n Business Tax and Company Law Quarterly - Dissenting minority shareholders' appraisal rights : reappraising the appraisal remedy in section 164 of the Companies Act 71 2008

Volume 7, Issue 4
  • ISSN : 2219-1585


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.

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