27 September 2024

Appraisal Rights for Minority Shareholders in South Africa

Submitted by: SchoemanLaw Inc
Appraisal Rights for Minority Shareholders in South Africa

Minority shareholders often face challenges when majority shareholders or company management make decisions that may negatively affect their interests. South Africa’s Companies Act 71 of 2008, through Section 164, provides a safeguard for minority shareholders by giving them the right to exit the company and receive fair compensation for their shares. This protective measure, known as the right of appraisal, discourages oppressive actions from majority shareholders and promotes fairness in corporate actions.

Understanding the Right of Appraisal

Section 164 introduces the right of appraisal, which allows minority shareholders to require the company to repurchase their shares at a fair value if certain corporate events occur. This right is triggered when the company undertakes significant changes that could reduce the value of minority shareholders' investments. Minority shareholders can invoke this right to ensure fair compensation, particularly in instances where they disagree with a company’s major decisions.

Situations That Trigger the Right of Appraisal

Minority shareholders may exercise their right of appraisal in specific situations known as affected transactions under the Companies Act, including:

  1. Sale of a Substantial Portion of Assets
    When a company disposes of a significant portion of its assets, it can dramatically alter the company's operations and financial prospects.

  2. Scheme of Arrangement
    This formal restructuring of a company's capital, assets, or liabilities can significantly impact shareholder value.

  3. Mandatory Offers
    In the event of a takeover, shareholders must receive equitable offers to sell their shares, ensuring they are not unfairly disadvantaged.

  4. Mergers or Amalgamations
    Shareholders need protection when companies merge, and appraisal rights allow them to exit if they are dissatisfied with the terms.

  5. Change of Control Transactions
    Shareholders have the right to assess the fairness of transactions such as takeovers or acquisitions that alter control within the company.

Importance of Affected Transactions

Affected transactions play a crucial role in corporate governance, offering essential protections for minority shareholders. By invoking appraisal rights, shareholders ensure that they are treated fairly during significant corporate events. These provisions aim to:

  • Protect minority shareholders from being disadvantaged.
  • Guarantee equal treatment for all shareholders.
  • Ensure the fair and transparent conduct of key corporate actions like mergers and reorganisations.

Regulatory Oversight of Affected Transactions

The Takeover Regulation Panel (TRP), established under Section 196 of the Companies Act, oversees affected transactions to ensure legal compliance. The TRP's role is to regulate corporate transactions that could lead to a change of control, ensuring transparency and fairness.

How to Exercise the Right of Appraisal

To use the right of appraisal, shareholders must follow these steps:

  1. Submit a Written Objection
    The shareholder must formally object to the corporate action before the resolution is passed.

  2. Vote Against the Resolution
    After the resolution is proposed, the shareholder must vote against it to signal their dissent.

  3. Demand Fair Value Payment
    If the resolution is approved, the dissenting shareholder must request the company to repurchase their shares at a fair value. If the offer is inadequate, the shareholder can take the matter to court, where a fair value will be determined.

Conclusion

The right of appraisal is a crucial protective measure for minority shareholders, ensuring their interests are safeguarded during major corporate decisions. Section 164 of the Companies Act 71 of 2008 provides minority shareholders with a structured exit when their rights are threatened, promoting fairness and equitable treatment in South Africa’s corporate governance landscape.

Johan De Lange | Schoemanlaw Inc
Attorney
https://schoemanlaw.co.za/our-services/commercial-law/


Total Words: 479

SchoemanLaw Inc

SchoemanLaw Inc Attorneys, Conveyancers and Notaries Public is a boutique law firm offering its clients access to high quality online legal documents and agreements, together with a wide range of legal services. The firm has an innovative and entrepreneurial mindset that distinguishes it from other law firms. We apply our first-hand understanding of the challenges facing entrepreneurs (regardless of their business size) to develop proven, practical solutions incorporating legal compliance, risk aversion and business sense. We achieve this by offering clients tailored, yet holistic support comprising of legal gap analysis, the design of tailored legal solutions and the practical implementation thereof through training and automation. With your personal interests in mind, our ultimate aim is to implement measures that protect the results of your hard work as effectively as possible.