The introduction of the appraisal remedy in section 164 of the Companies Act, 71 of 2008 (“Companies Act”) offers dissenting shareholders a right to exit a company at fair value in the event of certain fundamental transactions and corporate actions.
In the recent judgment of Hoogeveld Boerderybeleggings (Pty) Ltd and Others v TWK Agriculture Holdings (Pty) Ltd [2021] A28-2020 (ML) (“TWK”), the appellants, a group of minority shareholders in TWK (the defendant) sought to rely on the appraisal remedy due to alleged material adverse effects that the proposed amendment of TWK’s memorandum of incorporation (“MOI”) would have on minority shareholders’ rights.
A company may amend its MOI in accordance with section 16 of the Companies Act, provided that the shareholders approved the amendment by way of a special resolution. Despite passing the required threshold for a special resolution, it is not the only protection awarded to shareholders in the Companies Act. If an amendment to the MOI has a material adverse impact on the rights of a class of shareholders, dissenting shareholders who actively opposed the amendment by providing a notice of objection and do not vote in support of the resolution to amend the MOI, may also exercise their appraisal rights in terms of section 37(8) read with 164(2)(a).
Recent judgment by the High Court
In TWK, the High Court of South Africa, Mpumalanga Division (Mbombela) had to determine whether the wording of section 164 read with section 37(8) of the Companies Act allowed a shareholder of a single class of shares to rely on the appraisal remedy. The appellants averred that the proposed amendments to the defendant’s MOI materially and adversely affected the preferences, rights, limitations, interests and other terms of the shares held by them and as a result sought to rely on section 164 to exit the company at R120.00 per share or at the fair value prior to the adoption of the amended MOI.
The court a quo followed a narrow interpretation of sections 37(8) and 164 and held that a shareholder could only exercise its appraisal rights where the company had more than one class of shares, thereby limiting the application of the relief provided under said sections where a company had only a single class of shares.
Paving the way for shareholder activism
On appeal, the High Court of South Africa, Mpumalanga Division (Middelburg) opted to follow a contextual approach to interpret the application of section 37(8) and 164 to shareholders of a single class of shares. The appraisal remedy is a novel introduction in South African company law and there is currently no case law in South Africa dealing with the application and interpretation of section 164. Accordingly, the court leaned on foreign law to interpret the provision.
On its reading of Canadian company legislation, a shareholder has a right to dissent even if a corporation has only one class of shares. Unfortunately, the South African counterpart statute is not so clear on this point and has been the topic of debate amongst some legal commentators and academics that the reference in section 164 to a “class of shares” implies that a class of shareholders requires at least one other class of shareholders in existence.
When reading section 164 and 37(8) in conjunction, however, the court found there to be no indication that the legislator intended to limit the application of section 164 or to take away the protection afforded by the section from shareholders who hold only one class of shares. Therefore, it found the language of section 164 should not limit the availability of the remedy to a company with a single class of shares. Such limitation would be irrational and unjustifiable. The purpose of section 164 is after all to provide an internal mechanism for dissenting shareholders to receive the fair value of their shares in instances where an amendment to the MOI would have a materially adverse effect on the preferences, rights, interests and limitations enjoyed by such shareholders.
Takeaway for companies wishing to amend their MOI
A company having only one class of shares, will not be excluded from the application of the appraisal remedy.
When amending its MOI, the board and shareholders should keep in mind that if the amendments being proposed alter the preferences, rights, limitations or other terms of any existing class of shares in any manner which may be seen to be materially adverse to the rights or interests of the holder(s) of that class of shares, such proposed resolution may well trigger a statutory buy-out right at fair value according to the appraisal remedy found in section 164(2)(a) of the Companies Act.
Please note that our blog posts are informal commentaries on developments in the law as at the time of publication and not legal advice. You should place no reliance on our blog posts; we look forward to discussing your particular matter with you.