Share Repurchases & S164 Relief

Historically, the law has prohibited companies from repurchasing its own shares. There were a number of reasons for this, including shareholder protection. This prohibition protected shareholders against the risk of oppression from majority shareholders and the risk of being underpaid for their shares. Share repurchasing is now permitted and regulated by section 48 of the Companies Act 71 of 2008 (“the Act”). However, how the protection extended to shareholders to protect them from the risk of oppression caused by share repurchases has been unclear under the new system.  The Supreme Court of Appeal recently clarified this position in Capital Appreciation Ltd v First National Nominees (Pty) Ltd and Others (280/2021) [2022] ZASCA 85 (8 June 2022) (“Capital Appreciation”) and clarified that S164 of the Act provides relief to shareholders .

Oppression may occur in circumstances of share repurchasing by a company if minority shareholders are dispossessed of their shares when majority shareholders vote for the company to repurchase minority shareholders’ shares, at a price they did not agree to. The situation forces minority shareholders to sell at a price nominated by the company. In this way, a share repurchase may be coercive and potentially oppressive. The Court in Capital Appreciation has clarified the position and held that these shareholders are, if they have followed procedure, entitled to apply to a court to appraise the value of their shares so that they may be paid a fair price for them.

The contention in Capital Appreciation was whether s164 of the Act applied in the circumstances of a share repurchase. S164 entitles shareholders who dissent to a company’s decision to restructure or enter into a scheme of arrangement (as contemplated in s115 of the Act) to approach a court to have their shares appraised by an expert, to ensure that their shares are bought at fair value. Capital Appreciation was the applicant on appeal and the company seeking to repurchase its own shares. It contended that s164 did not apply as the repurchase of more than 5% of shareholding in the company did not constitute a “scheme of arrangement” as contemplated in S114 of the Act and so S164 was not triggered. Both the High Court and Supreme Court of Appeal were of the opinion that a share repurchase was a scheme of arrangement, but that regardless of this, the fact that the repurchase in question was over the 5% threshold meant that s114 and 115 were triggered. These sections, in turn, triggered s164 as described below.

The Supreme Court of Appeal examined the relevant provisions of the Act, sections 48, 114, 115 and 164, and held S164 of the Act provides relief to shareholders. Specifically, it held that minority shareholders who vote against the sale of their shares (who ‘dissent’) are within the scope of s164’s application. This section entitles dissenting shareholders to apply to a court to determine and enforce the fair value of their shares (to ‘appraise’ their shares).

The Court held that this remedy is available in a specific set of circumstances. First, the company must be proposing the repurchasing of more than 5% of the issued shares of any class. Section 48(8)(b) of the Act establishes that re-acquisitions above this 5% threshold are subject to sections 114 and 115 of the Act. Section 114 places certain obligations on a company wishing to re-acquire its securities. Section 115 deals with the required approval for such re-acquisitions. Specifically, section 115(8) refers to section 164 which provides that holders of voting rights (shareholders) are entitled to have their shares appraised under section 164. They are allowed to do so if: the Company has proposed the repurchase of their shares (which repurchase is of more than 5% of total issued shares), they notified the company in advance of the intention to oppose the Company’s proposal (which decision is conducted by a special resolution) and they have subsequently voted against that special resolution. Such shareholders are entitled to sell their shares (“opt out”) of the company by withdrawing the fair value of their shares, as appraised, in cash.

On finding that s115 of the Act applied, the Court in Capital Appreciation upheld the order by the first court, providing that the shares in question must be appraised by an expert to determine their fair value.

The judgment in Capital Appreciation encourages companies to make reasonable offers for share repurchases, rather than attempting to underpay minority shareholders – knowing that these shareholders may approach a court for appraisal relief under s164 of the Act. However, from a dissenter shareholder’s perspective, the procedure to receive a Court determined fair value is not as inviting as it seems at first blush.

The potential costs of a Court application may deter those shareholders from applying for the appraisal relief. More discouraging, however, is that to qualify for this relief, these shareholders must comply with procedural requirements of first objecting to the proposed repurchase, and then also voting against the resolution for the repurchase. This can be overly burdensome to shareholders who are not aware of this procedure or equipped to timeously follow it.

Additionally, the valuation of shares is not an exact science. It will only estimate a range of values, not a particular figure, and different valuation methods may yield different results. Whilst the Court may employ the assistance of appraisers to determine the fair value for the shares, the risk remains that appraiser’s determination of the fair value may be lower than the shareholder’s estimate of the fair value.

The Court in Capital Appreciation provided valuable direction regarding the appraisal remedy available to shareholders, finding that S164 of the Act provides relief to shareholders. However, this remedy may not be accessible to shareholders who find themselves subject to a repurchase of their shares, as it can often be costly and the outcome may not fit the shareholder’s expectation of the value of their shares. Given these difficulties, we caution companies repurchasing shares and minority shareholders who receive unfavourable share repurchase offers to seek legal advice.

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