Business Tax and Company Law Quarterly - latest Issue
Volume 7, Issue 4, 2016
Source: Business Tax and Company Law Quarterly 7, pp v –vi (2016)More Less
Another year-end is fast approaching. This is the seventh completed year of Business Tax and Company Law Quarterly. It's been a privilege to work with such esteemed co-authors, editors and publisher. The journal continues to focus primarily on relevant tax and company law in South Africa and has remained practical in its approach to unpacking complex changing tax and company law associated with commercially relevant market features and trends.
Dissenting minority shareholders' appraisal rights : reappraising the appraisal remedy in section 164 of the Companies Act 71 2008Author Milton SeligsonSource: Business Tax and Company Law Quarterly 7, pp 1 –12 (2016)More Less
A recent report in Business Day dealt with a dissenting minority shareholder who had invoked what was described as an 'obscure' and 'little-used' section of the Companies Act (viz section 164 of the Companies Act 71 of 2008), in applying to court for a determination of the fair value of his KWV shares after the sale of the company's operational assets. Prompted by that report and by the limited use that has been made of this important provision and the absence of any reported decisions applying it, the present article seeks to investigate more closely the scope and purpose of section 164. The article initially discusses the purpose of section 164, which is essentially to provide an appraisal remedy to dissenting minority shareholders, by allowing them to realise their investment and exit the company at a fair value, which is mutually agreed with the company, or fixed by the court if the shareholder is dissatisfied with the company's fair valuation of the shares. The article then explores the detailed provisions of section 164, which has 21 sub-sections, and the requirements that a dissenting shareholder must satisfy before the appraisal remedy can be invoked. The remedy is triggered only if a company gives notice to its shareholders of a meeting to consider the adoption of a resolution (a) to amend its Memorandum of Incorporation by altering the preferences, rights, limitations or other terms of any class of its shares in a manner materially adverse to the rights and interests of holders of that class; or (b) to enter into a fundamental transaction contemplated in sections 112(proposals to dispose of all or the greater part of the assets or undertakings), 113 (proposals for amalgamation or merger) or 114 (proposals for scheme of arrangement) of the Act.A dissenting shareholder seeking to invoke the appraisal remedy is obliged to follow precisely the correct procedure and time limits laid down in the section. These include objecting to the resolution, voting against it and, after the adoption of the resolution, making a demand for payment by the company of the fair value of the dissenting shareholder's shares. The company is thereupon obliged to make an offer in respect of such shares which the directors consider to be their fair value. Such offers may be accepted by the dissenting shareholder. A dissenting shareholder who is dissatisfied with the company's offer, however, may apply to a court to determine the fair value of the shares. There are rules governing such an application to court and the company to apply to the court for relief where its fair value payment obligations would result in the company being unable to pay its debts as they fall due and payable for the ensuing 12 months. A number of ancillary rules further regulate the appraisal remedy. The article next discusses the effect of the important provision in section 164(16) according to which the fair value in respect of any shares must be determined as at the date on which, and time immediately before, the company adopted the resolution that gave rise to the shareholder's rights under the section. The result of this restrictive provision is that any increase (or decrease) in the fair value of the shares that is attributable to the triggering company action itself must be disregarded. The article points out that this is consistent with the traditional approach to the valuation of shares involved in take-over bids and discusses the leading case in this regard. The article further examines the meaning of the expression 'fair value' and how it is arrived at, including the use of expert appraisers to assist in assessing such value, and what valuation methodologies they can be expected to apply. The article concludes that the appropriate valuation methodology will vary, depending on the nature of the company, whether it is listed or not, and the size, scope and circumstances of the company at the time it adopts the relevant resolution. Where the Court must decide the issue, it will have a wide discretion to determine a fair price which is fair to both the dissenting shareholder and the company. Finally, the article explores the possible reasons as to why section 164 has so seldom been invoked during the five-year period of its existence.
