Case Comments: Using a Scheme of Arrangement to Eliminate Minority Shareholders

• Jurisdiction: South Africa
• Citation: (2010) 22 SA Merc LJ 443
• Published date: 25 May 2019
• Author: Stephanie Luiz
• Pages: 443-452
• Date: 25 May 2019

Case Comments

Using a Scheme of Arrangement to Eliminate

Minority Shareholders

STEPHANIE LUIZ

University of KwaZulu-Natal

1 Introduction

Where an arrangement is proposed between a company and its members (or

between the company and any class of members) and an application is made,

the court is authorised to direct that a meeting be called to consider the

arrangement (s 311(1) of the Companies Act 61 of 1973 (‘the 1973 Act’)). If,

at the meeting, the arrangement is approved by a majority of at least

‘three-fourths of the votes exercisable by the members or class of members

(as the case may be) present and voting either in person or proxy at the

meeting’, a further application may be made to the court for a sanctioning of

this arrangement (s 311(2)). The sanctioning by the court is necessary to make

the arrangement binding on all the members of the company or on all the

members of the particular class (as the case may be) (ibid).

Although probably not originally intended for the purpose, the s 311

scheme of arrangement began to be used to eliminate minority shareholders in

order to achieve a takeover of a company after the decision in In re National

Bank Ltd ([1966] 1 WLR 819; [1966] 1 All ER 1006 (ChD)). In that case the

Court sanctioned a scheme that in essence involved an acquisition by an

outsider of all the issued share capital of a company. (See Stephanie Marie

Luiz An Evaluation of the South African Securities Regulation Code on

Takeovers and Mergers (unpublished LLD thesis, Unisa (2003) at 577-8 and

581-2.)

Over the years various issues have arisen in the context of using the s 311

scheme of arrangement to achieve a takeover of a company. The Van Wyk De

Vries Commission (Commission of Enquiry into the Companies Act

Supplementary Report RP 31 of 1972 in par 77.01) addressed the question of

whether the scheme of arrangement procedure as provided for in s 103 of the

Companies Act 46 of 1926 (the predecessor of s 311) was not being misused

to avoid the compulsory acquisition provisions found in s 103ter of the 1926

Act (the predecessor of s 321 of the 1973 Act). Further, prior to the repeal of

ss 314 to 321 from the 1973 Act (by s 6 of the Companies AmendmentAct 78

of 1989), the question arose in Ex parte Federale Nywerhede Bpk (1975 (1)

SA 826 (W) at 833) whether a scheme of arrangement involving an extinction

of shares

443

(2010) 22 SA Merc LJ 443

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