MAILBOX: DTIC shuts down potential for shareholder activism with the Companies Amendment Bill

31 October marked the deadline for interested parties to submit comments on the Companies Amendment Bill 2021 gazetted early in October by Ebrahim Patel, who is both a senior figure in the South African Communist Party (SACP) and South Africa’s Minister of Trade, Industry and Competition (DTIC). A few days prior to this deadline, BizNews published an article by Adam Pike, a corporate and commercial adviser and litigator, who pointed out that, if passed, the Companies Amendment Bill 2021 would purportedly “facilitate the ease of doing business” at the expense of transparency and accountability. While the advantages of this legislation appear to be beneficial – particularly as a way to counteract the red tape which very often hinders economic development in South Africa’s ailing economy – the devil lies in the debilitating detail of the incipient Companies Amendment Bill. The article below is a follow-up to Pike’s initial article highlighting the hidden harms that the Companies Amendment Bill presents. – Nadya Swart

By Adam Pike

When Ebrahim Patel published the Companies Amendment Bill 2021 for public comment, he did so on the basis that the proposed amendments would facilitate the ease of doing business. According to the Department of Trade, Industry and Competition, the requirement for a special resolution when a company buys back its shares on a securities exchange is entirely unnecessary because, it says, a special resolution in terms of section 48(8) is time-consuming and costly. On the face of it, this is a significant reversal of the policy position the DTIC adopted in 2011.

Keen observers of developments in corporate law will know that section 48(8) was not part of the Companies Act 2008 when it was promulgated. The protective measures incorporated in 48(8) were introduced in 2011 as an amendment to the Act, and for good reason. The 2011 amendment implemented protective measures on companies wanting to buy back more than 5% of its shares because the DTIC accepted that although a share repurchase appears to be a voluntary transaction, it is not. In reality, it is a distribution of the company’s profit and a reorganisation of its share capital.

Moreover, a repurchase has a decidedly coercive effect. Shareholders are forced to choose between participating in profits and relinquishing their shares or foregoing the distribution, but increasing their ownership participation. It is always possible that a shareholder may wish to do neither. For that reason, DTIC bolted the ready-made accountability, transparency and remedial provisions in sections 114 and 115 onto the section 48(8) repurchase provisions, which inure to the benefit of minority shareholders, protecting them from the coercive and potentially oppressive effects of certain share buy backs.

Firstly, an independent expert must be appointed to give shareholders a fairness opinion on the repurchase. Then, the company must seek shareholders’ approval by way of a special resolution. Finally, the company must alert its shareholders to their right to a remedy if they object to the terms of the transaction. The appraisal remedy gives dissenting shareholders a statutory put option against the company. If exercised, the company is obliged to acquire the dissenting shareholders shares at fair value, not at the traded price.

Set against the utility of the protective measures, the reasons given by the DTIC for repealing the special resolution requirement from section 48(8) for listed companies, namely time and cost, make no sense at all. This is because the JSE specifically requires a share repurchase to be approved by a special resolution. The JSE also impels a board to obtain an opinion from an independent expert concerning the fairness of the repurchase terms. 

No cost is saved, no time goes unwasted and the amendment to section 48(8) will achieve nothing insofar as JSE-listed companies are concerned. 

So then, what is the purpose of the amendment to section 48(8)? To answer that question, one must appreciate what the DTIC did not say.

Recall the famous Sherlock Holmes mystery about the dog that didn’t bark. It’s a short story called Silver Blaze about the disappearance the night before a race of a racehorse and the murder of the horse’s trainer. Holmes concluded that since the dog did not bark, it must have known the perpetrator. The dog that did not bark led Holmes to track down the guilty party.

What the DTIC did not say in its Memorandum on the Companies Amendment Bill is that the amendment to section 48(8) removes reference to sections 114 and 115. The DTIC failed to disclose that shareholders of listed companies will be deprived of a potent remedy in the face of prejudice and oppression. Dissenting shareholders will no longer have the right to put their shares to the company and to exercise the appraisal remedy.

Rather than a candid explanation concerning the real effect of the amendment, the DTIC declares that “the protection envisaged by the requirement of a special resolution is unnecessary, time-consuming and costly”. If this is the purpose of the amendment, it fails to achieve the DTIC’s stated goals, since these protections are required by the JSE in its listing rules. 

Instead, the net effect of the amendment, being the revocation of the appraisal remedy, is shrouded in deafening silence, especially when read with DTIC’s media statement on 29 September 2021, which claims that:

“The amendments contained in the Bill set out to improve accountability and scrutiny on remuneration practices, promote shareholder activism and corporate governance.”

The removal of the reference to sections 114 and 115 from section 48(8)(b) achieves the exact opposite, for those sections enhance and encourage corporate governance and shareholder activism.

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