DealMakers - Q2 2022 (released August 2022)
Minority shareholders’ appraisal rights
by Johan Coertze and Giscard Kotelo
An important consideration when implementing a repurchase of shares
The repurchase by a company of its own shares is allowed in terms of section 48(8) of the Companies Act 71 of 2008 (the “Act”) provided, inter alia, that the solvency and liquidity test is met. One of the other core restrictions, in terms of s48(8)(b), is that a decision by a company’s board to acquire its own shares is subject to the requirements of s114 and s115 of the Act where the transaction – in terms of which the shares are reacquired by the company, considered individually or as an integrated series of transactions – involves the acquisition by the company of more than 5% of its shares.
S115(8) expressly provides that any person who informed the company of their intention to vote against the special resolution approving a fundamental transaction – and, in fact, attends the relevant meeting and votes against such special resolution – is entitled to seek relief in terms of s164 of the Act.
S164 of the Act provides for dissenting shareholders’ appraisal rights. An appraisal right is best described as the right of a dissenting shareholder, who does not approve of a fundamental transaction, to have its shares bought out by the company in cash, at a price reflecting the fair value of the shares.
In the recent case of Capital Appreciation Ltd v First National Nominees (Pty) Ltd and Others, the Supreme Court of Appeal (the “SCA”) was called upon to consider whether the reference to the requirements of s114 and s115 of the Act in s48(8)(b) means that the appraisal rights in s164 of the Act were triggered when a company proposed to repurchase more than 5% of its shares.
The facts can 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 s48, s114 and s164 of the 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 s164 of the 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 s164 due to the fact that Capital Appreciation proposed to repurchase specific shares from specific shareholders in terms of s48 – which repurchase met the requirements of s48(8)(b). Capital Appreciation changed tack and argued in court that s164 did not apply, with the result that First National Nominees (the minority shareholder) had no right to an appraisal of the fair value of its shares by the court.
Before the High Court, (which judgment became the subject of the appeal) Capital Appreciation argued that the repurchase of shares in terms of s48 does not qualify as a scheme of arrangement, as understood in the authorities related to the previous Companies Act and, accordingly, although s48(8)(b) incorporates the requirements of s114 and s115 into a transaction whereby more than 5% of a company’s shares will be repurchased, this is only a reference to the procedural requirements and not the appraisal rights in s164. Moreover, as s48(8)(b) does not reference s164, the legislature would have made reference thereto in s48 if its intention was that s164 would be triggered in the circumstances referred to in s48(8)(b). The High Court disagreed and held that the inclusion of the requirements of s114 and s115 in s48(8)(b) incorporated all the requirements of these sections into a repurchase in terms of s48(8)(b), including the appraisal rights in s164, 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 s114 and s115 in s48(8)(b) establishes a direct link between s48(8)(b) and s164. The SCA held that First National Nominees was, therefore, entitled to be paid the fair value of its shares by Capital Appreciation.
In so ruling, the SCA confirmed that a company wishing to repurchase more than 5% of its shares in terms of s48 of the Act must, in addition to complying with the procedural requirements of s114 and s115, comply with the requirements of s164, should a minority shareholder wish to exercise their appraisal rights. The possibility of a minority shareholder exercising their appraisal rights is, therefore, an important consideration when a company decides to implement a repurchase of shares in terms of s48 of the Act.
Coertze is an Associate and Kotelo a Candidate Attorney. Article overseen by Counsel Michael Van Vuren | Fasken.
Capital Appreciation Ltd v First National Nominees (Pty) Ltd and Others  ZASCA 85 (8 June 2022).