SANCHIA TEMKIN

SHAREHOLDERS' agreements may be under threat from the new Companies Act, which will extend substantial rights to minority shareholders, an expert in company law warned yesterday.

If a company gives notice of a new scheme of arrangement, proposes a merger or amalgamation, or wants to sell the majority of its assets, dissenting minority shareholders could force it to buy back their shares at fair value, said Wouter Scholtz, a director at audit, tax and advisory firm Mazars, Moores Rowland.

The new Companies Act, which is due to come into effect on or after April 1, provides considerable protection to minorities. The new law had been prompted by a growing incidence of assets and entire businesses being sold from under minority shareholders' noses.

The right to force a buyback, which is extended by section 164 of the new act, would prevail over restrictive terms in the shareholders' agreement, said Scholtz.

"The wide meaning being attributed to a 'scheme of arrangement', as defined in section 114, will also extend the scope of minority shareholders' rights," he said.

Once the act becomes effective, a scheme of arrangement would include any reorganisation of the share capital of a company, whether through a split or through consolidating shares into different classes, or an exchange of securities, or a reacquisition of securities. An exchange of securities would include a share-for-share exchange, and a reacquisition of securities might include a share buyback.

If the dissenting minority shareholder was not satisfied with the buyback price being offered, or if the company failed to make an offer, the shareholder could apply to court for a determination of fair value.

Regarding restrictive shareholders' agreements, Scholtz said the new act specifically provided that any provision in a shareholders' agreement that was inconsistent with the act should be void to the extent of that inconsistency.

"Section 164 may serve to override a variety of common provisions in shareholders' agreements, particularly provisions commonly imposed on black shareholders."

He said it was not uncommon to provide that if black empowerment shareholders wanted to sell their shares within a specified time, usually three years, a company could buy them back at the issue price, whether or not this was fair value.

More commonly, the agreement provided for a lock-in, placing a prohibition on the sale of the shares for a specified period.

It was also not uncommon, in the case of private companies, to provide that a shareholder who wanted to dispose of his shares must offer them to the company or fellow shareholders at a price determined by a prescribed formula, which might or might not yield a fair value.

temkins@bdfm.co.za