Share buybacks – The latest the do’s and don’ts

Share buybacks – The latest the do’s and don’ts
07 Apr 2021

Section 48 of the Companies Act 71 of 2008 as amended (the “Companies Act” or the “Act”) makes provision for the reacquisition by a company of its own shares.

Section 48(8)(b) of the Act provides that a decision by the board of a company to acquire its shares is subject to “the requirements of” sections 114 and 115 of the Companies Act. If considered alone or together with other transactions in an integrated series of transactions, it involves the company’s acquisition of more than 5% of the issued shares of any particular class of the company’s shares.

Two critical questions have stood since the commencement of the Companies Act:

  1. Is such a buyback, in fact, a scheme, or is it merely subject to the procedural requirements thereof?
  2. Either way, are appraisal rights triggered when the company proposes such a buyback?

A recent judgment in First National Nominees Pty Ltd and Others v Capital Appreciation Limited (case no. 19/41679, 5 February 2021) has, to a certain extent, provided much-needed clarity.

In this case, Capital Appreciation Limited (“CPL”) issued a circular to its shareholders in terms of which it advised them that it would be repurchasing a certain number of shares held by specific shareholders. The circular stated that the transaction triggered sections 48, 114 and 164 of the Companies Act. It entailed CPL acquiring more than 5% of its own issued shares. CPL, however, later changed its stance, saying that section 164 was not triggered.

The Section 164 appraisal remedy aims to maintain an equilibrium between minority shareholders and controlling shareholders. It empowers minority shareholders to withdraw from a company while obtaining fair value for their shares.

CPL’s argument was that a scheme of the arrangement, after all, is to bind a whole group of shareholders by way of a special resolution, regardless of whether the minority voted against the scheme or did not even participate in the vote. This is fundamentally different from what is contemplated in section 48(8)(b). Reacquisition, in terms thereof, involves a voluntary seller in a typical contractual setting.

The advantage of the judgment, therefore, is that where a regulated company undertakes a contractual/voluntary share buyback from specific shareholders under section 48(8)(b) of the Companies Act, it is not undertaking a “scheme of arrangement”. Therefore, one is not concerned with an “affected transaction” under section 117(1)(c)(iii) which is regulated by the Takeover Regulation Panel. This removes a substantial layer of regulation to comply with.

However, appraisal rights do still apply, which is not linked to whether or not the company is a regulated company. Instead, it has to do with the fact that section 115(8) cross-refers to dissenting shareholders’ rights in section 164. The operative section regulating appraisal rights, namely section 164, appears to capture only schemes of arrangement as referred to in section 114. Still, there have already been precedents whereby the courts are taking the view that section 115(8) has the effect of broadening the appraisal remedy beyond the transactions listed in section 164.

Contact an Attorney at SchoemanLaw for all your commercial needs.

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(This article is provided for informational purposes only and not for the purpose of providing legal advice. For more information on the topic, please contact the author/s or the relevant provider.)
Nicolene Schoeman-Louw
Nicolene Schoeman-Louw

Mrs Nicolene Schoeman – Louw founded the firm in 2007, aged 24, and is now the Managing Director of the firm. Nicolene is an admitted Attorney of the High Court... Read more about Nicolene Schoeman-Louw

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