In the realm of business rescue and liquidation, there is significant strength in numbers. Majority shareholders (creditors) seem to carry considerable weight and influence when it comes to the appointment of a BRP, be it in a voluntary or court-mandated business rescue, and they are always towards the top of the pile when it comes to recovering funds.
What happens to minority shareholders? I recently read an interesting opinion piece on the Lawtons website discussing how appraisal rights can protect these parties.
How do they work?
The Lawtons article points out that Appraisal rights in company law originated over a century ago in the United States of America, and the remedy is found in other jurisdictions, such as Australia, Canada, and New Zealand.[1] The remedy provides welcome alternative relief for dissenting minority shareholders in the form of a surrender to the company in which they invested all their shares in the company, in consideration for payment by the company to them in case of the fair value of their shares.
The appraisal remedy is available to minority shareholders not aligned with and opposing certain key decisions of the majority shareholders, who would otherwise be trapped in the company or in the “group of companies” to which that company belongs. Now, they may exercise their appraisal rights, cash in their shares and exit the company or the group.
One of the key decisions majority shareholders in a company may wish to implement and approve by the adoption of a special resolution at a meeting of shareholders, which would trigger the appraisal rights, is a disposal by that company of all or a greater part of the assets of that company contemplated by section 112(2) of the Companies Act. Minority shareholders in the disposing company who oppose the decision of the majority shareholders may exercise their appraisal rights and exit the disposing company.
The article adds that, viewed in the context of a “group of companies” to which a disposing of company belongs, the disposal by a company in the group, or disposals in a series by one or more companies in the group, might significantly impact minority shareholders invested in any intermediate holding company or in the ultimate holding company in relation to the disposing subsidiary company in the applicable group. Such minority investors at each holding company level could have been trapped in the applicable holding company in the applicable group to which the disposing company belongs without the statutory appraisal remedy.
However, the appraisal remedy protecting dissenting minority shareholders comes at a cost.
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A “group of companies” / cost implications of the appraisal remedy
The Lawtons article pointed out that a disposing company is often a company in a “group of companies”, being “a holding company and all of its subsidiaries”.
With regard to the possible “subsidiary company”/“holding company” “relationships”, as defined in the Companies Act, a company may be a subsidiary company in relation to one or more holding companies, and each holding company (with its own set of “group of companies”) may have majority shareholders, and corresponding minority shareholders with appraisal rights against that holding company.
In other words, a subsidiary company may be part of multiple sets of “groups of companies”, each with its own intermediate holding company, up to the ultimate holding company, possibly with multiple sets of minority shareholders with appraisal rights in relation to the disposing company and each applicable holding company.
The article adds that it follows that if a subsidiary company intends to enter into disposal, then each holding company (with its own set of “group of companies”) in relation to the disposing subsidiary company would need to be identified to ascertain each shareholder base (and corresponding minority shareholder base with appraisal rights) entitled to vote on the special resolution/s required by the Companies Act to approve the disposal and to quantify the contingent cost to the group if each applicable minority shareholder base were to exercise its appraisal rights in full.
The proceeds of the disposal by the disposing subsidiary company, received by the disposing subsidiary company from the third-party purchaser, could be applied to fund the payments of respective fair value for the shares of each respective set of minority shareholders exercising their appraisal rights at each applicable layer in the group/s of companies. These respective contingent liabilities within the disposing subsidiary company and each intermediate and ultimate holding company would need to be factored into the cost/benefit analysis of the proposed disposal and possibly into the price negotiations with the purchaser.
The article points out that the effect of the novel appraisal remedy protecting dissenting minority shareholders in circumstances where the possible net proceeds of the disposal by a disposing subsidiary company, after deducting all probable contingent appraisal remedy liabilities, might not justify proposed disposal, could be restrictive on the disposal and acquisition of assets and undertakings in the market, which might adversely affect the efficiency of markets, and would certainly need to be considered when planning and structuring “groups of companies”.
The statutory framework regulating disposals
The article adds that the relevant provisions of the Companies Act regulating the disposal by a company, in a “group of companies”, of all or a greater part of its assets or undertaking are contained in sections 112, 113, 114, 115, and 164 of the Companies Act. These sections are interrelated; in the sense that they refer to each other in cascading sequence.
Under section 112(2), a company may not dispose of all or a greater part of its assets or undertaking unless (a) the disposal has been approved by a special resolution of the shareholders, in accordance with section 115, and (b) the company has satisfied all other requirements set out in section 115, to the extent those requirements are applicable to such disposal by that company.
