The Western Cape High Court recently revisited the scope of appraisal rights under the Companies Act 71 of 2008 in Cilliers v LA Concorde Holdings Limited and Others (WCC, case no 23029/2016, 14 June 2018, per Papier J). The case concerned a minority shareholder in a holding company seeking to rely on s 164 appraisal rights after the holding company’s subsidiary planned to sell substantially all of its operating assets.

Legal background

The Companies Act provides a range of protections for shareholders who disagree with fundamental changes to a company’s structure or operations. One of these mechanisms is found in s 164, which permits a shareholder who objects to certain types of transactions to formally dissent and then demand payment of the fair value of their shares.

A common trigger for the exercise of appraisal rights is when a company decides to dispose of all, or almost all, of its assets. Under s 112, such a disposal can only proceed if:

• the shareholders pass a special resolution in terms of s 115, and
• the company satisfies all other requirements in s 115 that apply to the disposal.

Section 115(2)(b) expands this requirement to the holding company of a disposing subsidiary. If, on a consolidated basis, the subsidiary’s disposal represents the disposal of all or most of the holding company’s assets, the holding company’s shareholders must also approve the transaction by special resolution.

Facts of the case

The applicant held a minority shareholding in La Concorde Holdings Ltd, the holding company which in turn owned all the shares in KWV SA (Pty) Ltd.

Early in 2016, the public was informed via SENS that the subsidiary intended to sell all of its operational assets to an external buyer. As a result, La Concorde convened a shareholders’ meeting on 29 June 2016 to vote on the resolutions required under s 115(2)(b).

The applicant and other minority shareholders attended, objected to the resolutions, and voted against them.

Following the vote, the holding company made an offer, based on a KPMG valuation, to buy out the dissenting shareholders. The offer was later withdrawn and, in any event, rejected by the applicant as being undervalued. The applicant then approached the court to invoke appraisal rights under s 164 and sought the appointment of independent appraisers to determine the fair value of the shares.

The issue before the court

The central question was whether a minority shareholder in the holding company is entitled to rely on s 164 when it is the subsidiary, not the holding company itself, that disposes of all or most of its assets.

Put differently:
Does s 164 apply when the triggering transaction takes place in the subsidiary, but the Act requires shareholder approval in the holding company under s 115(2)(b)?

Arguments presented

Respondents’ position

The respondents submitted that appraisal rights only arise when the company in which the shareholder actually holds shares adopts a s 112 resolution. Since only the subsidiary was disposing of assets, and the applicant was not a shareholder of the subsidiary, the respondents argued that the applicant could not claim appraisal rights.

Applicant’s position

The applicant relied on s 115(8), which expressly grants appraisal rights to any shareholder who:

• gives prior notice of objection to a special resolution contemplated in s 115, and
• votes against that special resolution.

Because the holding company had to pass a special resolution under s 115(2)(b), the applicant argued that s 115(8) automatically triggered s 164 rights for dissenting shareholders of the holding company.

The court’s decision

Papier J held that:

1. Section 115(2)(b) creates a mandatory requirement for the holding company’s shareholders to approve the disposal when, on consolidation, the subsidiary’s disposal effectively amounts to a disposal by the holding company itself.
2. Section 115(8) is explicit: any shareholder with voting rights who objects and votes against such a special resolution has access to the s 164 appraisal remedy.
3. Consequently, a minority shareholder of a holding company is indeed entitled to invoke s 164 where the subsidiary engages in a transaction that, at group level, constitutes a disposal of all or most of the holding company’s assets.

The court ordered that:

• the applicant was entitled to appraisal rights under s 164,
• two independent appraisers must be appointed to determine fair value, and
• s 115(8) must be read as extending s 164 protection to dissenting shareholders of a holding company in these circumstances.

Significance of the judgment

This decision is noteworthy for several reasons:

• It represents the first reported instance of a minority shareholder successfully compelling the appointment of appraisers under s 164 in relation to a subsidiary-driven disposal.
• The judgment confirms that the reach of appraisal rights is broader than transactions undertaken by the company directly. Where a subsidiary’s major disposal effectively constitutes a disposal by the holding company, the holding company’s dissenting shareholders enjoy full appraisal protection.
• It affirms that the architecture of s 115 and s 164 is designed to safeguard shareholder value within complex corporate groups, especially where decisions at subsidiary level materially affect the holding company’s asset base.