S48 Share Buybacks

COMPANIES ACT AMENDMENTS NO. 16 OF 2024

Additional Scheme of Arrangement Requirements for a Buyback or Repurchase of Shares
Amendment of Section 48 of the Companies Act

Inadvertently, it seems any share buyback or repurchase would qualify as a Section 114 Scheme of Arrangement and require an Independent Expert Report to be approved at a Section 115 Shareholder Special Meeting, unless the repurchase is pursuant to a pro rata offer made by the company to all shareholders, or if the transaction is effected on a recognized stock exchange. A Shareholder Special Resolution is required where shares are bought back from a director, prescribed officer, related person, or in other specified instances.

A share buyback or repurchase no longer requires a special resolution if the transaction is pursuant to a pro rata offer made to all shareholders by the company, or if the transaction is effected on a recognized stock exchange. Shares bought back from a director or prescribed officer of a company would also fall under this rule if the relevant criteria are met.
However, the amendment requires that other share buyback or share repurchase transactions remain subject to the requirements of Section 114 and Section 115 of the Companies Act, being a Scheme of Arrangement. This could potentially include share buybacks where only one or more, but not all, shareholders’ shares are repurchased by a company by individual agreement and not as part of an offer by the company to all shareholders, which could occur when an individual shareholder exits the business.
The amendment was made by substituting Section 48(8), which resulted in the removal of the previous Section 48(8)(b), which considered only repurchases of more than 5% of the issued share capital of a company to be subject to the requirements of Sections 114 and 115 of the Companies Act (Scheme of Arrangement). Subsection 48(8)(b) was removed, but Section 114 still states that “Section 48 applies to a proposed arrangement contemplated in this section [S114] to the extent that the arrangement would result in any reacquisition by a company of any of its previously issued securities.”
In terms of the Companies Act requirements surrounding a Scheme of Arrangement for the repurchase of securities by a company, the company would be required to retain an independent expert to prepare an Independent Expert Report concerning the proposed arrangement for the board, and cause that report to be distributed to all shareholders before the shares may be repurchased.
In accordance with Section 115 of the Companies Act, any such “Scheme of Arrangement” (which includes a repurchase of securities per Section 114) must be approved by special resolution at a shareholders’ special meeting called for that purpose, in which dissenting shareholders may also exercise their appraisal rights per Section 164.
Furthermore, if the company is considered regulated (see Section 118 amendments), it would also require approval or exemption from the Takeover Regulation Panel for the repurchase of its securities in accordance with Section 117 of the Companies Act.

It is hard to consider that any and all shares repurchased, irrespective of circumstances, would be required to undergo the rigorous processes set out in Sections 114 and 115 of the Companies Act. However, unfortunately, on strict interpretation of Section 114 of the Companies Act, this seems to be unavoidable unless the transaction is done pursuant to a pro rata offer made by the company to all shareholders or if the transaction is effected on a recognized stock exchange.

It will be interesting to see over time whether common law principles such as unanimous assent and substantial compliance will provide a means by which companies may qualify their share repurchases if they did not comply with the requirements of Sections 114 and 115. However, doing so may pose high risks to directors and companies, given that Section 48 of the Companies Act further requires that companies apply to court within two years for approval where shares were bought back contrary to Sections 46 and 48 of the Companies Act. Directors could be held liable in terms of Section 77 of the Act if they failed to vote against the acquisition of shares, despite knowing that the acquisition was contrary to Section 46.

The Companies Act Amendments 2024:

Pertinent changes were made to our South Africa Companies Act recently after the Companies Amendment Act 2024, No. 16 and the Companies Act Second Amendment, 2024 No. 17 were ascended into law on 25 July 2024.

The amended provisions are not yet operational and will come into effect after President Cyril Ramaphosa makes proclamation in the Gazette as to the effective date.

Statucor continues to unpack the amendments and the effect that they may have on our valued clients, and we look forward to publishing further communications on our observations in future. Click here for a full summary of all changes made to the Companies Act through the 2024 Amendments or view our News page for our latest articles on the Companies Act, Governance and Compliance matters that may be pertinent to you.