Re-Acquisition by a Company of Own Issued Shares under Sections 48 and 114(1) of the Companies Act 71 of 2008: A Critical Assessment through Capprec

• Author: Bidie, S.S.
• DOI: https://doi.org/10.47348/SAMLJ/v34/i1a3
• Published date: 24 October 2022
• Date: 24 October 2022
• Pages: 52-87

RE-ACQUISITION BY A COMPANY OF OWN

ISSUED SHARES UNDER SECTIONS 48 AND

114(1) OF THE COMPANIES ACT 71 OF 2008:

A CRITICAL ASSESSMENT THROUGH

CAPPREC

SIMPHIWE S. BIDIE*

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

Abstract

Since the Companies Act 2008 came into being, there has been no clear

direction regarding the interpretation to be given to the provisions

regulating buy-back transactions. Recently, the provisions finally

received some concrete attention in the judgment of Windell J in First

National Nominees (Pty) Limited v Capital Appreciation Limited

(Capprec). The judgment is important because it has since provided a

measure of clarity on the potent interdependence between sections 48

and 114 of the 2008 Act, and how these must be interpreted. What is of

interest is how Windell J set out and interpreted the operation and

interdependence between section 48(2)(a), section 48(8)(b) and

section 114 of the 2008 Act. Overall, the arguments from both parties

in Capprec presented Windell J with a solid foundation that enabled

the court to proffer a succinct and illuminating direction on the

interpretation and operation of the provisions. This article attempts to

extricate whether the course Windell J adopted in her judgment is

consistent with what the 2008 Act contemplates, and if not, what

would have been the appropriate course to take. The article

demonstrates that Windell J did not seize the opportunity to

thoroughly engage with section 114(1)(e) regulating buy-back schemes

of arrangement and to ascertain what a scheme entails. This is despite

the fact that in Capprec both parties’ arguments were underpinned by

whether or not the proposed arrangement was a scheme. In this regard,

Windell J’s approach is disappointing and is criticised because her

interpretation means that the provisions of the 2008 Act have still not

been clarified, although we have been waiting for 13 years for

clarification. This is an unnecessary oversight by the judge.

*LLB, LLM, LLD (UFH).

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(2022) 34 SA Merc LJ 52

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Keywords: share buy-backs; re-acquisition of own shares; buy-back schemes

of arrangement; minority shareholders

I INTRODUCTION

It is almost 22 years since South African companies have been statutorily

permitted to repurchase their own shares through the use of arrange-

ments and/or schemes.

1

Even before the statutory recognition of

buy-backs in the country, court judgments had shown that not only

South African companies were engaging in such arrangements, but

companies in other jurisdictions as well. These companies found it

useful to utilise these arrangements as a mechanism by which to

fundamentally re-organise and restructure their capital.

The latter instance is mirrored in what took place in First National

Nominees (Pty) Limited v Capital Appreciation Limited (Capprec).

2

In

this recent judgment on buy-backs, the applicants sought to assert their

statutory right to protection by invoking section 164 of the Companies

Act 71 of 2008 (Act 71 of 2008).

3

The main arguments by the

respondents were that the section did not apply because the proposed

arrangement was not a scheme of arrangement as contemplated under

section 114 of the 2008 Act, or as was understood in the authorities

related to the Companies Act 61 of 1973 (Act 61 of 1973). The res-

pondents submitted that although section 48(8)(b) of Act 71 of 2008

requires that the transaction be subject to the requirements of sections

114 and 115, that reference relates only to the procedural requirement.

The section does not deem a transaction that is not meant to create a

scheme into a transaction that creates one. Moreover, the exclusion of

section 164 was informed by the fact that section 48(8)(b) of Act 71 of

2008 only refers to sections 114 and 115 but does not refer to section 164.

Had the legislature intended that section 164 be triggered in the circum-

stances referred to in section 48(8)(b), this would have been made plain

within section 48.

4

Put differently, the respondent appeared to contend that section

48(8)(b) of Act 71 of 2008 suggests two available scenarios in a buy-back

1

The recognition began with the Companies Amendment Act 37 of 1999, amending the

Companies Act 61 of 1973.

2

First National Nominees (Pty) Ltd v Capital Appreciation Ltd [2021] ZAGPJHC 18

(‘Capprec’). In Juspoint Nominees (Pty) Ltd v Sovereign Food Investments Limited (BNS

Nominees (Pty) Ltd Intervening) [2016] ZAECPEHC 15, Stretch J did not analyse schemes to

any signif‌icant extent.

3

Also see the Companies Amendment Act 3 of 2011 (‘2011 Amendment Act’); and the

Companies Amendment Bill, 2019 [B–2019].

4

Capprec para 19.

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transaction: f‌irst, that the section caters for different types of transac-

tions even if all may exceed the 5 per cent threshold set by Act 71 of 2008

as the minimum; secondly, that these transactions would operate

differently even though their application is triggered by section 48(8)(b).

They would operate differently to the extent that companies may design

arrangements not as schemes, as opposed to those companies that may

design arrangements as schemes. If a transaction is not structured as a

scheme, then section 164 would not apply even though the section 114

and section 115 procedures would have been triggered. This line of

argument suggests that the intention that must be assessed is that of the

scheme creator. The respondent’s view was that reference by section

114(4) to section 48 distinguishes a ‘transaction contemplated’ in

section 114(1)(e) from a ‘transaction contemplated’ in section 48 — if it

did not, there would be no need for the inclusion of section 114(1)(e).

5

Furthermore, the respondents contended that in section 164(2)(b) of

Act 71 of 2008 the legislature only included repurchase transactions

contemplated in section 114 and did not include repurchase transac-

tions contemplated in section 48. This was so because section 48 deals

with the acquisition by a company of its own shares in a manner

different from section 114. In this regard, they submitted that section 48

deals with a consensual agreement between the company and the seller

of shares. So, section 48 would operate differently in that a re-acquisition

in terms of the section involves a voluntary seller. Section 114 deals with

a scheme of arrangement between the company and the holders of any

class of its shares in a manner contemplated in paragraphs (a) to (f) of

section 114(1), where, in all of these instances, there must be the

requirement of coercion. Thus, in terms of section 114, a re-acquisition

by the company of its securities is achieved through a ‘scheme’ and in

such an event, in terms of section 114(4), the provisions of section 48

apply.

The applicant’s simple argument was that the requirements of section

114 of Act 71 of 2008 were not made applicable to the transaction

because the transaction was a scheme of arrangement. They submitted

that the requirements of sections 114 and 115 of Act 71 of 2008 were

made applicable to the transaction because the transaction crosses the

5 per cent threshold for a purchase by the company of its own shares and

because that is what section 48(8)(b) provides. Thus, whether or not the

transaction is a scheme of arrangement as provided for in section 114(1)

is irrelevant because section 48(8)(b) of Act 71 of 2008 makes the

5

Capprec para 18.

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