By Thanny Mosima
I. INTRODUCTION
The Companies Act 71 of 2008 (“the Companies Act”) introduced the dissenting shareholder’s appraisal
remedy as part of a broader reform aimed at balancing majority rule with minority protection. Section 164
provides shareholders who oppose certain fundamental transactions with the right to exit the company
and receive fair value for their shares.
This article provides an overview of appraisal rights as a mechanism with a primarily purpose to protect
minority shareholders. This will be done by looking at the nature of shareholder appraisal rights and the
events that trigger them, how a shareholder can enforce these rights, the current legal positon around the
determination of “fair value”, the advantages of using this mechanism and the disadvantages alike.
II. WHAT ARE SHAREHOLDER APPRAISAL RIGHTS?
Shareholder Appraisal rights are granted in terms of section 164 of the Companies Act. This section grants
shareholders the right to dissent from fundamental transactions and demand payment of the fair value of
their shares. This right is available to shareholders who hold a voting rights in a company and the primary
purposes of this right is to protect minority shareholders who object to certain fundamental transactions
which are approved by a special resolution.
These rights may be invoked where shareholders oppose decisions involving for example:
- Disposal of all or the greater part of the company’s assets (s 112);
- Amalgamations or mergers (s 113);
- Schemes of arrangement (s 114);
- Amendments to share rights, preferences, or limitations attached to a class of shares in a
company’s memorandum of incorporation where such changes are likely to materially prejudice
that class of shareholders.
The remedy does not apply in the context of business rescue plans. The appraisal remedy serves as a
statutory exit mechanism, ensuring that shareholders are not compelled to remain invested in a company
undergoing fundamental changes with which they disagree. This ensures that minority shareholders are
not compelled to participate in decisions they fundamentally oppose while also enabling the majority to
proceed with transactions alongside shareholders who support the strategic direction of the company.
III. HOW DO I ENFORCE MY APPRAISAL RIGHTS AS A SHAREHOLDER?
Since minority shareholders hold the right to demand the fair value of their shares in cash. Prior to
making a demand, the dissenting shareholders must make a written notice of objection and send it to
the company before the resolution is adopted. The company then has 10 business days to provide the
dissenting shareholders with a notice that the resolution has been adopted.
Before the minority shareholders can be entitled to the fair value of their shares there are a number of
requirements which must be met. A dissenting shareholder must:
- Deliver a written notice of objection prior to the vote;
- Vote against the resolution;
- Ensure the resolution is adopted despite their opposition;
- Submit a demand for fair value within the prescribed timeframe.
Once dissenting shareholders have formally demanded payment for their shares, the company is required
to make an offer to purchase those shares at a fair value. If the shareholder does not accept the offer
within 30 business days, the offer automatically lapses. This is according to Standard Bank Nominees RF
(Pty) Ltd v Hospitality Property Fund Ltd 2020(5) SA 224 (GJ). Where a shareholder accepts the company’s
offer, the company is then oblidged to pay the agreed amount within 10 business days of acceptance.
IV. HOW WILL THE FAIR VALUE OF MY SHARES BE DETERMINED?
The court in BNS Nominees (RF) (Proprietary) Limited and another v Arrowhead Properties Limited and
others [2022] JOL 56102 (GJ) at par 9 stated that should the dissenting shareholders reject an offer made by
the company for reasons they believe the value of the shares is inadequate, the dissenting shareholders
may apply to court to determine the fair value of the shares. The issue South African courts face is that is
that the term “fair value” is one that has been borrowed from other jurisdictions and in South Africa there
isn’t much case law that deals with the definition.
Section 164(15)(c)(ii) of the Companies Act prescribes that the fair value of any shares must be determined
at the date which, and time immediately before the company adopted the resolution that gave rise to the
shareholder appraisal rights. The court in BNS Nominees (RF) (Proprietary) Limited and Another v Zeder
Investments Limited and Another (5643/2020) [2021] ZAWCHC 263 (3 December 2021) at par 38 stated that
the approach should be followed in South African law regarding fair value of the shares is that the result of
the determination of the fair value of the shares should strike a balance that reflects their true economic
worth.
