South Africa: Jekyll And Hyde – Share Repurchases And Schemes Of Arrangement In The Context Of An Affected Transaction

A share repurchase is often mistakenly (and automatically) assumed to be a scheme of arrangement since section 114(1) of the Companies Act 71 of 2008 ("the Act") defines a scheme of arrangement as an arrangement between a company and holders of any class of shares in the company and includes "a re-acquisition by the company of its securities". In this article we discuss why this is not always the case.

Scheme of Arrangement or Repurchase?

Section 114(1)(e) of the Act provides that a scheme of arrangement includes a "re-acquisition by the company of its securities". Section 48(8)(b) (which deals with the repurchase of shares), on the other hand, seems to suggest that a share repurchase is not a scheme of arrangement, but is rather only subject to the procedural requirements of section 114 and 115 of the Act.

A recent judgment in First National Nominees (Pty) Ltd & Others v Capital Appreciation Limited & Another seems to provide some clarity on this issue.

The court held that a share repurchase pursuant to an agreement between a company and certain of its shareholders, which do not have the effect of binding other shareholders that are not a party to the agreement is not a scheme of arrangement. A share repurchase by way of an agreement therefore has different characteristics to that of a scheme of arrangement. It follows that although a scheme of arrangement is not defined by the Act, an arrangement that has the intention of binding all shareholders, provided that all statutory requirements are met is, by its nature, a scheme of arrangement. The judgment makes it clear that a share repurchase in terms of section 48(8)(b) of the Act may be implemented in terms of a scheme of arrangement. However, it will only be a scheme of arrangement if, by its nature it seeks to bind all shareholders, whether or not they have agreed to it. If the share repurchase is not intrinsic to the nature of a scheme of arrangement it will just be a share repurchase that is subject to the additional requirements as contained in section 114 and 115 of the Act (which includes inter alia, appointing an independent expert).

TRP Compliance : Share Repurchases and Schemes of Arrangement

The consequences of whether a repurchase is a scheme of arrangement or not has implications for the process required to be followed to determine whether the provisions of Parts B and C of Chapter 5 of the Act (and the corresponding regulations) ("TRP Code") - which sets out the provisions applicable to the Takeover Regulation Panel ("TRP") and the regulation of "affected transactions" by a "regulated company" - apply or not.

Section 117(c) lists a scheme of arrangement between a "regulated company" and its shareholders as an "affected transaction". An affected transaction of this nature will be subject to the TRP Code. This is a simple assessment.

If a "regulated company" repurchases more than 5% of its own issued shares in a single transaction or a series of integrated transactions, such share repurchase will (in terms of section 48(8)(b) of the Act) also be subject to the requirements of section 114 and 115 of the Act (it goes without saying that the repurchase of less than 5% will not trigger this compliance requirement). The fact that i) the transaction in question is a repurchase, does not automatically mean that it is also a scheme of arrangement; and ii) the transaction in question is subject to section 114 and 115 of the Act, does also not automatically mean that it therefore constitutes an "affected transaction" either. Such a transaction will only constitute an "affected transaction" (and trigger compliance with the TRP Code) if it falls within the requirements of section 117(1)(c)(iv) [as read with section 122(1)].

In summary, a "regulated company" can implement a share repurchase in terms of section 48(8)(b) or a scheme of arrangement. If a "regulated company" gives effect to a share repurchase by way of a scheme of arrangement such transaction would automatically be considered an "affected transaction" and therefore require TRP Code compliance, whereas a share repurchase under section 48(8)(b) of the Act will only be an "affected transaction" if it meets the further requirements of section 117(1)(c)(iv) of the Act.

Due to the fact that the aforementioned judgment may still be subject to an appeal and also because there are wider TRP implications if a share repurchase could seen to be a scheme of arrangement, it is important to consider the TRP's past practices to assess how they have historically regulated share repurchases under section 48(8)(b) of the Act.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.