The consequences of performing a share buy-back in terms of section 114 of the Companies Act

In a South African framework section 114 of the Companies Act, 71 of 2008 makes it possible for the board of a company to propose and implement an arrangement between the company and holders of any class of its securities by way of the following:

• A consolidation of securities of different classes;
• A division of securities into different classes;
• An expropriation of securities from the holders;
• Exchanging any of its securities for other securities;
• A re-acquisition by the company of its securities; or
• A combination of the methods contemplated above

This article will however focus on the re-acquisition of the securities by the company and the possible consequences this transaction may have on the company.

Consider the following example, a holder of a company’s securities opts to sell to a third party. A valuation would have to be performed and upon arriving at a fair value the holder could sell, however once a company opts to repurchase these shares from the holder section 114 becomes applicable and together with the valuation an independent expert is to be retained by the company to objectively analyse the transaction and compile an additional report in compliance with the Act.

The consideration of the independent expert is an important concept as the Act requires that this individual should not only be qualified, competent and have the necessary experience in the field to understand the arrangement, but also independent to the company. The person retained therefore should not have any other relationship with the aforementioned company or the proponent of the arrangement, such as would lead a reasonable and informed third party to conclude that the integrity, impartiality or objectivity of that person is compromised by that relationship.

Further the report issued by the person to the board must be distributed to all holders of the company’s securities and must at a minimum include the following:

• State all prescribed information relevant to the value of the securities affected by the proposed arrangement;
• Identify every type and class of holders of the company’s securities affected by the proposed arrangement;
• Describe the material effects that the proposed arrangement will have on the rights and interests of the persons mentioned above;
• Evaluate any material adverse effects of the proposed arrangement against –
  • The compensation that any of those persons will receive in terms of that arrangement; and
  • Any reasonably probable beneficial and significant effect of that arrangement on the business and the prospects of the company;
• State any material interest of any director of the company or trustee for security holders;
• State the effect of the proposed arrangement on the interest and person contemplated above; and
• Include a copy of sections 115 and 164.

Furthermore Section 48 of the Act could be triggered limiting among others that a subsidiary may not hold more than 10% of any class of securities in the company. These limitations would however not be discussed in this article.

The consequences to the company taking the above into account are fairly straightforward as section 114 of the Act relates to compliance. However the implications of not complying with this section could have far reaching implications to all parties involved in the arrangement.

Therefore before taking the leap into the reacquisition of a company’s securities in the South African market please contact Gerard from ECOVIS ARB Auditors Inc. regarding any further details on section 114 or to obtain more information on how we can assist you with section 114-related services.

Author
Gerard Fick
gerard.fick@ecovis.com