Dramatic changes in minority shareholder rights - CNBC Africa

Dramatic changes in minority shareholder rights

Financial

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“Things have definitely changed since the New Companies Act. It’s a drastic change from the old companies act, specifically, to what is called the appraisal rights,” Jeanelize Maritz, Director of Cape Town based Themis Commercial Legal Advisors, told CNBC Africa.

The issue of minority shareholders rights was highlighted earlier in the year when international services and trading company, Bidvest Group, offered to purchase a 60 per cent stake of the JSE listed pharmaceutical maker, Adcock Ingram[DATA AIP:ADCOCK INGRAM HLGS LD.] of all ordinary shares of the group.

The offer was rejected by Adcock chairman, Khotso Mokhele, as Bidvest’s initial letter of intent did not make an offer in accordance with the New Companies Act.

Maritz stated that the appraisal rights section under the act provides minority shareholders with more leeway so that company directors and majority shareholders are obligated to communicate with them on all company changes, such as mergers, acquisitions or selling of company assets.

“Where a transaction has to be approved by 75 per cent of the shareholders or more, in that case the minority shareholders can advise the company in advance that it’s going to be voting against the fundamental transaction,” she explained.

If the minority shareholder, Maritz added, votes against the transaction and the solution is carried out, the shareholder can force the company to buy them out (ie purchase their shares) at a market related value.

Alternatively, if the resolution is carried out and 15 per cent of shareholders have voted against it, minority shareholders may approach the court to review the transaction. This process is called a determination of fair value and could however delay the company in proceeding with business deals and realising growth potential.

“Unfortunately that is the risk. What the legislatures had in mind when imposing this act is that they want to force directors and the majority shareholders to consult with minority shareholders to ensure the directors adhere to the standards of conduct that the act has set for them,” explained Maritz.

However, there are provisions in the companies act to protect the business. They directors may approach the court to works out payment terms and conditions that will allow the company to meet their obligations without running into financial difficulties later on.

Also, if minority shareholders abuse their appraisal rights by acting in a vexatious manner as a means to prevent the company from doing business, the court may intervene.

“There are scenarios under the new companies act and minority protections where the directors can approach the court and say to the court that these minority shareholders are acting in a vexatious manner,” said Maritz.

While the appraisal rights provision may be a concern for company boards, Maritz believes that disputes can be avoided if company directors and majority shareholders constantly communicate with minority shareholders on all company updates to ensure that they do feel included in the decision making.  

“You don’t want a scenario where the tail is wagging the dog but it is what it is and companies have to deal with the new act. Directors need to ensure that there is great correspondence with minority shareholders so you don’t end up where there is a press of conduct towards the minorities,” she concluded.

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