The Companies Act, Act 71 of 2008 (hereinafter the “Act“), allows for a “dissented shareholder” to demand that his shares be re-acquired by the company in which he holds them at “fair value”.
To be ‘dissent’ means to have an opinion, philosophy, or sentiment of non-agreement or opposition to a prevailing idea or policy enforced by the majority of shareholders and the board of the company.
Section 164 of the Act allows for certain rights to minority shareholders in instances where the conduct of the company and other majority shareholders is oppressive, unfairly prejudicial, or unfairly disregards the interests of the dissented shareholder. This is the so-called ‘appraisal rights’ in Section 164 of the Act.
A dissenting shareholder may elect to enforce his ‘appraisal rights’ if and when a company proposes to:
- Amend the provisions of its Memorandum of Incorporation, by altering the preferences, rights, limitations or other terms of any class of its shares in any manner materially adverse to the rights or interests of holders of that class of shares; or
- enter into a transaction contemplated in Section 112 (i.e., disposal of all, or the greater part, of its assets or undertaking of the company); Section 113 (i.e., an amalgamation or merger transaction); or Section 114 (i.e., a scheme of arrangement).
Should the company propose to take any of the aforementioned actions, the notice to shareholders must contain a reference to their appraisal rights per section 164 of the Act. Accordingly, a dissenting shareholder can force the company to re-acquire his shares at fair value.
Should the dissenting shareholder consider the ‘fair value’ offered by the company to be inadequate, he may apply to the court for the fair value to be determined in respect of the shares. Although the Act does not define ‘fair value’. The Act does stipulate that the court may appoint more than one appraiser to assist it in determining the fair value in respect of the shares, and as such, there is a plethora of valuation methodologies available to determine fair value, and which methodologies (or combination of methodologies) to use, will depend on the circumstances, economic and market conditions, industry, and informational asymmetries of the concerned company. ‘Fair value’ is thus not a fixed-level concept capable of prior specification and therefore defies a definition.
Despite this allusivity, our courts have provided some guidance in the matter of BNS Nominees (RF) (Proprietary) Limited and Another v Arrowhead Properties Limited and Others  JOL 56102 (GJ) where the Court formulated the following tentative definition:
“Fair value is the value a share would realise in an undistorted market, in the medium term, with free interaction between buyers and sellers with proper information, and without any exceptions being made for minority holdings or the effect of the corporate action that has led to the dissent.”
Hence, our courts have stated that fair value can be assessed with reference to a market price that is not subject to distortions, and to get to market price, the fair value can be represented by a range of values. Although, fair value may exist on a cohesion of values, some higher and some lower, none of them is unfair, unless it can be shown that one valuation methodology, in the relevant circumstances, is unfair or prejudicial, in its application to the dissenting shareholder.
Companies are therefore cautioned when determining fair value in light of Section 164 of the Act, and thus advised to consult with their professional advisers to ensure that the valuation method is relevant to the circumstances and without any unjustified distortions.
Article by Derek Brits