A critique of the exclusion of the application of the solvency and liquidity test on appraisal rights

• Jurisdiction: South Africa
• Pages: 1-30
• Date: 16 August 2019
• Published date: 16 August 2019
• Citation: (2018) 4(2) JCCL&P 1
• Author: Bidie, S.S.

1

A CRITIQUE OF THE EXCLUSION

OF THE APPLICATION OF THE

SOLVENCY AND LIQUIDITY TEST

ON APPRAISAL RIGHTS

SIMPHIWE S BIDIE

Lecturer, Nelson R Mandela School of Law, University of Fort Hare

ABSTRACT

In recent times the protection of minority shareholders has received

quite a lot of attention in corporate governance. This is especially

so now that corporate reforms abound. The development of the

appraisal remedy has been a means towards the protection of such

shareholders. These rights have been occasioned by the relentless

contests, which companies are often inundated with, between

majority and minority shareholders. Recently, appraisal rights have

found expression in legislative frameworks of several countries to

accord protection to minority shareholders. In South Africa, the

Companies Act 71 of 2008 accords appraisal rights to minority

shareholders. Under s 164 of the Act, when minority shareholders

opt to exercise appraisal rights by, for example, making a demand to

be paid by the company for their shares, those payments are excluded

from constituting distribution by the company or the acquisition of

shares by a company within the meaning of s 48 of the Act, and as

such the payment is exempted from the operation of the provisions

of s 48 or the application of the solvency and liquidity test set out in

s 4 of the Act. The purpose of this paper is to critically engage with

the exemption of a company from the scrutiny of the solvency and

liquidity test because of payments made to minority shareholders

occasioned by the exercise of appraisal rights.

I INTRODUCTION

In recent times the protection of minority shareholders has received

quite a lot of attention in corporate governance. This is especially so

now that corporate reforms abound.1 The development of the appraisal

remedy has been a means towards the protection of such shareholders.

1 Tshepo Mongalo Corporate Law & Corporate Governance: A Global Picture of Business

Undertakings in South Africa (2003) 260.

(2018) 4(2) JCCL&P 1

© Juta and Company (Pty) Ltd

2

(2018) 4 (2) JOURNAL OF CORPORATE AND COMMERCIAL LAW & PRACTICE

These rights have been occasioned by the relentless contests, which

companies are often inundated with, between majority and minority

shareholders.2 Appraisal rights are but one aspect in a spectrum of

other remedies accorded to minority shareholders, by virtue of their

status as such, which they become legally entitled to use to protect

their rights against unfavourable resolutions adopted or intended to

be adopted by majority shareholders.

Historically, appraisal rights have been borrowed from the United

States of America where these have long been in existence.3 In the US,

these rights were and still are provided as a reaction to the abolition

of the requirement of unanimous consent for merger.4 Presently,

they are regulated under the Model Business Corporation Act, 1984

(hereinafter ‘the MBCA’).5

Currently, appraisal rights form part of statutory measures

incorporated by several countries to accord protection to minority

shareholders. In South Africa, the Companies Act 71 of 2008

(hereinafter ‘the 2008 Act’)6 provides appraisal rights to minority

shareholders in terms of s 164. In Canada, the appraisal rights are

provided for in s 190 of the Canada Business Corporations Act, 1985

(hereinafter ‘the CBCA’).7 However, not all countries provide for

these remedies statutorily. For example, in Australia and the United

Kingdom, no provision is made under the Corporations Act 2001 and

the Companies Act 2006 respectively for appraisal remedies. This,

however, does not mean that minority shareholders have no other

2 See the discussion of the various sources of conflicts between minority and

majority shareholders in John H Farrar & Laurence J Boulle ‘Minority shareholder

remedies: Shifting dispute resolution paradigms’ (2001) 13 Bond Law Review at

2–4; and Bayless Manning ‘The shareholder’s appraisal remedy: An essay for

Frank Coker’ (1962) 72 Yale Law Journal 223–65.

3 Manning op cit note 2 at 228; Basil Mashabane ‘Appraisal rights and protection

of minority shareholders’ De Rebus 1 December 2016, available at http://www�

derebus�org�za/appraisal-rights-protection-minority-shareholders/, accessed on 17 June

2018; and Jeffrey G MacIntosh ‘The shareholders’ appraisal right in Canada: A

critical reappraisal’ (1986) 24 Osgoode Hall Law Journal 201 at 204.

4 Jacqueline Yeats ‘Putting appraisal rights into perspective’ (2014) 25 Stell LR 328

at 335.

5 In the US, all states provide for appraisal rights to minority shareholders, and all

but two provide that shareholders who dissent may withdraw their investment by

demanding that their stock be appraised under judicial supervision and purchased

by the corporation. Mashabane op cit note 3; ‘The right of shareholders dissenting

from corporate combinations to demand cash payment for their shares’ (1959) 72

Harvard Law Review 1132 at 1132; and Manning op cit note 2 at 226.

6 GN 421 in GG 32121. The Act was assented to by the President on 9 April 2009.

The Act came into operation on 1 May 2011.

7 In New Zealand, appraisal rights are provided for in ss 110–115 of the Companies

Act 105 of 1993 as amended by Companies (Minority Buy-out Rights) Amendment

Act 69 of 2008.

© Juta and Company (Pty) Ltd