The shareholder’s appraisal remedy under the Companies Act: How should the courts gauge ‘fair value’?

• Citation: (2024) 141 SALJ 293
• DOI: https://doi.org/10.47348/SALJ/v141/i2a3
• Published date: 10 April 2024
• Pages: 293-322
• Author: Cassim, M.F.
• Date: 10 April 2024

293

https://doi.org/10.47348/SALJ/v141/i2a3

THE SHAREHOLDER’S APPRAISAL REMEDY

UNDER THE COMPANIES ACT: HOW SHOULD

THE COURTS GAUGE ‘FAIR VALUE’?

MALE KA FEM IDA CASSIM†

Professor of Law, Mercantile Law Depa rtment, University of S outh Africa

The appraisa l remedy is the right of m inority sharehol ders to demand th at the

company buy out thei r shares in cash, at a p rice reec ting their ‘fa ir value’, when

they are ag grieved by cer tain trig gering transa ctions that the m ajority sharehol ders

have approved. T he appraisal ri ght is an Americ an concept th at was introduced int o

South Afric an law when the Co mpanies Act 71 of 2008 ca me into force. The most

formidable cha llenge concer ning the apprai sal right is the mean ing and interpr etation

of the key phrase ‘ fair value’ and, coup led with this, the ap propriate valua tion

methodology that th e court ought to adop t when valuing the shar es of dissenting

minority shareh olders. Two recent judgments of the High Cour t have considered these

thorny issues for t he rst time. This article cr itically analyses the ndings of the High

Court in BNS Nom inees (R F) (Pt y) Ltd v Zeder Inves tments Ltd and BN S

Nominees ( RF) (Pty) Ltd v A rrowhead Propert ies Ltd, with a particular foc us

on the divergent ap proaches that t he two cases ado pt in gauging the ‘fa ir value’ of

the dissenters’ sha res and the judici al discretion to ap point an appraise r to value

the shares. Thi s is followed by a detail ed discussion of the p roper interp retation of

the pivotal phrase ‘ fair value’ in apprai sal proceedings and of a ppraisal valuation

methodology. This is do ne with referen ce to the legal position i n comparable foreign

jurisdiction s such as the United S tates of Amer ica and Canada. G uidelines are al so

suggested for th e South African cour ts to follow when gauging the ‘ fair value’ of shares

in appraisal case s.

Appraisa l right – f air value – v aluation of sh ares – mi nority pr otection –

dissenti ng shareholders

I IN TROD UCT ION

The appraisa l right i s the right of m inorit y shareholders to com pel the

company to buy out their sh ares in ca sh at a price reect ing their ‘ fair

value’ when they have dis sented from cer tain t rigger ing tra nsaction s

that have been approved by a speci al resolution of the s hareholders

of a company.1 The appraisal r ight empowers a di ssentient mi nority

† M BBCh LLB LLM ( Wits) PhD (Cape Town). https://orcid.org/0000-0003-

0955-8767.

1 Maleka Femida Ca ssim ‘The in troduction of t he statutor y merger i n

South Afr ican cor porate law: M ajority r ule oset by t he appraisa l right ( Part I)’

(2008) 20 SA Merc LJ 1 at 19, cited with approval by the G auteng Local Divis ion

of the High Cou rt in First Na tional Nominee s (Pty) Ltd v Capita l Appreciation L td

2021 (4) SA 543 (GJ) para 31 and by the Wester n Cape Division of the H igh Court

in BNS Nominees (R F) (Pty) Ltd v Z eder Investmen ts Ltd [2021] ZAWCHC 263

para 3. See al so Capital Appreciation Lt d v First National Nominees (Pt y) Ltd 2022 (6)

SA 67 (SCA) para 22 .

(2024) 141 SALJ 293

© Juta and Company (Pty) Ltd

294 (2024) 141 THE SOUT H AFRICAN LAW JOURN AL

https://doi.org/10.47348/SALJ/v141/i2a3

shareholder, who can not prevent the trig gerin g transa ction, to exit f rom

the company by withd rawing t he fair va lue of his or her share s in cash.2

Therefore, it is ai med at maint aini ng the equil ibrium bet ween minor ity

shareholders a nd controll ing shareholder s3 where fund amental ch anges

are made to the cor porate str ucture. T he appraisa l remedy tempers t he

principle of major ity ru le. It ensures th at aggr ieved minor ity shareholde rs

are not bound to rema in invested i n the company when the major ity

has fund amental ly change d the nature of t he enterpri se into which the

aggr ieved minorit y had orig inal ly bought.

The term ‘apprai sal’ r ight may be somewh at mislead ing. It is more

accurately ch aracterised as a buy- out right or a cash-out r ight of dissentient

minorit y shareholders (which entitle s them to have their shares bought out

or cashed out by the company at a f air value) rat her than a r ight to have

their share s appraised. T he right is nonet heless label led as an ‘apprais al’

right becau se in circu mstance s where the company and the d issenter a re

unable to reach an a greement on the pr ice of the shares , then, as a las t

resort, the d issenti ng shareholder ha s the right t o have the ‘fai r value’ of

the shares a ssessed by a judic ially s upervise d appraisa l.

This ri ght is relat ively new to South Afr ican law. It was intro duced

when the Companie s Act 71 of 2008 (‘the Act’) c ame into eect on

1 May 2011. Appraisal is an A merican conce pt. It has been a feat ure of

America n law for over a centur y, having rst emer ged in Ohio in 1851.4

It was more recently adopt ed in Canada in the 1970s and 1980 s and in New

Zealand i n the 1990s but has not bee n adopted in the United K ingdom

or Austral ia.

One of the greate st challen ges concerni ng the apprai sal rig ht is the

meanin g and interpre tation of the key phra se — the ‘fa ir value’ of the

shares of d issentin g shareholders — a nd the appropriate va luation method

that the cour t should adopt when valu ing these sha res. In th is regard , the

appraisa l provision of the Act d irects the cou rt to deter mine ‘a fai r value’

of the shares of d issenti ng shareholders i n terms of s 164(15)(c)(ii) and, i n

terms of s 164(16), xes the time for va luation as the d ate on which, and

the time im mediately b efore, the company adopted t he resolution that

gave rise to a sh areholder’s rights under s 164. The Act is, however, entir ely

silent on the mean ing of ‘f air value’ and t he method of valuat ion that

2 The Suprem e Court of Appe al in Capital A ppreciation L td v First National

Nominees (P ty) Ltd ibid para 28 , quoting Ma leka Femid a Cassi m ‘Shareholder

remedies a nd minorit y protect ion’ in F H I Cassim e t al Contemporary Company

Law 2 ed (2012) 698–9.

3 First National Nom inees (Pty) Ltd v C apital Apprecia tion Ltd ibid par a 31, citing

Maleka Fem ida Cass im ‘The appra isal reme dy and the oppre ssion remedy und er

the Compan ies Act of 2008, and the overl ap between them’ (2017) 29 SA Merc LJ

305 at 313; see also Zed er Investments s upra note 1 para 3.

4 Maleka Femid a Cassim op c it note 1 at 19.

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