The High Court recently ruled that regardless of how a challenge is framed, if it entails a direct or indirect attack on a resolution approving a scheme of arrangement, it can only be brought under section 115 of the Companies Act. Extra-statutory relief is barred.
The recent case of Africa Wide Mineral Prospecting and Exploration (Pty) Ltd v Platinum Group Metals (RSA) (Pty) Ltd and Others dealt with a scheme of arrangement under sections 114 and 115 of the Companies Act, 2008 (Act). The scheme entailed the expropriation of the shares held by Africa Wide Mineral Prospecting and Exploration (Pty) Ltd (Africa Wide) in Maseve Investments 11 (Pty) Ltd (Maseve).
The plaintiff, Africa Wide, sought to collapse the scheme of arrangement on the basis that a sale of business agreement concluded in respect of Maseve was not unanimously approved. This was a requirement in terms of Maseve's Memorandum of Incorporation (MOI) and the shareholders agreement governing the relationship between Maseve's shareholders, Africa Wide and Platinum Group Metals (RSA) (Pty) Ltd (PTM).
PTM, Maseve's majority shareholder, wished to dispose of its shares in Maseve, which was experiencing financial difficulties. To facilitate a possible sale of the Maseve shares, PTM proposed and adopted a special resolution to amend the MOI by introducing a drag-along clause.
In March 2017, PTM rejected an offer from the Royal Bafokeng for Maseve's assets because it was not prepared to dispose of Maseve's assets in isolation but wanted to dispose of its shareholding in Maseve. The Royal Bafokeng then offered to purchase all of the shares in Maseve.
Given the drag-along clause, Africa Wide could not have resisted such a sale of shares. A problem was, however, posed by the fact that ministerial consent to the sale of the shares in terms of section 11 of the Mineral and Petroleum Resources Development Act, 2002 (ministerial consent) would take some time to obtain, delaying both the flow of funds to PTM and the Royal Bafokeng's access to Maseve's concentrator plant.
These crucial commercial objectives resulted in a reconfiguration of the Royal Bafokeng's original offer to buy the shares, and in November 2017, the following two inter-related agreements were concluded:
- a sale of business agreement between Maseve, PTM and Royal Bafokeng Resources (Pty) Ltd (RB Resources) in terms of which RB Resources would acquire Maseve's concentrator plant, five immovable properties and certain related assets held by Maseve (Sale of Business Agreement); and
- a scheme implementation agreement between Maseve, PTM and Royal Bafokeng Platinum Limited (RB Platinum) in terms of which RB Platinum would, following compliance with sections 114 and 115 of the Act, acquire 100% of the issued shares in Maseve from PTM and Africa Wide and, in return, PTM and Africa Wide would receive shares in RB Platinum.
The conclusion of the Sale of Business Agreement, as a first step, would (i) allow for upfront payment of part of the proceeds while ministerial consent was awaited on the share transaction and (ii) permit RB Platinum (through RB Resources) to access the plant.
In December 2017, a round-robin board resolution was circulated to approve all the steps statutorily required under the Act to implement the schemes of arrangement. The resolution was approved, although the director nominated by Africa Wide voted against it. A shareholders' meeting was then held in January 2018 to approve the scheme of arrangement. It was approved by a special resolution in terms of the provisions of section 114(1)(c) and 115(2) of the Act, with the consequence that all statutory steps required to implement the scheme were taken.
Were minority protections triggered?
The High Court (Gauteng Division, Johannesburg) found that Africa Wide had failed, on the facts, to establish that the minority protections in the MOI and shareholders agreement had been triggered. The court looked at the true intention of the parties to the Sale of Business Agreement, which was neither to dispose of the plant in a vacuum nor to change the nature of Maseve's business, leaving Africa Wide a disadvantaged minority shareholder. The true purpose of the transaction was the transfer of the Maseve shares in accordance with the scheme of arrangement, and the Sale of Business Agreement was intended to be an integral and indivisible part of the offer and acceptance implicated in the ultimate acquisition of the shares by RB Platinum. It was therefore clear that Africa Wide neither needed nor was entitled to the minority protections.
Was Africa Wide's claim statutorily barred?
Although the court found that Africa Wide had failed to establish its case on the evidence, the court also dealt with the special plea raised by the defendants. This special plea was that even if Africa Wide had shown that the Sale of Business Agreement required unanimous shareholder approval, its claim, which was based on common law, was statutorily barred by the operation of section 115 of the Act.
In this regard, the court held that:
- regardless of how a challenge is framed, if it entails an attack on the resolution approving the scheme, either directly or indirectly, it can only be brought under section 115;
- the respective five- and ten-day limits within which court approval can be required or leave to bring a review can be sought are peremptory and there is no provision for their extension; and
- the statutory machinery which brings a scheme of arrangement into effect would be rendered unworkable if a court challenge could be brought, at any time, outside it.
Africa Wide's argument that its challenge was not a challenge, in terms of section 115, to the scheme of arrangement
Africa Wide had framed its attack as being not against the scheme, but against the Sale of Business Agreement, which it argued was not part of the scheme. It contended that it did not seek to impugn the scheme on any of the grounds available under section 115 of the Act. But it argued that if the Sale of Business Agreement was set aside, this would result in the failure of the scheme.
The court held that this was a semantic argument, which ignored the versatile nature of the concept of a scheme of arrangement, and that nothing in section 114 prevents a proposed scheme from being made conditional on an agreement with a third party or any other agreement or event lending functionality to the scheme.
The court also pointed out that Africa Wide's argument failed to take account of the fact that the scheme was approved in purported compliance with the legislative requirements and was accordingly enforceable by and against the scheme participants in terms of section 115(9) unless reviewed and set aside.
Conclusion and key takeaway
The court agreed with the defendants that Africa Wide's case, properly stated, was that the resolution was wrongly adopted because it was materially tainted by a failure to comply with the MOI. The attack on the resolution fell squarely within the type of challenge contemplated in section 115(7)(b). The only avenue of review was under section 115(7)(b). The fact that such review was not brought meant that it could not be brought and was statutorily barred.
This judgment and the recent judgment of the High Court (Western Cape Division, Cape Town) in Sand Grove Opportunities Master Fund Ltd and Others v Distell Group Holdings Ltd and Others, reported on in an e-alert, highlight the importance of bringing any challenge to a scheme of arrangement strictly in accordance with the statutory requirements. Applications brought by parties who do not have standing; applications brought outside the prescribed time limits; applications for leave to intervene as co-applicants in proceedings brought timeously by parties who do not have standing; and challenges to resolutions approving schemes of arrangement that are framed to avoid section 115 are unlikely to pass muster.
Interestingly, Africa Wide did not, as an alternative argument, seek relief in terms of section 163 of the Act on the basis that the amendment of the MOI to introduce the drag-along clause and/or the scheme of arrangement unfairly prejudiced it as the minority shareholder in Maseve. The court's approach to a section 163 application may have differed from its approach to the indirect challenge to the resolution.