How to determine whether separate class meetings must be held to vote on a scheme of arrangement
The number of takeovers and resultant delistings of Johannesburg Stock Exchange (JSE)-listed companies has increased in recent years, and the scheme of arrangement (Scheme), in terms of section 114 of the Companies Act, No 71 of 2008 (the Act), remains the most commonly used mechanism to effect such transactions. In terms of s114 of the Act, the board of a company may propose to its shareholders an arrangement in terms of which, inter alia, the securities held by all or certain of the shareholders may be expropriated for consideration. The offer could be made by the company itself, or by a third-party offeror. Therefore, the Scheme would be proposed as an arrangement between the company and certain shareholders, in terms of which the company or a third-party offeror offers to acquire the relevant shares in issue (Target Shares). If the Scheme is approved at a general meeting by a special resolution of the shareholders entitled to vote thereon, and all applicable conditions to which the Scheme is subject are fulfilled, all of the Target Shares will, by operation of law, be acquired. This is the main benefit of a Scheme when compared with a “general offer” to the relevant shareholders: the Scheme binds all shareholders and not only those who support the Scheme. However, a potential complication arises when a Scheme is proposed to shareholders of a company who own different classes of shares. The question then arises whether separate class meetings ought to be held to consider and vote on the Scheme.
This issue arose for the first time under the new Act in the Sand Grove Opportunities Master Fund Ltd and others v Distell Group Holdings Ltd and others (2002) 2 All SA 855 (WCC) judgment, wherein the first respondent, Distell Group Holdings Ltd (Distell) proposed a Scheme to its shareholders in terms of which, inter alia, Distell would be acquired by a South African subsidiary of Heineken International BV (Heineken). Distell, a JSE-listed company at the time, had two classes of issued shares – ordinary shares and B shares. The B shares, owned by a subsidiary of Remgro Limited, were linked to certain of the ordinary shares held by such holder and enjoyed no economic rights, but afforded their holder certain additional voting rights at meetings of Distell. A combined meeting of Distell’s ordinary and B shareholders was held, which approved the Scheme with the requisite majority. The applicant, Sand Grove Opportunities Master Fund Ltd (Applicant), a hedge fund, was dissatisfied with this outcome and applied to the court for orders, inter alia, declaring that the meeting at which the special resolution was adopted was not properly constituted and, therefore, invalid and void, and that the special resolution adopted at the meeting was also invalid. The Applicant argued that the Scheme was required to be tabled for approval by the holders of each class of Distell’s shares at separate meetings in terms of s115(2)(a) of the Act – namely, one meeting for the holders of the ordinary shares, and a separate meeting for the holders of the B shares.
In making its determination, the court reminds us that in terms of s311(1) of the previous Companies Act, No 61 of 1973, a court could give direction on whether, separate, meetings had to be convened for different ‘classes’ of members or creditors. However, the court noted that under the current Act, the courts no longer play a role in determining, ahead of the voting, whether separate class meetings are required. Under the Act, this is the responsibility of the company which proposes the scheme to its shareholders, i.e. the independent board must consider and determine the manner in which s115(2) of the Act must be complied with. The court further observed that the Takeover Regulation Panel could also, in the exercise of its functions in terms of s119(2)(b)(ii) of the Act, direct the holding of appropriately constituted separate meetings.
In determining whether an offer should be put to shareholders in a single meeting or at separate class meetings, the court considered, inter alia, the principles established in English case law, especially the lease judgment in Sovereign Life Assurance Co v Dodd (1892) 2 QB 573, in which it was held that the test for calling separate meetings is based on the similarity or dissimilarity of the shareholders or creditors rights, and not on the similarity or dissimilarity of their interests. The court held that the manner of determining the question of whether a relevant dissimilarity of rights was involved would be to ask the questions of what was being offered to whom under the proposed Scheme and how different classes were being treated under the proposed Scheme, and to see whether the answer demonstrated that it was improbable that the classes could consult together at a combined meeting. Therefore, a difference in the rights of the shareholders may be a basis to require convening separate meetings, but only if the difference in treatment of the classes is such that it would make it unrealistic for the shareholders of the two classes to consult together. It was further noted that this is a value judgment which involves, amongst other things, the materiality of the differences in rights in comparison with the commonality of the rights under discussion.
The court also held that one must bear in mind the impracticalities and other disadvantages of dividing the total voting rights to be exercised into too many separate meetings – a principle that has long been recognised in the law in relation to schemes of arrangement. The court noted that it would not be advancing the general efficacy and efficiency of the Scheme procedure to adopt an interpretation of s114 of the Act that would bring about hair triggers for separate class meetings on the mere basis that the class rights were not identical. According to the court, it is unlikely that there was an intention by the legislature, in relation to s114 of the Act, to introduce a new approach abolishing the sound and well-established policy, or to import such obvious impracticalities. The court, therefore, held that a company concerned with convening a meeting in terms of s115(2) must conduct itself mindful of the same considerations mentioned above.
In conclusion, for now, the common law on class meetings lives on, and it is the responsibility of the independent board of a company, on a case-by-case basis, to consider and determine the most appropriate manner in which to comply with s115(2) of the Act. This is a question which will not always be easy to answer, and it is, of course, something which potentially could be reviewed by a court at the insistence of a dissenting shareholder, under an application in terms s115(3) of the Act.
Jesse Prinsloo is an Associate and Dane Kruger a Director in Corporate and Commercial | Cliffe Dekker Hofmeyr.
This article first appeared in DealMakers, SA’s quarterly M&A publication
DealMakers is SA’s M&A publication.
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