The inherent powers of a South African court to set aside a resolution (“Resolution”) concerning a statutory merger or other fundamental transaction, being a transaction as contemplated in Chapter 5, Part A of the Companies Act No. 71 of 2008 (“Companies Act”), are subject to specific conditions as outlined in the Companies Act. This legal framework empowers a court to prevent a company from implementing a Resolution, thereby halting the progression of a merger or another fundamental transaction.
This article shall briefly explore the legal framework applicable to fundamental transactions and a South African court’s powers in relation thereto.
Section 115 of the Companies Act outlines two scenarios where court approval is mandated before a company can proceed with a fundamental transaction, even after the adoption of a Resolution:
- Opposition by 15% (fifteen percent) of Voting Rights:
- if at least 15% (fifteen percent) of the exercised voting rights oppose the Resolution, court approval is required;
- within 5 (five) business days of the vote, any person voting against the Resolution can demand court approval; and
- the company in question must, within 10 (ten) business days of the vote, either seek court approval at its own expense or treat the Resolution as null and void. The procedure for treating a resolution as null and void is unfortunately not clearly addressed in the Companies Act.
- Shareholder Application for Review:
- Court approval is necessary when a shareholder, who voted against the Resolution, successfully applies for leave from the court within 10 (ten) ten business days of the vote to challenge the proposed fundamental transaction.
- The court may grant leave only if satisfied that the applicant is acting in good faith, is prepared for the proceedings, and has alleged facts supporting an order to set aside the Resolution.
- The costs of this application may not necessarily be borne by the company.
These court approval provisions are available exclusively to those who opposed the Resolution, aiming to protect the interests of all shareholders, and not just dissenting shareholders.
During a court review initiated by the company in question or upon granting leave to a shareholder opposing the Resolution, a court may set aside the Resolution under specific conditions. The Resolution can be deemed manifestly unfair to any class of holders of the company’s securities or be invalidated if the vote was tainted by conflicts of interest, inadequate disclosure, non-compliance with the Companies Act, the memorandum of incorporation, or other applicable company rules, and any other substantial procedural irregularity.
In conclusion, a company facing opposition from at least 15% (fifteen percent) of voting rights can follow the outlined procedures, and a shareholder voting against a Resolution can seek a court review, provided they meet the criteria stipulated in section 115 of the Companies Act. These legal provisions ensure a fair and transparent process for fundamental transactions while safeguarding the interests of shareholders.
VDMA’s team of experts is at your disposal for any company law assistance that you or your business may require.
Published 29 January 2024