appraisal rights to help minority shareholders

Minority shareholders must follow the decisions of the majority but the addition of appraisal rights has changed things somewhat.

The idea that majority decisions rule has been one of the basic principles of company law for over 100 years.  The principle is still fundamental to South African company law.  However, the Companies Act of 2008 (“the Act”) provides minority shareholders certain rights in limited circumstances.

One of these rights is called “appraisal rights”.  Appraisal rights provides minority shareholders a way to exit the company and potentially avoid oppression of the majority.  These minority shareholders are called “dissenting shareholders”,

The aforementioned circumstances relate only to company resolutions passed by the majority shareholders.  There are only 2 kinds of resolutions that allow a dissenting shareholder to activate their appraisal rights.

Resolutions that can activate appraisal rights

1. A resolution to amendment the company’s Memorandum of Incorporation in a manner that has a materially adverse effect on the rights attached to shares in the company.
2. A resolution to confirm the disposal of all, or the greater part, of the assets of the company, including, amalgamation or merger with another company.

Dissenting shareholders may choose to exit the company if such a resolution is proposed.  They can “force” the company to buy their shares.  This right is discretionary and the dissenting shareholders may choose whether they wish to active it.  To activate the right, dissenting shareholders must follow the procedure set-forth by the Act correctly.

Procedure to activate appraisal rights

Notice of resolution

In the normal course, the shareholders of a company will be given notice of a resolution which notice must contain the proposed resolution to be adopted.

Written notice of objection

Where the dissenting shareholders are given notification of the proposed resolution, they must note their objection to the proposed resolution in writing before the vote for the resolution.

Vote at the meeting

The dissenting shareholders must vote against the resolution in question at the shareholders' meeting and the resolution must still be passed by the majority shareholders.

Notification of resolution being passed

Within 10 days of the passing of the resolution the company must send notification confirming same to all dissenting shareholders that noted a written objection.

Written demand

Within 20 days of receiving the notification of the passing of the resolution, the dissenting shareholders must deliver a written demand requiring that the company purchase their shares for their fair value (see below for more information).

Written offer from company

Within 10 days of receipt of the demand from the dissenting shareholders the company must make an offer to the dissenting shareholders for the fair value of the dissenting shareholders’ shares.  The offer must also include how the company calculates the “fair value” of the shares.

If the dissenting shareholders do not believe the “fair value" offered by the company is correct, the parties may negotiate or approach a Court to adjudicate.

Shareholders that did not receive notification of the resolution being passed have 20 days from the date they find out about the resolution to demand fair value.

If the correct procedure is not followed, the aggrieved party/ies may approach a Court to remedy the situation.

Appraisal rights will expire if the company revokes the adopted resolution that aggrieved the dissenting shareholders.

What is "fair value""?

There is no set way to determine "fair value".  Sometimes the parties will have an agreement that provides a means to calculate the value of shares.  In the absence of an agreement, it is often best to obtain a valuation from a neutral third-party valuator.

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DISCLAIMER: THERE ARE MORE CONSIDERATIONS THAN WE CAN COVER IN THIS ARTICLE SO ONLY USE THIS INFORMATION AS A GUIDE.   THIS INFORMATION DOES NOT CONSTITUTE LEGAL ADVICE.  IT IS ALWAYS BEST TO DISCUSS YOUR SITUATION WITH AN ATTORNEY; CONTACT US AT 0861 88 88 35helpdesk@gcm-legal.com AND THROUGH THE CONTACT FORM ON THIS PAGE.

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