The article points out that the reference in section 112(2) to “the shareholders, in accordance with section 115” is a reference to the shareholders of the subsidiary company and the shareholders of the applicable holding company, respectively, as contemplated by section 115(2).
Section 112 is clearly subject to section 115.[2] In other words, the subsidiary company cannot implement the disposal in terms of section 112(2) without the approval of the special resolutions in accordance with section 115.
The article adds that section 112 does not create any appraisal right. It contemplates approval by the adoption of special resolutions in accordance with section 115.[1] It is section 115 that establishes the requirement and creates the obligation to obtain the necessary special resolutions.
Section 115(8) then links to the appraisal relief in section 164. In terms of section 115(8), “the holder of any voting rights in a company is entitled to seek relief under section 164” if that person notified the company in advance of the intention to oppose “a special resolution contemplated in section 115”, was present at the shareholders’ meeting, and voted against the special resolution.
Section 115(2) contemplates the following shareholders’ meetings and special resolutions in the context of a subsidiary company in a “group of companies” proposing disposal of all or the greater part of its assets or undertaking (contemplated by section 112(2)):
The Lawtons article points out that, first, at a disposing subsidiary company level, section 115(2)(a) requires a meeting of shareholders of the disposing subsidiary company to consider and adopt a special resolution approving the proposed disposal by the subsidiary company (of all or the greater part of the assets or undertaking of the subsidiary company).
Second, at a holding company level, section 115(2)(b) requires a meeting of shareholders of a holding company (in relation to that subsidiary company) to consider and adopt a special resolution approving the disposal by the subsidiary company, where such disposal by the subsidiary company, having regard to the consolidated financial statements of the holding company, constitutes a disposal of all or a greater part of the assets or undertaking of that holding company.
It is possible in terms of section 115(2) that a special resolution of the shareholders of an intermediate holding company is required, but not of the ultimate holding company, having regard to the respective consolidated financial statements of the intermediate holding company and ultimate holding company and consideration of whether the disposal by the disposing subsidiary company constitutes a disposal of all or a greater part of the assets or undertaking of the applicable intermediate holding company but not of the ultimate holding company.
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The article adds that the respective minority shareholders in the disposing subsidiary company and applicable holding company in question, who disagree with the special resolution to dispose of all or a greater part of the assets or undertaking by the subsidiary company (which also constitutes a disposal of all or a greater part of the assets or undertaking of the applicable holding company), and follow all the applicable procedural steps, including objecting to the special resolution before the shareholders’ meeting called to adopt the resolution, attending the meeting and voting against the special resolution in question, may then surrender all their shares in the company in question and demand that the company in question make an offer to them to pay them the fair value of all of the shares of the company held by that shareholder.
The respective dissenting minority shareholders in the disposing subsidiary company and the applicable holding company are thus each given an option to cash in at the respective fair value of their shares and exit the subsidiary company and/or applicable holding company.
Deemed disposal by the holding company
The article points out that reading section 115(2)(b) together with section 112(2), it appears that although the holding company does not itself actually dispose of any asset or undertaking, section 115(2)(b) deems the disposal by the subsidiary to “constitute a disposal by the holding company of all or a greater part of the assets or undertaking of the holding company”.
Such a deemed disposal by the holding company, is a disposal which on its own would require approval by way of a special resolution of shareholders of the holding company in terms of section 112(2).
In effect, the holding company is then, by virtue of the subsidiary company entering into the disposal contemplated by section 112(2), itself in terms of section 115(2)(b), also regarded as if it is also entering into a disposal contemplated by section 112(2).
The article adds that section 164(2) requires the notice of the meeting of shareholders of the subsidiary company and the notice of the meeting of shareholders of the holding company, respectively, to include a statement informing the applicable shareholders of their appraisal rights under section 164 (against the subsidiary company and against the holding company, as the case may be).
It follows that (i) dissenting minority shareholders in the subsidiary company could exercise their option to surrender all their shares and exit the subsidiary company at fair value of shares in the subsidiary company, and (ii) dissenting minority shareholders in the holding company could exercise their option to surrender all their shares and exit the holding company, at fair value of the shares in the holding company.
The article points out that minority shareholders of companies at all levels within a “group of companies” will need to stay alert as always to possible dissipation of value of their respective investment in the applicable group by ‘under the radar‘ structuring and disposals (that is, activities that do not trigger the requirement of a special resolution of shareholders of any company in the applicable group, and thus do not activate the protection of the statutory appraisal remedy).
More to come
It is clear that appraisal rights can offer significant benefits to minority shareholders.
In the next edition of this article, we will focus on the Cilliers case and round up the focus on this issue.
We live in interesting times.
