Share Repurchases And Regulatory Consequences

Under South Africa's Companies Act 71 of 2008, a share repurchase may qualify as a scheme of arrangement under Section 114 if it meets specific statutory and judicial criteria.

This classification hinges on the transaction's nature, procedural compliance and its impact on shareholder rights.

Below is a structured analysis of the key factors determining when a share repurchase constitutes a scheme of arrangement.

Statutory Framework

1. Definition of a Scheme of Arrangement
Section 114(1) broadly defines a scheme of arrangement as an "arrangement between a company and holders of any class of its securities". This includes reacquisitions of the company's own securities, such as share buy-backs, provided they:

• Alter the rights or obligations of shareholders inter se (among themselves) or between the company and its shareholders.
• Are implemented through mechanisms like consolidating securities, expropriating shares, or exchanging securities.

The Act does not explicitly define "arrangement," leaving courts to interpret its scope. Judicial rulings emphasise that schemes involve binding all shareholders, regardless of individual consent, through a collective process.

2. Interplay with Section 48
Section 48 governs share repurchases but intersects with Section 114 when:

• The repurchase exceeds 5% of a class of issued shares (alone or as part of an integrated series).
• The transaction binds dissenting shareholders, requiring compliance with Sections 114 and 115.

While Section 48 facilitates voluntary, one-on-one buy-backs, Section 114 applies to coercive transactions that restructure shareholder rights on a collective basis.

3. Procedural Safeguards
For a repurchase to qualify as a scheme of arrangement, the following steps are mandatory:

• Independent expert report: Assessing fairness, material effects, and compliance with the solvency test.
• Special resolution approval: A 75% majority vote by shareholders (excluding shares subject to the repurchase).
• Appraisal rights: Dissenting shareholders may demand fair cash compensation under Section 164.

Failure to comply invalidates the transaction and exposes directors to liability.

Judicial Interpretations

1. Key Case: Capital Appreciation Ltd v First National Nominees

The Supreme Court of Appeal (SCA) clarified that:

• A share repurchase exceeding 5% under Section 48(8)(b) triggers Section 114's procedural requirements but does not automatically become a scheme of arrangement.
• A scheme of arrangement requires coercion—binding all shareholders through a special resolution, even if they oppose the transaction.

In this case, the court upheld minority shareholders' appraisal rights under Section 164, affirming that procedural safeguards apply regardless of whether the transaction is technically a "scheme".

2. Voluntary vs. Coercive Transactions

Courts distinguish between:

• Voluntary buy-backs: Governed by Section 48, involving negotiated agreements with individual sellers.
• Coercive schemes: Subject to Section 114, where shareholders are bound by majority approval (e.g., delisting's, mergers, or capital restructurings).

For example, a targeted buy-back from specific shareholders (without binding others) is not a scheme of arrangement, even if it exceeds 5%.

3. Thresholds and Minority Protections

Crossing the 5% threshold activates minority protections (e.g., independent reports and appraisal rights) but does not inherently classify a transaction as a scheme. Courts focus on whether the transaction:

• Fundamentally alters the company's capital structure.
• Requires collective approval due to its impact on all shareholders.

Practical Implications

A share repurchase is considered a scheme of arrangement under Section 114 if it meets two criteria:

• Structural Coercion: Binds all shareholders of a class, irrespective of individual consent; and
• Fundamental Impact: Alters shareholder rights or the company's capital structure (e.g., delisting's, mergers).

In summary, a share repurchase becomes a scheme of arrangement under Section 114 when it imposes collective changes to shareholder rights through a binding process.

While exceeding the 5% threshold under Section 48 triggers procedural safeguards, the transaction's coercive nature—not merely its size—determines its classification. Legal advice is critical to navigate these requirements and mitigate risks of non-compliance.