Appraisal rights of minority shareholders in a holding company, in relation to the subsidiary of the holding company

August 1st, 2018
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Cilliers v LA Concorde Holdings Limited and Others (WCC) (unreported case no 23029/2016, 14-6-2018) (Papier J)

By Marvin Petersen

In the recent judgment of Cilliers v LA Concorde Holdings Limited and Others (WCC) (unreported case no 23029/2016, 14-6-2018) (Papier J), the court had to determine whether the appraisal rights of a minority shareholder in a holding company, in terms of s 164 of the Companies Act 71 of 2008 (the Act) had been established, where the holding company’s subsidiary intended to dispose of all or the greater part of its assets.

The Act provides various remedies for the protection of minority shareholders. Section 164 of the Act contains one such remedy available to minority shareholders by enabling a dissenting shareholder during an offer and under certain limited circumstances to inform the company of their intention to vote against a special resolution; and within a prescribed time to require that the company pay them the fair value for all the shares they hold in the company (appraisal rights).

An instance where a minority shareholder may exercise their appraisal rights is when a company resolves to dispose of all or the greater part of the assets or undertaking of a company. In this regard, s 112(2) of the Act provides that:

‘A company may not dispose of all or the greater part of its assets or undertaking unless –

(a) the disposal has been approved by a special resolution of the shareholders, in accordance with section 115; and

(b) the company has satisfied all other requirements set out in section 115, to the extent those requirements are applicable to such a disposal by that company.’

Section 115(2)(b) of the Act provides that the disposal of all or the greater part of its assets or undertaking must be approved by a special resolution, by the shareholders of the company’s holding company if any, if the holding company is a company or an external company; the proposed transaction concerns a disposal of all or the greater part of the assets or undertaking of the subsidiary, and having regard to the consolidated financial statements of the holding company, the disposal by the subsidiary constitutes a disposal of all or the greater part of the assets or undertaking of the holding company.

Facts

The applicant was a minority shareholder in the first respondent, La Concorde Holdings Ltd (the holding company). The holding company owned 100% of the shares in its wholly owned subsidiary, KWV SA (Pty) Ltd (the subsidiary).

On 11 May 2016, the Stock Exchange News Service announced that the subsidiary would dispose of all its’ operational assets to a third party. On 29 June 2016, the holding company gave notice to its shareholders at a general meeting, where at which, resolutions were put to the holding company’s shareholders, on the basis that the disposal by the subsidiary constituted a disposal of all or the greater part of the assets or undertaking of both the subsidiary and the holding company. At the shareholders meeting, the applicant (along with the first, second, and third applicant) as a shareholder in the holding company, objected to and voted against the resolutions.

The holding company made an offer (which was subsequently retracted) to acquire the shares held by the dissenting shareholders, including the applicant, and relied on a valuation of their shares obtained from KPMG. The offer was rejected by the applicant on the basis of it being inadequate, whereafter the applicant instituted an application in terms of s 164 of the Act for two appraisers to be appointed to enable the court to determine the fair value in respect of the shares.

Issue

The issue before the Western Cape Division of the High Court (WCC) was whether s 164 of the Act affords appraisal rights to dissenting shareholders of the holding company whose subsidiary has implemented a transaction disposing of all or the greater part of its assets or undertaking in accordance with s 115(2)(b) of the Act.

Arguments

The respondents contended that a dissenting shareholder of the disposing company has appraisal rights if the company in which it holds shares, adopted a resolution contemplated in s 112 of the Act. In other words, it was contended on behalf of the respondents that the applicant, as a minority shareholder in the holding company, is not entitled to appraisal rights in respect of the subsidiary company disposing all or the greater part of its assets or undertaking in accordance with s 115(2)(b) of the Act.

The applicant, in his argument relied on the wording of s 115(8) of the Act, that affords the dissenting shareholders, appraisal rights in terms of s 164, in the circumstances where the disposal by the subsidiary constituted a disposal of all or the greater part of the assets or undertaking of both the subsidiary and the holding company. In this regard, s 115(8) provides that:

‘The holder of any voting rights in a company is entitled to seek relief in terms of section 164 if that person –

(a) notified the company in advance of the intention to oppose a special resolution contemplated in this section; and

(b) was present at the meeting and voted against that special resolution.’

Judgment

Papier J held that s 115 of the Act sets out the manner in which shareholder approval must be obtained. It creates a requirement and establishes an obligation on the shareholders in the disposing company’s holding company if, having regard to the consolidated financial statements of the holding company, the disposal of the subsidiary constitutes a disposal of all or the greater part of the assets or undertaking of the holding company. Therefore, the clear wording of s 115(8) affords the applicant with appraisal rights as a shareholder in the holding company when subsidiary of the holding company disposes of all or the greater part of its assets or undertaking in the circumstances where s 115(2)(b) is applicable.

Papier J further held that s 115(8) of the Act extends the category of shareholders to all other shareholders (with voting rights), who are not necessarily envisaged in s 164, affording to the holder of any voting rights in a company, the right to seek relief in terms of s 164 of the Act.

Accordingly, it was ordered, inter alia, that the applicant – as a minority shareholder in the holding company – is the holder of shareholder appraisal rights as envisaged in terms of s 164. That two appraisers be appointed to determine the fair value in respect of the shares and that s 115(8) of the Act be interpreted to mean that s 164 of the Act applies to dissenting shareholders of the holding company, who advised a company that they object to the resolution and have voted against it at a meeting called for that purpose, in compliance with the provisions of the Act.

Conclusion

This judgment is important for a number of reasons. Firstly, the applicant is the first known minority shareholder to successfully use s 164 of the Act to exercise valuation rights wherein the court exercised its discretion to appoint two appraisers to determine the fair market value of respect of shares that are subject to appraisal rights. Secondly, the judgment is unequivocal in its findings that a minority shareholder in the holding company is capable of holding a shareholder appraisal right in respect of a subsidiary company in compliance with the relevant provisions of the Act.

 Marvin Petersen LLB (UWC) is an attorney at Herold Gie Attorneys in Cape Town.

This article was first published in De Rebus in 2018 (Aug) DR 42.

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