High court decision clarifies appraisal rights of minority shareholders
The High Court of South Africa, Western Cape Division, recently delivered a judgment that provided some clarity on the provisions of the Companies Act 2008 (Act) relating to appraisal rights of minority shareholders.
Appraisal rights grant a dissenting shareholder who does not approve of certain proposed corporate actions (a sale of all or the greater part of the assets or undertaking, mergers, schemes of arrangement and amendments to the terms of a class of shares) (and who votes against the requisite resolution(s) necessary for such corporate action(s)) the right to demand that the company pay it the fair value of its shares, which may ultimately be determined judicially.
Mr A A Cilliers, a minority shareholder in La Concorde Holdings Ltd (La Concorde), brought an application against La Concorde and its wholly-owned subsidiary, KWV South Africa (Pty) Ltd (KWV), among others, in terms of which he sought to enforce his attempted exercise of his appraisal rights against La Concorde.
KWV wished to dispose of all its operational assets to a third party (Proposed Disposal). The Proposed Disposal constituted the disposal of all or the greater part of the assets of both KWV and La Concorde, having regard to the latter's consolidated financial statements, in terms of section 112(2), read with section 115(2) of the Act.
Accordingly, in terms of the Act, the Proposed Disposal needed to be approved by special resolutions of the shareholders of both the holding company and its subsidiary. Cilliers objected and voted against the Proposed Disposal. Cilliers then sought to exercise his appraisal rights under section 164 of the Act and demanded that La Concorde pay the fair value for his shares in La Concorde.
La Concorde refused to do so. La Concorde argued that the appraisal rights in section 164 did not extend to the shareholders of the holding company who voted against the Proposed Disposal and that section 164 remedies were only available to the shareholders of the company disposing of all or the greater part of its assets, namely KWV.
Decision of the High Court
The High Court had to determine whether section 164 affords appraisal rights to the dissenting shareholders of the holding company whose subsidiary has implemented a disposal of all or the greater part of its assets or undertaking.
The High Court found that the Act grants dissenting shareholders of the holding company appraisal rights in these circumstances. The key points of the judgment are as follows:
- the provisions of the Act were "clear and unambiguous". The High Court took into account the rules of interpretation of statutes and concluded that had the legislature intended for a narrow interpretation of the provisions of the Act, "it would have simply said so".
- "to treat the dissenting shareholder in the holding company any differently in the circumstances of this case, would undermine the clear purpose of minority shareholder protection embodied in the policy and Act".
- the disposal of the assets of KWV in the circumstances of this case will have a material effect on the investment of the shareholders in La Concorde.
The decision of the High Court will give comfort to minority shareholders seeking to exit group companies where they oppose certain corporate actions at subsidiary-level.
La Concorde and KWV have indicated that they would be appealing the decision of the High Court.