The Companies Act 71 of 2008 (“the Act”), provides that a company may acquire its own shares, to the extent that it is solvent and liquid, as more fully described in Section 4 of the Act. Companies have had to come to terms with a re-acquisition of their own shares leading to the application of Section 46 of the Act, necessitating that the board of a company adopt a resolution. Furthermore, companies have become accustomed to considering the provisions of Section 48 of the Act when attending to share buybacks. In the application of Section 48 of the Act however, many companies fall foul of the application.
REQUIREMENTS IN TERMS OF SECTION 48(8) OF THE ACT
Section 48(8)(a) of the Act requires that a decision of the board of a company to attend to a share buyback must be approved by a special resolution of the shareholders of such a company if any of the shares forming part of the buyback will be acquired from a director or prescribed officer of the company, or any person related to a director or prescribed officer of the company.
Section 48(8)(b) of the Act requires that, if a share buyback transaction would result in the acquisition by the company of more than 5% of the issued shares of the company (or any particular class thereof), the transaction will be subject to Section 114 and Section 115 of the Act.
IMPLICATIONS OF SECTION 48(8) OF THE COMPANIES ACT
Section 48(8)(a) of the Act has quite a clear purpose in respect of the protection of the company and the shareholders against an abuse of a share buyback transaction by the board of a company. Companies may, however, have to be fairly cautious in respect of determining which individuals are to be considered as prescribed officers, as envisaged in Regulation 38 of the Companies Regulations, 2011. In cases of doubt, it may be prudent to follow a cautious approach and obtain a special resolution of shareholders approving of the share buyback.
Section 48(8)(b) of the Act, however, may prove to be more complicated to comply with. Very often, in a closely held private company, the shareholding of a particular shareholder may easily be more than 5% of the issued shares of the company (or any particular class thereof). In cases where more than 5% of the issued shares of the company (or any particular class thereof) forms the subject of the share buyback transaction, Section 114 and Section 115 of the Act would, inter alia, require that the company must retain an independent expert to compile a report in respect of the buyback transaction. Such a report must be prepared as a report to the board of the company and must be distributed to all holders of the securities of the company and must address the following matters:
- State all prescribed information relevant to the value of the shares affected by the share buyback transaction;
- Identify every type and class of holders of the company’s securities affected by the proposed share buyback transaction;
- Describe the material effects that the proposed share buyback transaction will have on the rights and interests of every type and class of holders of the company’s securities affected by the proposed share buyback transaction;
- Evaluate any material adverse effects of the proposed share buyback transaction against the compensation that any such persons will receive, and any reasonably probable beneficial and significant effect on the business and prospects of the company;
- State any material interest of any director of the company or trustee for security holders;
- State the effect of the share buyback transaction on the interest and person of any director of the company or trustee for security holders; and
- Include a copy of Section 115 and Section 164 of the Companies Act.
The requirements in respect of the independent expert retained in order to compile the relevant report, is relatively stringent. The following criteria applies to the independent expert retained:
- Such person must be qualified, and have the competence and experience necessary, to understand the type of share buyback transaction proposed, to evaluate the consequences of the proposed share buyback transaction, and to assess the effect of the share buyback transaction on the value of securities and rights and interests of the shareholders and creditors of the company;
- Such person must be able to express opinions, exercise judgement and make decisions impartially; and
- Such person retained must not –
- have any other relationship with the company or with a proponent of the share buyback transaction, that would lead a reasonable and informed third party to conclude that the integrity, impartiality or objectivity of such person is compromised;
- have had any relationship as envisaged above within the immediately preceding 2 years; or
- be related to a person who has or has had a relationship as envisaged above.
In practice, before a share buyback transaction is attended to, the facts surrounding such potential share buyback must be carefully analysed against the provisions of Section 48 of the Act, particularly if the shareholders of the company have holdings that would constitute more than 5% of the issued shares of the company (or any particular class thereof) or if the transaction would involve a shareholder that is also a director or prescribed officer of the company.
Legal Advisor, Johannesburg