Schemes of Arrangement in terms of Chapter 5 of the Companies Act 71 of 2008

Abstract

A change in or the consolidation of a company can be achieved in many different ways and one way is to use a scheme of arrangement. Part A of Chapter 5 of the Companies Act 71 of 2008 (hereafter ‘the Act’) provides for three types of fundamental transactions, namely, an amalgamation or merger, a disposal of all or the greater part of the assets or the undertaking of a company and for schemes of arrangement. The research will be limited to schemes of arrangement (hereafter ‘arrangement’), specifically on the meaning of the term ‘arrangement’. Schemes of arrangement are provided for in section 114 of the Act which provides that the board of a company may propose and implement any arrangement between the company and holders of any class of its securities by way of, among other things; a consolidation of securities of different classes, a division of securities into different classes, an expropriation of securities from the holders, exchanging any of its securities for other securities, a re-acquisition by the company of its securities or a combination of the methods mentioned above. The list of the methods mentioned above does not constitute a closed list of the methods that could be employed to effect a scheme of arrangement. This is so because the list is preceded by the words ‘may include’ and ‘by way of’, ‘among other things’. Section 114 also requires the retention of an independent expert, who must, as part of the report to the shareholders, include a copy of sections 115 and 164 of the Act. Section 115 deals with the requisite approval for all fundamental transactions and section 164 deals with appraisal rights of minority shareholders. Section 114 of the Act lists methods with which a scheme of arrangement may be effected, including, inter alia, an expropriation of securities from the holders and a reacquisition by the company of its securities; however, the Act fails to define what a scheme of arrangement is. As a result of the legislature’s failure to define what an arrangement is, case law provides insight into discerning the parameters of what may or may not constitute a scheme.

There has been much controversy regarding what constitutes an arrangement, especially in the area of the nature of the consideration given in lieu of shareholders’ shares, with courts differing in the interpretation of what qualifies as an arrangement. Of importance to note on this point is the addition of the expropriation of securities from the shareholders in section 114 of the Act because with the Companies Act 61 of 1973 (hereafter ‘the 1973 Act’), the expropriation of securities for cash was held by the courts to fall outside the scope of an arrangement in Ex Parte Sabel (EDMS) Bpk, which approach was later followed by the court in Ex Parte Natal Coal Exploration Co Ltd. Ex Parte Suiderland Development Corporation rejected this approach. In this case Van den Heever J stated that he did not understand why the ‘compensating advantage’ should have to take the form of retention of rights as members of the company and that if the legislature wished to limit the ambit of an ‘arrangement’ it would have done so by definition in the Act.

The current Act has potentially resolved this controversy by including expropriation as one of the methods that could be employed as a means of effecting a scheme of arrangement. In an obiter in Ex Parte Mielie-Kip Ltd, Flemming DJP, stated that a scheme of arrangement may provide for the termination of the relationship between a company and its shareholders, with or without substitution of a new relationship between the said parties. The differing court rulings will be discussed in detail below. Schemes of arrangement have not been challenged in court under the Act, and as such, the legal precedents that will be discussed in this paper are based on the predecessor of the Act, the 1973 Act.

Another important question to be considered is whether section 48 buy-backs by the company constitute a scheme of arrangement. The said section of the Act states that if a company reacquires its previously issued shares in excess of five per cent, it has to comply with the requirements of section 114 and 115. However, it does not state whether this means that the transaction is now a scheme of arrangement. Furthermore, a reacquisition of previously issued securities by a company is listed in section 114(1)(c) as one of the methods that can be used to effect a scheme of arrangement; however, as with section 48 of the Act, section 114 does not state whether or not this reacquisition will now be a scheme of arrangement. Due to the fact that schemes of arrangement are included in the definition of affected transactions in section 117(1)(c)(iii) in Part B of Chapter 5 of the Act, they must comply with the Takeover Regulations and Part C of the Act. It is thus necessary to consider the parameters of what a scheme of arrangement will constitute so as to align the transactions within the regulatory framework of the Act.