholders is required for the purposes of s115(2).
Oosthuizen is HOD, Mathibela a Trainee Associate, and Ndlovu, a Candidate Legal Practitioner in Corporate Commercial | ENSafrica.