The new Companies Bill contains certain proposals which, if adopted, will fundamentally alter the rights of shareholders arising out of takeovers and mergers. The Bill introduces the concept of "fundamental transactions", of which there are three. In addition, the Bill deals with mandatory offers and takeover offers.
The three fundamental transactions are:
Firstly Section 112 deals with proposals to dispose of all or the greater part of the assets or undertaking of a company. The "greater part" of the undertaking or assets is valued at fair market value as at the date of the proposal in accordance with financial reporting standards. A disposal of this nature must be approved by a special resolution of shareholders. This section does not apply if the disposal is part of a business rescue plan (business rescue being a new concept introduced to replace the current concept of judicial management) or transfers within the same group of companies.
The provisions largely reflect the current section 228. But an entirely new concept has been introduced in section 115 of the Bill which permits dissenting shareholders constituting at least 15% of the voting rights exercised on the relevant resolution to approach the courts to set aside the resolution. In order to invoke this section, at least 15% of the shareholders must have voted against the resolution. Subject to certain procedural safeguards, a court may set aside the resolution if:
- the resolution is manifestly unfair to any class of
- the vote was materially tainted by a conflict of interest,
inadequate disclosure, failure to comply with the Act, the
Memorandum of Incorporation or any applicable rules of the company,
or other significant and material procedural irregularity.
It will be interesting to see to what extent shareholders seek to take advantage of these new rights to oppose fundamental transactions.
When deciding whether a resolution is "manifestly unfair" to a class of shareholders the courts will need to strike a fair balance.
Secondly, the Bill makes provision for the merging or amalgamation of the corporate identity of companies.By the concept of "amalgamations" or "mergers" the Bill means that the assets and liabilities of one company are amalgamated or merged with those of another, thus effectively merging their corporate identities. The implications will need to be carefully considered. An immediate consequence is that this type of procedure is not catered for in tax law and we can expect some consequential amendments in tax legislation. An amalgamation or merger must also be approved by special resolution. There are other procedural safeguards in that the boards of the amalgamating or merging companies must be satisfied that the resultant entity will be solvent and liquid and a proper process of notification to shareholders must be followed. Once again, a dissenting minority of at least 15% may approach the courts to have the resolution overturned, subject to the criteria previously mentioned.
Thirdly, the new proposals do away with the need to have a schemes of arrangement regulated and approved through the courts and instead permit a company to enter into a scheme of arrangement with its shareholders through the mechanism of an appropriate special resolution. Schemes of arrangement may be used for the consolidation of securities of different classes, a division of securities into different classes, the expropriation of securities, the exchange of securities, the acquisition by a company of its securities or a combination of the above. Schemes are most frequently used these days as a compulsory takeover mechanism and the new legislation clearly recognises this in permitting schemes to be utilised for the "expropriation" of shares. Once again, a dissenting minority of at least 15% are permitted to approach the courts to have the resolution set aside or the grounds indicated already. The new procedure will greatly facilitate the use of schemes of arrangement by enabling companies to dispense with the time consuming court process. This mechanism is therefore likely to become the take-over mechanism of choice.
The current procedure for the making of takeover offers, although greatly shortened, remains in place and a squeeze out at 90% acceptance levels remains the norm. In other words, if an offer is made and 90% or more of shareholders accept, the remaining shareholders can be compelled to dispose of their shares. Given the new proposals for schemes of arrangement, it is unlikely that takeover offers will be very popular since it will be a lot easier to do it by way of a scheme of arrangement. However, since a takeover offer remains an offer and not a compulsory acquisition, the provisions of section 115 in respect of dissenting shareholders are not applicable and it is up to each shareholder whether to accept or reject the offer.
The Securities Regulation Panel will continue in its current role of regulating affected transactions but the Securities Regulation Code will be extended to certain private companies if a threshold of a certain percentage of issued shares has been transferred within a period of 24 months or the Memorandum of Incorporation of that company expressly provides that the company and its securities are subject to the Code. It is respectfully suggested that both of these tests are misconceived. The relevant test is the size of a company and the composition of its shareholders. On the new test, a company with only 2 shareholders could become subject to the Code if the relevant percentage of shares is transferred, which is somewhat absurd. It is hoped that these requirements will be reviewed.
The Bill (in section 164) introduces an entirely new concept into our law in the form of what are called "dissenting shareholders appraisal rights". If a company amends its Memorandum of Incorporation by altering the preferences, rights, limitations or other terms of any class of shares in a manner materially adverse to the rights or interests of the holders of that class or resolves to dispose of all or the greater part of its assets or undertaking, resolves to undertake a fundamental transaction (ie., to undertake an amalgamation or merger transaction or resolves to adopt a scheme of arrangement), then dissenting shareholders are given the right to object to such proposals. If the proposals are carried out despite such objections, then the shareholder who has given such an objection may demand that the company acquire that shareholder's shares at the fair value of such shares. If there is a dispute as to the fair value, then the shareholder may approach the courts to determine the value. Effectively therefore, unhappy shareholders are given a put option over their shares against the company in these circumstances. It will be appreciated therefore that any company embarking upon a fundamental transaction described above therefore runs the risk of having to buy back some of its shares. If the application of these rights would cause liquidity or solvency problems for a company, then the company may approach the court for an order varying its obligations. This introduces an entirely new dynamic into the takeover regime and it will be interesting to see to what extent shareholders seek to make use of these rights and to what extent it may hinder takeover activity on the part of companies.
In conclusion, it can be seen that two significant new rights have been granted to shareholders in the takeover scenario, namely:
- the right of a dissenting minority of at least 15% to approach
the court for an order blocking a fundamental transaction in
certain circumstances; and
- the right of a dissenting shareholder to require the company to
acquire his shares at fair value. Unbundled, these rights will be
an unruly horse.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.