S48 Share Buybacks

COMPANIES ACT AMENDMENTS NO. 16 OF 2024

Special Resolutions and Scheme of Arrangement Requirements in certain instances.

Amendment of Section 48 of the Companies Act

A Special Resolution of Shareholders must be adopted where a Company effects a buyback of shares unless a pro rata offer is made to all shareholders, or the shares are bought back on a recognized stock exchange. The Board must approve the repurchase by Board Resolution wherein the solvency and liquidity test is applied.

Where a company seeks to enter what is known as a Scheme of Arrangement (S114) for a repurchase of shares, then the company is still required to follow all procedural requirements set out in Section 114, 115 and 164 of the Companies Act. This includes an Independent Expert Report (S114) to be submitted to the shareholders of the company, a special meeting held for the purpose of approving the repurchase (S115) and the right for shareholders to exercise their appraisal rights (S164).

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 affected 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 were met.

However, other share repurchases remain subject to the requirements of Section 48, 114, and Section 115 of the Companies Act:

While the term “Scheme of Arrangement” itself is not defined in the Companies Act, common law principles consider it to include transactions whereby individual agreements with each affected shareholder cannot be concluded and whereby all or some shareholders would be bound by the transaction without agreeing thereto.
Where a company seeks to repurchase its previously issued securities from shareholders as a Scheme of Arrangement, the company must obtain an Independent Expert Report, hold a meeting for the purpose of approving the transaction, and provide procedurally for the various S164 appraisal rights of shareholders.

Where a Scheme of Arrangement does not apply, a pro rata offer was not made and the shares are not repurchased on a recognized stock exchange, then it should suffice for the company to adopt a Special Resolution and Board Resolution with the latter confirming the application of the solvency and liquidity test.

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 may often occur where an individual shareholder exits the business.

Ensuring that Share Repurchase Agreements are concluded amongst the company and effected shareholders may help ensure that the transaction is not recognized as a Scheme of Arrangement.

The amendment to the Companies Act 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 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 difficult to consider that all share repurchase transactions could require the rigorous processes set out in Sections 114 and 115 of the Companies Act. Whilst the Companies Act does not make this entirely clear, not every transaction could be considered a scheme of arrangement provided there is no element of coercion or shareholders being bound by terms that they have not agreed to.

Given that the Companies Act is not clear on the when a Scheme of Arrangement does or does not apply, 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 without the application of Sections 114 and 115. However, excluding S114 and S115 where it ought to have been applied, 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 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 above amendments came into effect after proclamation was made in the Gazette during December 2024.

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.