Share buybacks - the latest do's and don'ts

A recent judgment in First National Nominees Pty Ltd and Others v Capital Appreciation Limited (case no. 19/41679, 5 February 2021) has, to a certain extent, provided much-needed clarity as to whether a company's acquisition of more than 5% of its issued shares is in fact a scheme, or merely subject to  the procedural requirements thereof? Either way, are appraisal rights triggered when the company proposes such a buyback?

Written by Nicolene Schoeman-Louw, Managing Director SchoemanLaw Inc, for LexisNexis South Africa.

Section 48 of the Companies Act 71 of 2008 as amended (the "Companies Act" or the "Act") makes provision for the re-acquisition by a company of its own shares.

Section 48(8)(b) of the Act provides that a decision by the board of a company to acquire its shares is subject to "the requirements of" sections 114 and 115 of the Companies Act. If considered alone or together with other transactions in an integrated series of transactions, it involves the company's acquisition of more than 5% of the issued shares of any particular class of the company's shares.

Two critical questions have stood since the commencement of the Companies Act:

1. Is such a buyback, in fact, a scheme, or is it merely subject to the procedural requirements thereof?
2. Either way, are appraisal rights triggered when the company proposes such a buyback?

A recent judgment in First National Nominees Pty Ltd and Others v Capital Appreciation Limited (case no. 19/41679, 5 February 2021) has, to a certain extent, provided much-needed clarity.

In this case, Capital Appreciation Limited (“CPL”) issued a circular to its shareholders in terms of which it advised them that it would be repurchasing a certain number of shares held by specific shareholders. The circular stated that the transaction triggered sections 48, 114 and 164 of the Companies Act. It entailed CPL acquiring more than 5% of its own issued shares. CPL, however, later changed its stance, saying that section 164 was not triggered.

The Section 164 appraisal remedy aims to maintain an equilibrium between minority shareholders and controlling shareholders. It empowers minority shareholders to withdraw from a company while obtaining fair value for their shares.

CPL's argument was that a scheme of the arrangement, after all, is to bind a whole group of shareholders by way of a special resolution, regardless of whether the minority voted against the scheme or did not even participate in the vote. This is fundamentally different from what is contemplated in section 48(8)(b). Re-acquisition, in terms thereof, involves a voluntary seller in a typical contractual setting.

The advantage of the judgment, therefore, is that where a regulated company undertakes a contractual/voluntary share buyback from specific shareholders under section 48(8)(b) of the Companies Act, it is not launching a "scheme of arrangement". Therefore, one is not concerned with an "affected transaction" under section 117(1)(c)(iii), which is regulated by the Takeover Regulation Panel. This removes a substantial layer of regulation to comply with.

Thus, appraisal rights still apply, which are not linked to whether or not the company is a regulated company. Instead, it has to do with the fact that section 115(8) cross-refers to dissenting shareholders' rights in section 164. The operative section regulating appraisal rights, namely section 164, appears to capture only schemes of arrangement as referred to in section 114.

However, in National Credit Regulator v Opperman and Others 2013(2) SA 11 (CC), the court held that “It is trite that a statutory interpretation which gives meaning and efficacy to a provision, is to be preferred to one which renders a provision superfluous or nugatory.”

According to the court, the practical effect of all of this was that this creates a perplexing anomaly. On the one hand: minority shareholders are entitled to appraisal rights protection if the board decides to effect a (substantial) re-acquisition of the company's shares in terms of a scheme of arrangement but, on the other: not if it chooses to do so in terms of section 48. If the drafters did not intend appraisal rights to apply in these circumstances, more specific cross-referencing would have been provided. According to Cassim, as stated, the legislature was particularly concerned that adequate protection is afforded to minority shareholders. Appraisal rights empower minority shareholders to withdraw from a company while obtaining a fair value for their shares.

The appraisal remedy is aimed at maintaining the equilibrium between minority shareholders and controlling shareholders.[1] However, according to van der Linde, although section 164 appraisal rights enable the shareholder to "sell" her shares to the company at their fair value. It will afford limited protection against coercive and proportionate repurchases, except that the shareholder will be able to ensure a fair price. It may be a helpful remedy in the case of a selective repurchase from which the dissenting shareholder is excluded.[2] The appraisal right is intended to thwart opportunism and ill-advised business decisions by the board of directors. In this regard, the board will be more easily swayed to abandon an unwise transaction if a substantial number of shareholders dissent from it and invoke their appraisal rights. This is given the cash drain that the company would otherwise face in buying out the dissenters' shares at a fair value in cash.[3] In essence, according to Cassim, the appraisal right enables a dissenting shareholder, in certain statutorily prescribed circumstances, to force the company to purchase his shares in cash at a price reflecting the fair value of the shares and to exit the company.[4]

This forms the basis of the view that section 115(8) has the effect of broadening the appraisal remedy beyond the transactions listed in section 164.

Nicolene Schoeman-Louw
Managing Director SchoemanLaw Inc

[1] 2017 SA Merc LJ 305 Maleka Femida Cassim “The appraisal remedy and the oppression remedy under the Companies Act of 2008, and the overlap between them”.
[2] 2010 TSAR 288. Professor Kathleen van der Linde. “Share repurchases and the protection of shareholders”.
[3] Supra 2017 SA Merc LJ at 313
[4]MF Cassim "The Introduction of the Statutory Merger in South African Corporate Law: Majority Rule Offset by the Appraisal Right (Part I)" (2008) 20 SA Merc LJ 1 19