Background:

The South African Companies Act No. 71 of 2008 (“Companies Act”) contains built in protection provisions against the stripping by directors of a South African company’s assets or undertaking without the approval of shareholders. In terms of section 112 read with section 115 of the Companies Act, a special resolution of shareholders is required for the disposal of all or the greater part of assets or undertaking of a company (“Subsidiary Disposal”) (with certain exceptions, such as a transfer between a subsidiary company and its holding company).

In terms of section 115(2)(b), a special resolution of shareholders of a holding company is required, if the Subsidiary Disposal constitutes a disposal of all or the greater part of assets or undertaking of the holding company (“Holding Company Disposal”), having regard to the holding company’s consolidated financial statements.

Interpretational issues with section 115(2)(b):

In terms of common law, ‘disposal’ means to transfer ownership. From a strict reading of section 115(2)(b), section 115(2)(b) will only apply if a Subsidiary Disposal, constitutes a Holding Company Disposal, i.e. section 115(2)(b) will only apply if a transfer of ownership by the subsidiary company, constitutes a transfer of ownership by the holding company. No situation can be contemplated where the transfer of ownership or portion of ownership by a subsidiary company, will also constitute a transfer of ownership or portion of ownership by a holding company. As the subsidiary company is a different legal entity than the holding company, ownership by the subsidiary company will not result in ownership by the holding company of the relevant asset or undertaking. The effect of the wording of section 115(2)(b), results in the absurd conclusion that section 115(2)(b) will never apply.

In practice, the transfer of ownership by a subsidiary company may result in the value of the holding company’s investment in the subsidiary company decreasing. It is assumed that the intention of legislature with section 115(2)(b) might have been to require a special resolution of a holding company’s shareholders if a Subsidiary Disposal will result in the diminishment of all or the greater part of the value of the holding company’s investment in the subsidiary company. The aforesaid is a logical and business-like interpretation of section 115(2)(b), where the reading of section 115(2)(b) will not present absurd results. However, it appears that courts have not yet interpreted section 115(2)(b) for purposes of resolving this issue, and no clear solution has yet been determined.

In the meantime, and until such time that a court of law has interpreted the wording of section 115(2)(b), it would be prudent to obtain a special resolution of a holding company’s shareholders if a Subsidiary Disposal will result in the diminishment of all or the greater part of the value of the holding company’s investment in the subsidiary company.

Conclusion: 

A strict reading of the wording of section 115(2)(b) may result in section 115(2)(b) never applying, in that section 115(2)(b) requires the transfer of ownership by a subsidiary company to also constitute the transfer of ownership by a holding company – a situation that will likely never apply. Courts have not yet been tasked for interpreting section 115(2)(b) in a manner that will not result in the absurd conclusion that section 115(2)(b) never applies.

Until such time that a court of law decides regarding this issue, it would be prudent to follow a logical and business-like interpretational approach on what the legislature intended to protect with section 115(2)(b), being a diminishment in the value of the holding company’s investment in the subsidiary company. Therefore, it would be sensible to obtain a special resolution of shareholders where a Subsidiary Disposal will result in the diminishment of all or the greater part of the value of the holding company’s investment in the subsidiary company.

VDMA’s team of experts is at your disposal for any resolution drafting assistance that you or your business may require.

Published 9 April 2025