Who can exercise minority rights in fundamental transactions and is it necessary to hold separate scheme meetings?

​​​A decision of the High Court (Western Cape Division, Cape Town) deals with the questions of who can exercise minority rights in fundamental transactions and in what circumstances separate scheme meetings should be convened.

On 13 April 2022, in the matter of Sand Grove Opportunities Master Fund Ltd and Others v Distell Group Holdings Ltd and Others, the High Court of South Africa (Western Cape Division, Cape Town) ruled on a number of issues, including standing (the right) to bring applications in terms of section 115(3)(b) of the Companies Act, 2008 (Act); whether the courts enjoy a power to condone non-compliance with the 10 business day time limit prescribed in that section; and when separate meetings need to be convened for holders of different classes of securities.

These issues were considered in the context of a challenge to a special resolution approving a scheme of arrangement proposed by the board of Distell Group Holdings Limited (Distell) to the company's shareholders. The challenge was mounted by investment funds (the Sand Grove funds) managed or advised by Sand Grove Capital Management LLP, beneficial owners of ordinary shares in Distell.

Section 115(3)(b): standing, piggybacking and the time limit

Section 115(3)(b) of the Act provides that a company may not implement a special resolution approving a fundamental transaction (including a scheme of arrangement) without the approval of a court if a person who voted against that resolution applies, within 10 business days of the vote, to a court for leave to apply for a review of the transaction and is granted leave to do so.

The court dealt first with the Sand Grove funds' standing to bring the proceedings in terms of section 115. It held that the only person with standing in terms of section 115(3)(b) to impugn a resolution approving a fundamental transaction is one who, under section 115(2)(a), is 'entitled to exercise voting rights on such a matter' and who has voted at the relevant meeting against approving the transaction. Persons who are entitled to exercise voting rights are registered shareholders or their representatives by proxy.

As none of the Sand Grove funds was a registered holder of ordinary shares in Distell or appointed as a proxy by the registered shareholders, the court held that the funds were not entitled to exercise the voting rights attached to the shares at the meeting and did not vote at the meeting. The Sand Grove funds therefore had no standing to bring the application for relief in terms of section 115(3)(b).

The challenge to the Sand Grove funds' standing gave rise to an application in the names of First National Nominees (Pty) Ltd and Standard Bank Nominees (RF) (Pty) Ltd (the nominee companies), the registered holders of the ordinary shares in Distell in which the Sand Grove funds had a beneficial interest, for leave to intervene in the proceedings as co-applicants. The nominee companies' representative had exercised the voting rights attached to those shares to vote against the proposed transaction at the meeting convened in terms of section 115(2)(a). However, by the time the nominee companies lodged their application, the 10 business day time limit prescribed in section 115(3)(b) had elapsed.

The court refused the nominee companies' application for leave to intervene, stating that it is not possible to piggyback on proceedings instituted within the section's time limit by someone who had no right to institute them. In so finding, it held that an earlier decision of the High Court of South Africa (Western Cape Division, Cape Town) in Marble Head Investments (Pty) Ltd and Others v Niveus Investments and Another (Ferberos Nominees (Pty) Ltd and Another Intervening) (the Marble Head case), which had granted an application for leave to intervene in these circumstances, was clearly wrong.

The court also ruled, again disagreeing with the conclusion reached in the Marble Head case, that a court has no inherent power to condone non-compliance with the time limit prescribed in section 115(3)(b). The court found that the relevant part of the Act can also not be interpreted to grant such a power.

Separate meetings for holders of different 'classes' of securities?

The Sand Grove funds argued that the meeting at which the scheme of arrangement was approved had not been properly constituted, relying for this purpose on their interpretation of section 114 of the Act, which refers to any arrangement between a company and "holders of any class of its securities". The funds argued that two schemes of arrangement were proposed, one with the holders of Distell's ordinary shares and the other with the holder of Distell's B shares, and that these should have been put to the holders of the relevant class of shares at separate meetings.

The court held that it would undermine the effectiveness and efficiency of the scheme of arrangement procedure to adopt an interpretation of section 114 that would require separate meetings of the holders of each class of shares, determined with reference to section 37, when there is no significant dissimilarity between their affected rights.

Rather, any company concerned with convening a meeting in terms of section 115(2) must apply the principles set out in the Court of Appeal case of Sovereign Life Assurance Co v Dodd when determining whether separate meetings should be convened for different classes of shareholders. These principles place the focus, for the purposes of differentiating shareholders into separate classes, on the dissimilarity of shareholders' rights, as distinct from their interests, and only separate into different 'classes' 'persons whose rights are so dissimilar as to make it impossible for them to consult together with a view to their common interest'. If there is no such significant dissimilarity, there is no need for separate meetings.

Webber Wentzel acted for Heineken International B.V. and Sunside Acquisitions Ltd (the second and third respondents in the matter). Our team consisted of ​Hendrik du Preez, Andre Bowley, Riyaad Cruywagen, Chrisna Nöthling and Lebogang Maragelo. Our counsel were Jonathan Blou SC, Faizel Ismail SC and Alistair Price.


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