By: Nita van Zyl
The disposal of the assets of a wholly owned subsidiary company has a material knock-on effect on the investment of the shareholders in the holding company. The availability of appraisal rights to dissenting shareholders of a holding company where the subsidiary company makes such a disposal was recently considered in the Western Cape High Court decision of Cilliers v La Concorde Holdings Ltd and Others 2018 (6) SA 97 (WCC).
The applicant was a minority shareholder in a holding company (Holdco) that owned 100% of the shares in its wholly owned subsidiary company (Subco).
Subco wanted to dispose of all of its operational assets to a third party company. This would at the same time have amounted to a disposal of all or the greater part of the assets of Holdco. In terms of section 112 of the Companies Act, 71 of 2008, the disposal had to be approved by a special resolution of Subco’s shareholders. Subco dissenting shareholders would then of course become entitled to enforce their section 164 appraisal rights. Section 115 of the Act required approval for Subco’s section 112 transaction by the shareholders of Holdco, in that they had to adopt a special resolution in relation to such disposal, if having regard to Holdco’s consolidated financial statements, the disposal by Subco constituted a disposal of all or the greater part of the assets or undertaking of Holdco.
Section 115(8) of the Companies Act affords “a holder of any voting rights in a company” the right to enforce its appraisal rights in terms of section 164 of the Act. The question arose whether the “holder of any voting rights in a company” referred to in section 115(8) of the Act referred only to a Subco shareholder or whether it extended to a Holdco shareholder.
By way of background, the court stated that the introduction of appraisal rights in the 2008 Companies Act changed the nature of the rights and remedies available to lawfully outvoted shareholders by providing a right for dissenting minority shareholders to exit the company at fair value. The court stated further that a key policy objective of the Act was to protect smaller investors in companies by giving them the ability to make informed choices when they were unable to effectively influence company direction or pursue private actions.
Subco contended that appraisal rights under section 164 of the Act were granted only to shareholders in the disposing company (in other words to Subco) and that dissenting shareholders in Holdco were therefore incapable of holding appraisal rights under these circumstances.
The court, taking into account inter alia the context, purpose and background of the Act, found that the sensible and meaningful interpretation to be given to section 164, read in conjunction with sections 112 and 115 of the Act, was that Holdco shareholders could enforce appraisal rights, when Subco disposed of all or the greater part of its assets or undertaking, in circumstances where section 115(2)(b) of the Act applied.
To summarise then, appraisal rights extend to dissenting minority shareholders of a holding company where a subsidiary company has implemented a transaction disposing of all or the greater part of its assets or undertaking that constitutes at the same time a disposal of all or the greater part of the assets or undertaking of the holding company.