Dissenting shareholders should not be placed in a better position by being awarded more than the actual
value of their shares, nor disadvantage them by assigning a value which falls below what the shares are
objectively worth. The purpose is to ensure a fair and equitable outcome which represents the intrinsic
value of the shares. One may even consider the price of the share is as it reflects on the Johannesburg
Stock Exchange in order to assist in determining the value of the shares although this is not the only
relevant indicator.
According to BNS Nominees (RF) (Proprietary) Limited and Another v Zeder Investments Limited and Another
(5643/2020) [2021] ZAWCHC 263 (3 December 2021) at par 40 South African courts have a general principle
that should guide one when taking into account the fair value of the share which are the following:
- In the case of a listed company, the market price of the shares immediately before the adoption
- of the resolution that triggered the appraisal rights;
- The background and process leading to the adoption of the resolution referred above;
- Expert valuation evidence presented by the parties, as well as any report from an independent
appraiser appointed by the court in terms of section 164(14) of the Companies Act, concerning the
value of the shares;
South African courts have indicated that they are not confined to a single, rigid method when determining
“fair value” under section 164 of the Companies Act. They have also made it clear that they do not have
to follow section 164(15)(c)(iii) as though it creates a compulsory procedure, nor must they automatically
adopt the valuation approach used in another case. The Act gives the court a discretion, the court may
appoint one or more independent appraisers to assist with valuing the shares, but it can also determine
fair value itself where the available evidence is sufficient to do so. In practice, South African courts generally
apply the following approach:
- Dissenting shareholders who did not accept the company’s offer should be joined to the proceedings, and the court’s valuation will bind them as parties; and
- The shares are valued as at the date of, and immediately before, the company adopts the resolution that triggered the appraisal rights.
V. WHAT ARE THE BENEFITS EXERCISING MY APPRAISAL RIGHTS AS A
MINORITY SHAREHOLDER?
One advantage is that it provides the dissenting minority shareholders with an option to opt out of their
initial investment there be fundamental changes in it. This is because they may demand the fair value of
shares which they own in the company should their initial investment not be what they envisioned it to be.
This has the result of giving shareholders the freedom of choice to be able to do business with parties that
are more aligned with their greater strategic goal.
Market pricing mechanisms may be bypassed with this tool. Especially if it is believed that this will be an
investment strategy that is profitable. A perfect example is where Dell Inc acquired. Shareholders were
urged to use their appraisal rights by Carl Icahn and the purpose behind this was to put enough pressure
on Michael Dell so that he may settle.
VI. WHAT ARE THE DISADVANTAGES OF EXERCISING MY APPRAISAL
RIGHTS AS A MINORITY SHAREHOLDER?
A key disadvantage arises where the fair value of the shares cannot be readily agreed upon as mentioned
above. In such a situation, the dispute may escalate into protracted litigation. This process is timeconsuming
and can become financially burdensome on the dissenting shareholder. The this is because
the shareholder needs to pay legal fees in addition to paying the cost associated with appointing an
expert valuator to provide evidence on the appropriate valuation of shares.
A further concern is the lack of legislative guidance regarding the methodology for determining fair value.
The relevant provisions largely leave this determination to the discretion of the courts. Currently, there is
no prescribed clear or uniform approach to determining fair value. This uncertainty may prolong disputes
and result in inconsistent outcomes.
VII. CONCLUSION
Appraisal rights are a powerful tool for minority shareholders. The court in Justpoint Nominees (Pty) Ltd
and Others v Sovereign Food Investments Limited and Others (BNS Nominees (Pty) Ltd and Others (878/16)
[2016] ZAECPEHC 15 (26 April 2016) at par 66 stated that the protection of minority shareholders lies at the
heart of appraisal rights. Judicial interpretation has consistently demonstrated that these rights serve
as a mechanism enabling minority shareholders to exit the company where the nature of their original
investment is set to undergo a fundamental change.
The legal process which the minority shareholders have to endure is costly and cumbersome and the
legislative uncertainty does not make this process any easier. This may be a deterrent for the minority
shareholders to raise the appraisal rights. On the upside it can be used as a tool to achieve a certain goal
during negotiations. What is important is that this legislative tool exists and although it has challenges, it
does serve its purpose in practice.