As we reported in numerous previous articles, the Companies Bill (the “Bill”) contains better protection for minority shareholders. Such increased protection is especially important for minority shareholders in private companies (or what will become known as closely held companies) especially since their shares are commonly perceived as not being liquid as they have little influence on the decisions being taken by a company. No one would like to purchase a minority shareholding in a private company due to the fact that the majority could act in the majority’s best interest which could be to the minority’s detriment. This therefore influences the price investors or potential buyers are willing to pay for a minority stake in a private company. The Bill contains various provisions which may have an effect on the valuation of minority shareholdings in closely held companies.

The first of these provisions has to do with the any of the following three scenarios, namely where either a merger is contemplated, where substantially all of the assets or undertaking of a company is going to be sold or where the implementation of a scheme of arrangement is envisaged.  In terms of the Bill it is now easier to do so in general than what is currently possible under the Companies Act (the “Act”) as only the majority of the shareholders, who held at least 25% of the shares that are entitled to vote, need to vote in favour of the resolution to either merge, sell the assets or undertaking or enter into a scheme of arrangement. Please note that there are other provisions applying which could have a material influence on the ease with which the envisaged transaction may be implemented. This is in contrast to the Corporate Laws Amendment Act which requires a 75% support from the voting shareholders (please note this has not come into operation as yet). The protection for minorities however stipulates that in spite on the resolution being passed (thus the 25% approval) court approval may be necessary.

Such court approval will be necessary in one of two scenarios. Firstly the 25% may be stopped where 15% of the shares that were entitled to vote voted against the adoption of the resolution and such 15% unanimously require the company to seek court approval. Minority shareholders could thus take a united stand against the proposed resolution, but it many minority shareholders in own right will be able to satisfy the 15% requirement. Secondly where the minority cannot be unified the Bill states that any shareholder who voted against the resolution (thus the shareholder had to be present at the meeting and voted against the resolution), may apply to the court to grant for the right to apply for a review of the transaction. Such a shareholder must be acting in good faith, must appear to be prepared to sustain the proceedings and must allege that the resolution is manifestly unfair to any class of shareholders or that the vote was tainted by a conflict of interest, inadequate disclosure, failure to comply with the Bill or any rules of the company (such as the memorandum and articles of association or shareholders agreement) or that it was tainted with a significant and material procedural irregularity. The company will have to then apply for court approval and will have to bear the costs of such an application (the previously adopted resolution will be void).

But minority shareholders have a further remedy at their disposal where substantially all the assets or the undertaking of the company is proposed to be disposed of. In terms of this possible avenue when a company gives notice to the shareholders of the proposed resolution, a shareholder may give notice at or before the meeting that its objects to the proposed resolution. If the resolution is then adopted by less than 75% of the votes entitled to vote, the dissenting shareholder may demand that the company acquire its shares at fair value (which is valued at the date before the resolution was adopted).

The Bill contains numerous other amendments to the current corporate landscape prevailing at the moment, but companies and shareholders will have to wait at least until March 2008 as the Bill will only be introduced into Parliament in February of 2008. This does not however imply that companies should not already take head of the amendments and the accompanying effects on companies.

Rian Geldenhuys
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