Author Des KrugerSource: Business Tax and Company Law Quarterly 7, pp 13 –24 (2016)More Less
It is a reality of everyday commercial life that parties agree bilaterally to terminate contractual arrangements prior to their stipulated termination dates. In most circumstances, the party wishing to withdraw from the arrangement is required to pay an amount of compensation to the counter-party. The payment of this compensation and the agreement by the counter-party to surrender certain of its rights trigger tax implications. This article explores the income tax, capital gains tax (CGT) and value-added tax (VAT) implications that may arise in consequence of the early termination of a contractual arrangement. As regards the income tax implications, the issue is whether the compensation will constitute a receipt of a capital or revenue nature in the hands of the counter-party. While a number of tests have been adopted over the years, the test most often applied is whether the compensation fills the hole of therecipient's profits or assets, the former being revenue in nature and the latter capital in nature. The payment of the compensation by the party wishing to withdraw from the contractual arrangement may be deductible depending on whether it can be said that the payment (expenditure) is closely related to the party's income-earning operations. The author ventures that the debate regarding whether expenditure incurred in avoiding expenditure (i.e getting-out of an onerous arrangement) can be said to have been incurred in the production of the party's income is now moot the expenditure cannot be disallowed on that basis.Should the receipt of the compensation by the counter-party constitute a receipt of a capital nature, the issue arises as to whether the compensation can be said to constitute 'proceeds' for the 'disposal' of an 'asset' by the counter-party.The view of SARS is that the personal rights held by the counter-party under the contractual arrangement constitute an 'asset' for CGT purposes and a disposal of such 'asset' takes place when the right is surrendered in exchange for payment of the compensation. It is difficult to identify any base cost of such 'asset'. The surrender of a right (the personal rights held by the counter-party under the contractual arrangement) constitutes the supply of services by the counter-party and the counter-party will be required to account for VAT in respect of the compensation received.
Source: Business Tax and Company Law Quarterly 7, pp 25 –32 (2016)More Less
The 2016 Taxation Laws Amendment Bill includes a number of proposed amendments pursuant to the 2016/2017 Budget Speech delivered by the Minister of Finance in February 2016. This year's Bill contains a number of amendments that have been recently flagged by the Davis Tax Committee as well as National Treasury. The amendments referred to in particular are the deemed donations tax rules in respect of interest-free or low-interest yield loans to related-party trusts and remedying the currently favourable tax consequences of perpetual employee share schemes. A new provision, section 7C of the Income Tax Act, 1962 ('the Act'), introduces rules with effect from 1 March 2017 that deem interest-free or low interest- bearing loans to related-party trusts as a donation for donation tax purposes. The deemed donation is calculated based on the difference, per tax year, of interest on related party loans to trusts and the 'official interestrate' and is determined on the last day of the year of assessment of the trust. Various exemptions apply to the deemed donations tax liability most notably trusts that qualify as Public Benefit Organisations in terms of section 30 of the Act and loans to trusts that are funded by a natural person or his or her spouse to acquire a primary residence for use, wholly or partly, by that natural person or his or her spouse. Various amendments have been proposed to sections 8C and 10(1)(k) of the Act that deem returns on perpetual employee share schemes to be taxed at the recipients' marginal rate of tax. The main amendments are proposed to section 10(1)(k) of the Act with the introduction of proviso (jj) to the said section. The proviso applies to dividends in respect of Restricted Equity Instruments ('REI') defined in section 8C of the Act. The tax exemption of dividend income will not apply to dividends derived (i) in respect of share buy-backs or share redemptions, (ii) amounts derived in anticipation of or in the course of the winding up, liquidation or de-registration of a company, or (iii) dividends constituting non-REI's that vest in terms of section 8C of the Act. The latter proviso seems inequitable as it appears to include the dividend constituting the non REI in taxable income as well as taxing the gain upon the vesting of the non-REI in terms of section 8C.