South Africa Companies Amendment Bill, 2021: Potential relief after more than a decade, or further complexities?
06 October 2021
South Africa Companies Amendment Bill, 2021- Potential changes to share repurchase requirements
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Legal Development 13 October 2021 13 October 2021
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Africa
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Corporate
We explained, in our article of 6 October 2021, that the Companies Amendment Bill, 2021 as published on 1 October 2021 (“the Bill”) may potentially relieve companies in South Africa from some of the onerous provisions (such as section 45) of the Companies Act 71 of 2008 (“Companies Act”). However, some of the proposals of the Bill are also likely to be contentious (such as the changes proposed to section 26).
We now explore the proposed changes to section 48(8) of the Companies Act, which currently requires a special resolution by shareholders when a company is implementing a share buyback in only limited instances.
The proposed changes to section 48(8)
The requirement to obtain a special resolution of shareholders
Currently, in terms of section 48(8) of the Companies Act, a special resolution of shareholders is required in instances where:
- a company intends to repurchase shares from a director or prescribed officer of the company, or from a person related to a director or prescribed officer of the company (section 48(8)(a)) (“a Director Share Buyback”); or
- a share repurchase transaction alone, or together with other transactions in an integrated series of transactions, involves the acquisition by the company of more than 5% of the issued shares of any particular class of the company’s shares (section 65(11)(g) read with sections 48(8)(b) and 115)) (“a 5% Share Buyback”).
If the proposed amendments to section 48(8) are introduced, then the passing of a special resolution will be required for all share repurchases (including a Director Share Buyback and a 5% Share Buyback), unless made by means of an offer made pro-rata to all shareholders or a repurchase in the ordinary course on a recognised stock exchange on which the shares are traded.
Notably, due to the requirements of section 115(2)(a) of the Companies Act, it is currently not possible to pass a special resolution of shareholders for a 5% Share Buyback on a round robin basis and a meeting needs to be called for this specific purpose. If the proposed amendments to section 48(8) are introduced, it appears as if it would then indeed be possible to request shareholder approval on a round robin basis.
The application of sections 114 and 115 of the Companies Act to 5% Share Buyback
Currently, in instances of a 5% Share Buyback such a share repurchase is subject to the requirements of sections 114 and 115 of the Companies Act with the result that inter alia:
- As stated earlier, a special shareholder resolution is required for such a share repurchase and would need to be passed at a specific meeting called for that purpose (i.e. a round robin shareholder resolution is not permitted);
- The 5% Share Buyback would need to be implemented through a scheme of arrangement process (as contemplated in section 114 of the Companies Act) and would trigger, amongst other things, the requirement that an independent expert be appointed to report on the transaction;
- Shareholders would be entitled to exercise shareholder appraisal rights in terms of section 164(2)(b) of the Companies Act; and
- In terms of section 115(3), the applicable company would not be able to implement an adopted resolution in certain instances (i.e. if the resolution was opposed by a certain percentage of shareholders and subject to review by a court as contemplated in section 115(7).
If the proposed changes to section 48(8) are introduced, then the above requirements, of sections 114 and 115 of the Companies Act, would no longer apply to 5% Share Buybacks – with the result that there would no longer be a requirement to adhere to the onerous provisions of sections 114 and 115 of the Companies Act in such circumstances.
Conclusion
Even though the proposed changes to section 48(8) introduce additional requirements (i.e. to obtain special shareholder resolutions for all share repurchases unless the repurchase transaction takes place in prescribed circumstances), the proposed exclusion of the requirements of sections 114 and 115 for 5% Share Buybacks are to be welcomed as it would simplify the share repurchase process and would provide significant relief (from a cost; timing and procedural perspective) to companies desirous of implementing a 5% Share Buyback.
Clyde & Co intends to submit comments to the Companies Bill by the deadline of 31 October 2021. Please contact Ernie van der Vyver or Hielien Venter if you have any questions or would like to participate in the process to consolidate such comments ahead of this deadline.
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