Fair value, unfair fight over appraisal rights

Appraisal rights enable a shareholder to demand that the company buy back all their shares at “fair value”.

In four cases brought before South African courts, the judge has ruled in favour of the minority shareholders seeking to enforce their appraisal rights.

In each case, a relatively under-resourced party had to endure a long and costly legal battle to secure those rights against the unlimited resources available to corporate executives and the controlling shareholders.

In handing down judgment last week in the most recent case – between fintech company Capital Appreciation (Capprec) and Rozendal Partners – Judge Leonie Windell of the High Court in Johannesburg reminded corporate South Africa that the appraisal remedy “is aimed at maintaining the equilibrium between minority shareholders and controlling shareholders”.

Capprec has indicated it will appeal, but for now Windell’s ruling goes some way to reaffirming that equilibrium.

Appraisal rights, which made their first appearance in the 2008 Companies Act, enable a shareholder to demand the company buy back their shares at “fair value” if the company implements a significant transaction that the shareholder opposes.

A wretched process

This right, contained in Section 164 of the Companies Act, has been little used.

This is mainly because triggering it involves a tedious process that has become wretchedly legalistic and costly as companies try desperately to discourage its use.

It also means taking on the corporate establishment – the Capprec board reads like a who’s who of the top corporate personalities of the past 20 years, ditto for its law firm ENS.

Following the latest ruling, Adam Pike – senior partner at Pike Law, a specialist corporate and commercial law firm – has urged companies involved in significant transactions to be more circumspect in their dealings with minority shareholders.

In particular, says Pike: “When they’re obliged to make an offer to buy out minority shareholders, they must make a proper one.”

He also cautions them to be aware of the wide array of transactions – major disposals, mergers, schemes of arrangement, specific share buybacks – that trigger appraisal rights.

As Pike sees it, appraisal cases are inevitably motivated by the belief that the value being offered to the minority shareholder is significantly below the fair value of the share.

Pike should know – his firm has been involved in every appraisal case that has gone to court.

Significantly, his firm has been on the winning side in every one of those cases, despite being up against the largest and oldest law firms in the country.

In addition to the four cases on which the courts have ruled, two further matters have been resolved out of court and three are pending.

Clarity … and the big question

The fourth ruling left no doubt that Capprec could not avoid the consequences of the share buyback it had implemented and was obliged to pay investment management firm Rozendal Partners fair value for its 18.8 million Capprec shares.

But how to determine fair value?

Last week, Windell not only confirmed that Rozendal Partners did have appraisal rights, she set down a clear process by which a fair value for the shares must be determined: the process will include the appointment of an appraiser who will “assist the court” in determining the fair value.

And while Windell, alert to the prejudice caused by ongoing delays, provided a clear timeline for the procedure, she also required Capprec to pay the dissenting shareholders interest from the date of the 2019 transaction to whenever the final payment of fair value occurs.

This article first appeared on Moneyweb and was republished with permission.

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