August 18 2010
The draft Companies Amendment Bill, which was published on July 19 2010, seeks to remove confusion and errors in the new Companies Act. The bill has been published in order to remove the confusion surrounding and the errors appearing in the new act, which is not yet in force.
The Companies Amendment Bill contains a problematic new provision relating to share buybacks by a company. The new provision provides that a decision by the board of a company to acquire its own shares must be approved by special resolution of the shareholders if any shares are to be acquired from a director or prescribed officer of the company, or a person related to a director or prescribed officer of the company. In addition, such buyback will be subject to the requirements of Section 114 and 115 if, considered alone or together with other transactions in an integrated series of transactions, it involves the acquisition by a company of more than 5% of the issued shares of any particular class of the company's shares.
The reference to Sections 114 and 115 is unclear. Section 115 prescribes a new procedure for approving certain transactions and effectively requires an approval of more than 75% of shareholders and, if more than 15% of the shareholders vote against a resolution, the possibility of referring the matter to a court which could set aside the resolution, but only if the resolution is manifestly unfair or the vote was materially tainted by:
In addition, Section 115 allows a person certain rights under Section 164 (the minority shareholder appraisal right), which seems to apply in these circumstances as well. This is a fairly material change, in that it allows a minority shareholder to force the company to buy out the minority shareholder at fair value in the event of a buyback as contemplated above. This is a fairly radical remedy for a minority shareholder. Before the proposed amendment, the appraisal right applied only in limited takeover situations or where the minority shareholder's rights were affected.
The reference to Section 114 is more problematic. Section 114 deals with schemes of arrangement, which would not under normal circumstances be applicable to a buyback of shares from a director. A scheme of arrangement is an arrangement between the company and its shareholders. It seems that the only relevance of this is that the provisions of the scheme of arrangement section that deals with the preparation of a report by the board must be included in the document. Such a report must describe the material effects and evaluate any material adverse effect of that arrangement against the compensation that the person would receive, or any reasonable probable beneficial and significant effect of the arrangement on the business and prospects of the company. Section 114 also provides for an independent expert, who must compile the report required by this section. It may be that the reference to Section 114 should refer merely to the preparation of the report and not to the scheme of arrangement provisions themselves; this should perhaps be clarified.
Although the attempt to clarify issues in the new Companies Act that are unclear should be welcomed, the current draft of the Companies Amendment Bill also raises some additional questions. Hopefully, these problems will be sorted out in further drafts of the Companies Amendment Bill.
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