Share Buy-Backs: A discussion on the current legal framework and the changes considered in the Companies Amendment Bills.

A share buy-back, or share repurchase, is a transaction in which a company buys back its issued shares from a shareholder. Section 48 of the Companies Act 71 of 2008 (“the Act”) regulates how a company, or its subsidiary, may acquire the company’s shares.

Capital Appreciation Ltd v First National Nominees (Pty) Ltd and Others [2022] ZASCA 85 is a recent case which was taken on appeal to the Supreme Court of Appeal, thereby allowing the SCA to clarify the application of section 48, as read with sections 114, 115, and 164 of the Act, particularly in respect of how they relate to the rights of minority and dissenting shareholders in share buy-backs.

The facts in Capital Appreciation Ltd v First National Nominees were that Capital Appreciation notified its shareholders of its intention to repurchase several of its shares from specific shareholders. First National Nominees, being a shareholder in Capital Appreciation, objected to the proposed repurchase and voted against it at the general meeting of shareholders. When the resolution was nevertheless adopted, First National Nominees demanded that its shares be purchased at fair value, the determination of which was referred to the High Court in terms of section 164(4) of the Act, which deals with the appraisal rights available to dissenting shareholders. Capital Appreciation opposed the application on the basis that section 164 did not apply in the circumstances, and First National Nominees were not entitled to an appraisal by the High Court to determine the value at which Capital Appreciation would be required to purchase the shares.

Plasket JA, for the Supreme Court of Appeal, investigated the relevant provisions of the Act in his judgment.

Generally, section 48 of the Act allows the board of a company to determine that the company will acquire a number of its own shares. This power is, however, limited in several ways.

The board must ensure that the company satisfies the solvency and liquidity test contained in section 4 of the Act, requiring that the assets of the company are equal to or exceed its liabilities and the company will be able to pay its debts as they become due in the ordinary course of business for 12 months following the repurchase. Further, where the repurchase will result in no remaining shares being in issue, the transaction is prohibited. Where the repurchase involves a shareholder who is a director or prescribed officer of the company, or a person related to them, a special resolution of shareholders is also required.

Importantly for purposes of the Capital Appreciation Ltd v First National Nominees case, section 48(8)(b) requires that, where the transaction, if considered alone or together with other transactions in an integrated series of transactions, involves the repurchase of more than 5% of the issued shares of any particular class of the company’s shares, then the transaction is deemed to be a ‘fundamental transaction’ and the board’s decision will be subject to the requirements of section 114 and section 115 of the Act.

Given the extent of the proposed buy-back and First National Nominees’ shareholding, s48(8)(b) of the Act found application and sections 114 and 115, and by extension section 164, must therefore be taken under consideration.

Section 114 of the Act deals generally with schemes of arrangement. As far as share repurchases are concerned, the company is required to appoint an independent expert to compile a report that evaluates the consequences of the share buy-back and the effect of the transaction on the value and interests of the remaining shareholders. This report must include a copy of sections 115 and 164 of the Act to ensure that the shareholders are aware of their rights.

Section 115 requires certain transactions, including a scheme of arrangement involving a share buy-back, to be approved by a special resolution adopted by the shareholders entitled to exercise their voting rights in respect thereof. Section 115(8) provides that the holders of any such voting rights may seek relief in terms of section 164 if that holder – (a) notified the company in advance of the intention to oppose the special resolution; and (b) was then present at the meeting and voted against the special resolution.

Section 164 deals with a dissenting shareholder’s appraisal rights in the event that they require their shares to be bought out by the company. Where the company fails to make an offer to the dissenting shareholder, or makes an offer that the shareholder considers inadequate, the shareholder can make an application to the High Court to determine the fair value of the shares.

Given that First National Nominees complied with the procedural requirements set out in sections 115 and 164, the Supreme Court of Appeal confirmed their entitlement to be paid out the fair value of their shares by Capital Appreciation.

It is noteworthy that the revised Companies Amendment Bill (“the Bill”), which has recently been reintroduced to Parliament does make provision for changes to section 48 relating to share buy-backs.

The proposed amendments will simplify the law on buy-backs in two ways.

The first amendment is that all share buy-backs will require a special resolution by shareholders, unless the repurchase relates to a pro rata offer made by the company in question to all shareholders of a particular class, or the transaction is effected as part of a licenced exchange on the stock exchange in accordance with the Financial Markets Act 19 of 2012.

The second amendment relates to the removal of the provision under section 48(8)(b) that a repurchase of more than 5% of the company’s shares will be subject to sections 114 and 115 of the Act. This removes inter alia the requirement to obtain a report by the independent expert for each repurchase above this threshold.

These amendments seek to address the ambiguities in our law around buy-backs, as discussed in the Capital Appreciation Ltd v First National Nominees case. The result of removing the requirement to consider sections 114 and 115 of the Act is that the appraisal rights provided for in section 164 will also not apply to share buy-backs over the 5% threshold which are conducted in terms of section 48.

The Bill is not yet enacted and, as such, the position set out by the Supreme Court of Appeal in Capital Appreciation Ltd v First National Nominees will continue to apply.

Article by Marcus Schaefer.