SCA upholds minority shareholder rights in share repurchase

Madelein Burger, Nasrin Kharsany and Victoria McFarlane

The High Court judgment

In February 2021, we reported on the case of First National Nominees (Pty) Ltd and Others v Capital Appreciation Ltd and Another.

In that case, the High Court of South Africa (Gauteng Local Division, Johannesburg) considered whether a transaction that comes within the ambit of section 48(8)(b) of the Companies Act, 2008 (Act) is deemed to be a scheme of arrangement as contemplated in section 114 or if the repurchase is merely made subject to the requirements of sections 114 and 115. A transaction within the ambit of section 48(8)(b) is one that, considered alone or together with other transactions in an integrated series of transactions, involves the acquisition by the company of more than 5% of the issued shares of any particular class of the company's shares.

The court found that the express wording of section 48(8)(b), which states that the transaction is subject to the requirements of section 114 and 115, does not have the effect of deeming the transaction to be a scheme of arrangement if, by nature, the transaction is not a scheme of arrangement as this term is interpreted in our common law. Rather, a section 48(8)(b) transaction remains a section 48(8)(b) transaction but is made subject to the requirements of section 114 and 115 because the legislature deemed it fit to include and provide additional protection to minority shareholders.

The court found that, in the circumstances, regardless of whether (as a fact) the transaction which was sought to be implemented was a scheme of arrangement or not, it was a transaction that crossed the 5% share repurchase threshold contemplated in section 48(8)(b), thereby triggering the requirements of section 114 and 115 of the Act, which in turn vested the applicants with the right to obtain the judicial determination of fair value for their shares as contemplated in section 164 of the Act.

The Supreme Court of Appeal judgment

The judgment was taken on appeal and on 8 June 2022, the Supreme Court of Appeal (SCA) handed down its decision in the case of Capital Appreciation Ltd v First National Nominees (Pty) Ltd and Others.

In a unanimous decision, the SCA dismissed the appeal, finding that in terms of section 48(8)(b) a share repurchase above the 5% threshold is regarded as a fundamental transaction and that this is achieved by making the transactions that meet the prescribed threshold subject to sections 114 and 115.

The SCA found that the reference in section 48(8)(b) to section 114 establishes a direct link between share repurchases envisaged by section 48 and schemes of arrangement as envisaged by section 114(1)(e) (re-acquisitions by companies of their securities). Section 115 prescribes how the fundamental transactions set out in section 114 are to be approved. In doing so, section 115(8) makes provision for dissenting shareholders to enjoy the benefit of appraisal rights in terms of section 164. It is apparent from this summary, the SCA found, that there was a direct connection between section 48(8)(b), via sections 114 and 115, and section 164 and the appraisal right contended for.

It appears to be implicit in the judgment that the SCA's view is that a repurchase of more than 5% of the issued shares of any particular class is a scheme of arrangement and therefore a fundamental transaction, in contrast to the High Court's finding that such a transaction is not a scheme of arrangement but still requires compliance with sections 114, 115 and 164.

Companies Amendment Bill, 2021

On 1 October 2021, the Department of Trade and Industry published a new draft of the Companies Amendment Bill, 2021 (2021 Bill) for public comment. The 2021 Bill, in its present form, proposes to replace section 48(8) with a new subsection (8). The proposed new wording makes no reference to sections 114 and 115 of the Act. Accordingly, if passed into law, the requirement to comply with sections 114 and 115 will fall away and section 164 appraisal rights will not apply in respect of these transactions.

Until such time as the 2021 Bill becomes law, following the SCA's ruling in this case, a repurchase of more than 5% of the issued shares of any particular class of a company's shares must be regarded as a fundamental transaction to which the provisions of section 114, 115 and 164 of the Act apply.