Minority shareholders often face challenges, especially when the majority shareholders or company management make decisions that could adversely 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 while receiving fair compensation for their shares. This protective measure, known as the right of appraisal, discourages oppressive actions from majority shareholders and fosters fairness in corporate actions.

Understanding the Right of Appraisal

Section 164 of the Companies Act introduces the right of appraisal, which enables 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 diminish the value of the shares held by minority shareholders. 

When a corporate action is perceived to harm their interests, minority shareholders can invoke this right to ensure they are compensated fairly. This measure is particularly relevant in situations where shareholders disagree with a company’s major decisions or believe their interests are being overlooked.

Situations That Trigger the Right of Appraisal

Minority shareholders may exercise their right of appraisal in specific circumstances, known as affected transactions, as outlined in the Companies Act. These include:

• Sale of a Substantial Portion of Assets:
  • When a company disposes of a significant part of its assets or operations, it may dramatically alter the company's nature and financial prospects.
• Scheme of Arrangement:
  • This formal arrangement involves restructuring a company's capital, assets, or liabilities and typically requires court approval. Such restructurings may have a profound impact on shareholder value.
• Mandatory Offers:
  • In the event that an individual or group gains control of the company, they must make an offer to buy the remaining shareholders' shares on equitable terms, thereby ensuring fair treatment.
• Mergers or Amalgamations:
  • When two or more companies combine, shareholders need assurance that their interests are not undermined. Appraisal rights allow them to exit if they are dissatisfied with the terms.
• Change of Control Transactions:
  • Shareholders are given the opportunity to evaluate any changes in corporate control, such as takeovers or acquisitions. The right of appraisal ensures that their shares are not unfairly devalued during these transitions.

Importance of Affected Transactions

These affected transactions are pivotal to corporate governance, as they provide critical protections for minority shareholders. By invoking their appraisal rights, shareholders can ensure they are treated fairly during significant corporate events. The main objectives of this provision are to:

• Protect minority shareholders from being unjustly disadvantaged. 
• Guarantee that all shareholders receive equal treatment and access to relevant information. 
• Ensure the fair and transparent conduct of corporate reorganizations, mergers, and other key transactions.

Regulatory Oversight of Affected Transactions

The Companies Act mandates that the Takeover Regulation Panel (TRP) oversees affected transactions, ensuring they comply with legal standards. Established under Section 196 of the Companies Act, the TRP is tasked with regulating any transaction that could result in a change of control within a company. The panel’s role is to ensure these transactions are handled with transparency, fairness, and in accordance with legal requirements.

How to Exercise the Right of Appraisal

To take advantage of the right of appraisal, a shareholder must follow specific steps:

• Submit a Written Objection:
  • Prior to the resolution being passed, the shareholder must provide the company with a formal notice stating their objection to the proposed corporate action.
• Vote Against the Resolution:
  • Once the company passes the resolution, the objecting shareholder must vote against it to signal their dissent.
• Demand Fair Value Payment:
  • After the resolution is approved, the dissenting shareholder must request the company to repurchase their shares at a fair value. Should the company’s offer be considered inadequate, the shareholder may escalate the matter to court, which will determine the appropriate share value.

Conclusion

The right of appraisal serves as a vital protective measure for minority shareholders, ensuring that their interests are not compromised during major corporate decisions. Section 164 of the Companies Act 71 of 2008 offers minority shareholders in South African companies a structured means to exit a company when their interests are threatened, safeguarding them from unfair treatment or dilution of their shareholding. By enabling minority shareholders to challenge oppressive corporate actions and receive fair compensation for their shares, the right of appraisal promotes transparency, fairness, and equitable treatment in corporate governance. 

Written by Johan De Lange, Attorney, Schoemanlaw