The rules of engagement are ever changing when it comes to governing a company, an unsurprising fact given the dynamic nature of business. To add to this, constant developments in the law means that directors need to remain abreast of the dos and don’ts of running a business.
A notable change in our understanding of Company Law was recently espoused by the Johannesburg High Court in First National Nominees (Pty) Ltd v Capital Appreciation Limited (“First National Nominees”). Briefly stated, the facts of this case are as follows: the board of a company (Capital Appreciation Limited) sough to buy some of its own shares from specific shareholders, in a transaction that the company contended was quite straight forward from a Companies Act compliance perspective. One of the shareholders of the said company (First National Nominees (Pty)) held the view that the contemplated transaction gave the said shareholder access to certain rights in terms of the Companies Act (71 of 2008), the company disagreed.
What ensued was a legal battle, culminating in a decisive judgment that clarified the consequences that followed a company engaging in a share buyback transaction as contemplated in section 48(80(b), as well as expressing the rights that are opened up to a shareholder as a result of such a transaction. This case is important for boards of directors because what some might have once seen as a straightforward transaction for compliance purposes, has had more steps added to it in order for a board to be fully compliant with the Companies Act.
In terms of section 48 of the Companies Act the board of a company may decide to acquire a number of its own shares. Section 48(8) states that (i) such a decision must be approved by way of special resolution of the shareholders of the company, if the shares are being bought from a director, prescribed officer or any person related to these two categories of persons; and (ii) is subject to the requirements of section 114 and 115 of the Companies Act if the share buyback involves the acquisition by the company of more than 5% of the issued share capital in any class of shares. Section 114 of the Act deals with proposals for schemes of arrangements, and section 115 deals with approvals required for fundamental transactions, takeovers and offers. Pertinent to this case is the fact that both of these sections provide for the application of section 164 of the Companies Act (dissenting shareholders appraisal rights).
In First National Nominees the questions that the court had to answer were (i) whether the contemplated section 48(8)(b) share buybacks were in fact schemes of arrangement or whether they simply attracted the procedural requirements thereof; and (ii) whether appraisal rights are triggered by the share buybacks regardless.
In answering the first question, the court stated that a voluntary share repurchase agreement between the company and specific shareholders (which meets the requirements of section 48(8)(b)) does not constitute a scheme of arrangement as contemplated in section 114 of the Companies Act, and that accordingly, a board of a company, in approving such a transaction need only comply with the procedural aspects of section 114. However, in respect of the second question to be answered, the court found that indeed – in applying section 114 and 115 of the Companies Act, the sections ought to be applied in their entirety, meaning that shareholders appraisal rights are triggered by section share buyback transactions contemplated in section 48(8)(b).
What does this mean for boards practically? When a company buys its shares, and such transaction or transactions considered alone or in aggregate exceed 5% of the issued shares in a particular class of shares, such a transaction will need to comply with the requirements of sections 114 and 115 of the Companies Act.
Why is it important for boards to take note of this interpretation of section 48(8)(b)? When boards consider entering into share buyback transactions, if the transactions fall under section 48(8)(b), then boards ought to be vigilant to ensure that even shareholder appraisal rights are communicated to shareholders in the prescribed manner. Failure of a board to comply with sections 114 and 115 could result in dire consequences, particularly in light of section 48(7) which states that a director shall be liable for any loss, damages or costs sustained by the company as a direct or indirect consequence of the director having been present at the meeting when the board approved the share buyback transaction, or participated in making such a decision by way of round robin resolution, and failed to vote against the transaction despite knowing that the transaction was contrary to the provisions of the Companies Act.