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Share buy-backs by companies – how is this regulated?

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Share buy-backs by companies – how is this regulated?

22nd November 2017

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The Companies Act 71 of 2008, as amended (hereinafter the “Act”), have provisions in place that regulate the procedure when a company wishes to acquire its own shares. This re-acquisition, or share buy-back, may be authorised by the board of directors of a company, provided that, prior to effecting such re-acquisition, the solvency and liquidity test has been applied by the board. These buy-back provisions are set out in Sections 46 and 48 of the Act. The board of directors must vote on the decision whether to approve a buy-back or re-acquisition by the company of its own shares.

Companies Act provisions

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In terms of Section 48(8) of the Act, if a proposal by the board for a share buy-back is more than 5% of the issued shares of any class of shares of the company, the re-acquisition must comply with the requirements of Sections 114 and 115 of the Act.

A buy-back falls within the definition of ‘distribution’ as defined in Section 1 of the Act, and, since some of the shareholders in the subsidiary company can elect to receive cash as a consideration, the requirements of Section 46 must therefore be complied with.

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Thus, in addition to passing a resolution approving a buy-back, the board must, before making a re-acquisition, apply the solvency and liquidity test. A proposed repurchase will pass the solvency and liquidity test if the board is satisfied that:

  • the assets of the company, as fairly valued, equal or exceed the liabilities of the company, as fairly valued; and
  • it appears that the company will be able to pay its debts as they become due in the ordinary course of business for a period of 12 months following such repurchase.

Re-acquisition of shares exceeding 5% of the shares in the subsidiary company

If the re-acquisition proposed exceeds 5% of the issued shares in the subsidiary company, the decision must be approved by a special resolution of the shareholders of the company, if any of the shares are to be acquired by the company from a director or prescribed officer of the company, or a person related to a director or prescribed officer of the company.

In consequence of the above, minority shareholders can be prevented from participating in the decision to approve a buy-back by virtue of holding minority voting rights in the ordinary shares of a company.

Section 115 requires approval by a special resolution adopted by persons entitled to exercise voting rights on such a matter.  Provided the acquiring company has given notice to shareholders (including minority shareholders) in the subsidiary company of a meeting to consider adopting a resolution to repurchase its shares in terms of Section 115 of the Act, minority shareholders may opt to exercise their appraisal rights in terms of Section 164 of the Act.

In terms of this section, dissenting shareholders may give the company a written notice objecting to such resolution and demand that the company pay them ‘fair value’ for all their shares.

A minority shareholder may invoke the appraisal remedy in terms of Section 164 if he/she:

  • notified the company in advance of the intention to oppose a special resolution contemplated in this section; and
  • were present at the meeting and were entitled to vote, and voted against that special resolution.

However, minorities may only seek relief in terms of Section 164 of the Act, if the resolution to approve the re-acquisition has been passed and adopted accordingly.
Alternatively, minority shareholders may invoke the derivate action remedy and thereby take steps in terms of Section 165 demanding that the acquiring company institute legal proceedings to protect the interests of the target company.

Conclusion

The process of re-acquisition of shares could become a complicated process, especially if the terms aren’t mapped out clearly in the Memorandum of Incorporation and the Shareholders Agreements of the company. At SchoemanLaw Inc., we can assist you in completing the due diligence required to make a sound decision on your acquisition, and further to negotiate the deal to suit and protect your needs and interests, especially if you are an affected minority shareholder.


Written by André Nortjé – SchoemanLaw Inc

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