What you need to know about Share Buyback Transactions

In terms of section 48 of the Companies Act No. 71 of 2008 (“the Act”), the board of a company may, subject to the fulfilment of the requirements in section 46 of the Act, decide that the company should acquire its own shares.?Usually the decision by the board will be followed by a formal offer to the shareholder, after which the relevant shareholder can either accept or reject the offer.?This is called a share buyback transaction.

Share buyback transactions are governed in terms of section 48 the Act.?Section 48 of the Act contains various safeguards to manage the inherent risks associated with share buy back transactions.?In the case of First National Nominees (Pty) Ltd and Others v Capital Appreciation Limited and Another [2021] JOL 50073 (GJ), the court referred to the inherent risks as follows -?

“Because a repurchase is (i) a distribution of the company’s assets and (ii) a re-organisation of issued share capital (and hence of ownership), achieved by (iii) a transfer to the company of its shares, it invites all the abuses associated with each of these three functions. Indeed, a given repurchase may involve abuses of all three of these functions. Repurchase thus has significance for corporate governance, takeover regulation, creditor protection, discrimination between shareholders, oppression of minorities, and the proper functioning of the securities market.”

Section 48(2)(a) and (8) of the Act imposes certain requirements that have to be met prior to the implementation of a share buy back transaction.?These requirements include the following -–

1.?????The board must apply the solvency and liquidity test and must conclude that the company will satisfy the test immediately after implementation of the proposed transaction;

2.?????The decision by the board that the company will acquire its own shares must –

2.1.be approved by special resolution of the shareholders if the shares are acquired from a director, prescribed officer or person related to a director; and

2.2.?comply with the requirements set out in section 114 and 115 of the Act if the company intends to acquire more than 5% of the issued shares of a particular class.

Section 114 and 115 of the Act falls under Chapter 5 of the Act, which deals specifically with the approval of fundamental transactions and offers.?Fundamental Transactions include the sale of greater parts of the Company’s assets, mergers and amalgamations and schemes of arrangements.?This was confirmed in the case of First National Nominees (Pty) Ltd and Others v Capital Appreciation Limited and Another [2021] JOL 50073 (GJ), where the court held that a share buy back of more than 5% of the issued share capital shall constitute a fundamental transaction and that it shall be subject to the requirements of section 114 and 115 of the Act.?The court further held that –

“The reference in s 48(8)(b)?to s 114 establishes a direct link between share repurchases envisaged by s 48 and schemes of arrangement as envisaged by s 114 (1)(e). Section 115 prescribes how the fundamental transactions set out in s 114 are to be approved. In doing so, s 115(8) makes provision for dissenting shareholders to enjoy the benefit of an appraisal right in terms of s 164 – the ‘right of dissenting shareholders, who do not approve of certain triggering events, to opt out of the company by withdrawing the fair value of their shares in cash.”

In terms of section 114 of the Act, the company must obtain an independent expert to compile a report on the consequences of the proposed transaction and how the remaining shareholders will be affected by the proposed transaction.?The Act provides a comprehensive list of items that needs to be addressed in the report. The purpose of the independent expert report is to ensure that the interests of all the shareholders of the company are considered prior to the implementation of the transaction.

In terms of section 115 of the Act, the proposed transaction must be approved by way of a special resolution.?The resolution must be adopted at a shareholders meeting by persons who are present at the meeting and who are entitled to exercise more than 25% of the total voting rights.?It is important to note that a company’s memorandum of incorporation (“MOI”) may require a higher percentage, in which case the company will be obliged to comply with the requirement set out in the MOI.?

Considering the various provisions of the Act, it is clear that there is a whole list of requirements to be complied with prior to the implementation of a share buy back transaction.?Contact us should you require any assistance with your share buyback transaction.