Since the commencement of the Companies Act No. 71 of 2008 (“Companies Act”), companies and their legal advisors have been plagued by the question as to whether or not all share buy back transactions in excess of 5% (five percent) of the company’s issued share capital also constitute a scheme of arrangement. Fortunately for these companies and their legal advisors, some clarity on the matter has recently been provided by the Johannesburg High Court in the case of First National Nominees (Pty) Ltd and others v Capital Appreciation Limited and another 2021 (4) SA 516 (GJ). This case as well as the relevant provisions of the Companies Act pertaining to share buy backs and scheme of arrangements will be explored in this article.
Relevant Provisions of the Companies Act
The source of the debate regarding the aforementioned question stems from the wording in section 48(8)(b) of the Companies Acts which provides that a decision by the board of a company to acquire more than 5% (five percent) of the company’s own shares, whether in one transaction or through a series of integrated transactions, is subject to the requirements of sections 114 and 115 of the Companies Act. Section 114, read in light of section 48(8)(b), deals with the subject of schemes of arrangement and, amongst other things, makes specific reference to the applicability of section 48 in an arrangement regarding the re-acquisition by a company of its securities.
Resultingly, it was argued by many that all share buy back transactions in excess of 5% (five percent) of the company’s issued share capital would constitute a scheme of arrangement.
First National Nominees (Pty) Ltd and others v Capital Appreciation Limited and another
One could argue that the debate regarding the aforementioned question could have been avoided if the term “scheme of arrangement” was defined by the Companies Act – unfortunately it is not. The Johannesburg High Court has however finally had the opportunity to address the meaning of this term which was done in the case of First National Nominees (Pty) Ltd and others v Capital Appreciation Limited and another 2021 (4) SA 516 (GJ).
After consideration of the aforementioned aspects the court concluded, amongst other things, that:
- a transaction contemplating the repurchase by a company of its shares pursuant to an agreement between such company and only certain of its shareholders which does not seek to bind all other shareholders who have not agreed thereto, is not a scheme of arrangement. Vice versa, a transaction that seeks to bind all the shareholders regardless of whether or not such shareholders agreed thereto, is by its nature a scheme of arrangement; and
- the intended purpose of section 48(8)(b) of the Companies Act was not to classify every single share buy back contemplated in section 48 of the Companies Act as a scheme of arrangement, but rather to afford protection to minority shareholders against potential abuses that could accompany such share buy backs.
As a result of the courts judgment in the aforementioned case, the question as to whether all share buy back transactions wherein the company intends to acquire more than 5% (five percent) of the company’s own shares constitutes a scheme of arrangement and must resultingly be considered in light of Takeover Regulation Panel (“TRP”) requirements, has received some clarity. As there is now clarity that not all share buy back transactions of the nature described above are considered scheme of arrangements, it can be said that such share buy backs will also not constitute an “affected transaction” as defined in the Companies Act. Resultingly, the TRP requirements may not apply to such transactions.
VDMA’s team of experts are available to assist you and your business with any legal requirements pertaining to the drafting of share buy back agreements, including providing expert advice in respect of the Companies Act and TRP consent which may be required in order to implement such transactions.
Published 15 June 2022