The rights of a dissenting shareholder in a scheme of arrangement

"I'm a minority shareholder in a company that has been approached by a buyer willing to buy out all the shareholders. Because of Covid-19 the company has suffered financially and I know that the shareholders holding more than 75% of the company will want to accept the offer even though I believe it to be far below the market value of the shares. Is there any remedy at my disposal?"

The current Covid-19 pandemic and economic circumstances have wreaked havoc on many long-standing businesses and their future prospects and it is a general occurrence for companies or individuals with a healthy cash flow to look into buying out companies that have suffered, often below market value. One of the ways that such a takeover typically occurs is through a scheme of arrangement.

A scheme of arrangement usually means that a buyer will contact the company, and make an offer to purchase the shares from its current shareholders. The company, the current shareholders and the buyer will then all enter into a scheme of arrangement and agree as to how this "friendly takeover" will take place. Unfortunately, such transactions do not always mean that shareholders will get fair value for their shares. So, what options does a minority shareholder have who wishes to dissent against the arrangement? Here Section 164 of the Companies Act 71 of 2008 comes to the rescue and provides relief for "dissenting shareholders" that do not agree to such arrangements.

In order to enter into a scheme of arrangement, such a scheme must be approved by a special resolution (normally 75% of votes must be in favour of the resolution) of the holders of the relevant class of shares that are being acquired. For the dissenting shareholder to benefit from the relief of Section 164, the following steps, must be taken by the dissenting shareholder:
 

• The dissenting shareholder has to give notice of his objection to the company before the vote takes place.
• When this resolution is put to a vote, the dissenting shareholder has to vote against the proposed transaction.

If the special resolution is passed, the dissenting shareholder can then make use of the right to appraisal contained in Section 164 which allows the dissenting shareholder to demand that the company pay the fair value of such shares to him in exchange for the return of his shares to the company. In effect, the company will buy back the shares from the shareholder at a fair value.

This right of appraisal allows a minority dissenting shareholder that is negatively affected by the decision of the majority, to protect his investment and at least obtain fair value for his shares. But for this remedy to be used the dissenting shareholder must adhere to the strict timeframes and actions as required by Section 164.