n Business Tax and Company Law Quarterly - Regulating schemes of arrangement under the new Companies Act 71 of 2008 : innovations in minority protection

Volume 4, Issue 4
  • ISSN : 2219-1585


Part A of Chapter 5 of the Companies Act 71 of 2008 (''), regulates proposals by a company to implement certain '' (as they are described in the title of Chapter 5 and the head-note to Part A) and stipulates the requirements for approval thereof. The three are: proposals to dispose of all or the greater part of the assets or undertaking of a company (section 112); proposals for amalgamation or merger of two or more companies (section 113); and proposals for a scheme of arrangement between a company and the holders of its securities (section 114).

Section 115, a ground-breaking provision that introduces a number of innovative requirements for the greater protection of minority shareholders, creates a uniform, compulsory procedure that must be followed before implementing any of the three fundamental transactions.
This article focuses in particular on proposals for a scheme of arrangement under section 114 and the requirements of section 115 that must be satisfied before such a scheme can be implemented. It explores two interesting and important issues: (1) whether the provisions of sections 114 and 115 are mandatory whenever it is sought to implement an arrangement between a company and the holders of its securities, or merely provide an optional method of achieving such a transaction; and (2) whether the line of judicial decisions relating to section 311 (the provision that governed schemes of arrangement under the Companies Act 61 of 1973 ('the 1973 Companies Act'), that gave a narrow interpretation to 'arrangement', thereby limiting recourse to the section, would still apply to arrangements that fall under section 114 of the Act.
The article summarises the case law relating to arrangements under section 311 of the 1973 Companies Act, in terms of which the courts repeatedly held that the section could only be resorted to if the normal mechanisms for reaching independent agreement between the company and its members were not available, and it was necessary to resort to the section in order to obtain the consent of all the shareholders. This approach was ultimately endorsed by the Supreme Court of Appeal in the case in 2007, shortly before the enactment of the new Companies Act.
In order to answer the questions posed, the article examines the provisions of section 114 and 115 in some detail and analyses the purpose and effect of those provisions. It concludes that, despite the permissive wording of section 114(1), and the continued use in the Act of the terms 'arrangement' and 'scheme of arrangement' which appeared in section 311 of the 1973 Companies Act, and which might support the argument that recourse to section 114 is optional, there are cogent reasons for regarding sections 114 and 115 as the exclusive method for implementing a scheme of arrangement, compliance with their provisions being mandatory. In particular, it emphasises the fact that these sections form part of a wider regulatory scheme, the goal of which is to provide minority holders of securities with effective protection from abuse and that this regulatory scheme offers significantly different and more far-reaching safeguards than did section 311 of the 1973 Companies Act. The fact that section 114(1) contemplates six different categories of arrangement affecting the company's securities, 'among others,' also supports the interpretation that these sections are intended to have exclusive application.
Finally, the article concludes that, in the light of the analysis of the relevant provisions, it is unlikely that the line of cases decided under section 311 of the 1973 Companies Act would continue to apply to proposals for a scheme of arrangement under section 114, so as to limit its scope, as was the case with schemes of arrangement under section 311.

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