Legal and regulatory framework
The primary sources of laws and regulations that are relevant to shareholder rights and activism are the Companies Act 71 of 2008 (the Companies Act), Chapter 5 of the Companies Regulations 2011 promulgated thereunder (the Takeover Regulations), the Financial Markets Act 19 of 2012 (the Financial Markets Act) and common law.
Takeovers and other ‘affected transactions’ (e.g., statutory mergers, schemes and disposals of all or a greater part of a company’s assets or undertaking) are regulated under Chapter 5 of the Companies Act and the Takeover Regulations. In the context of such transactions, the Takeover Regulation Panel (TRP) is mandated to ensure the integrity of the marketplace and fairness to securities holders, and to prevent actions by offeree companies designed to impede, frustrate, or defeat an offer or the making of fair and informed decisions by securities holders. The TRP has the power to initiate or receive complaints, conduct investigations and issue compliance notices.
The Financial Markets Act provides for the regulation of financial markets and prohibits insider trading and market abuse. The Financial Sector Conduct Authority (FSCA) is responsible for enforcing the Financial Markets Act. Earlier this year, the FSCA reported that it and its predecessors had investigated 421 cases, taken enforcement action in 91 and imposed approximately 138 million rand in penalties since 1999.
The Listings Requirements (the Listings Requirements) of the Johannesburg Stock Exchange (JSE), enforced by the JSE, apply to JSE-listed companies. The Listings Requirements regulate, among other things, the fair and equal treatment of shareholders, access to information, certain voting thresholds, and pre-emptive rights and related party transactions.
The King IV Report on Corporate Governance for South Africa 2016 (the King Code), issued by the Institute of Directors in Southern Africa, contains various principles and recommendations intended to promote good corporate governance, many of which are relevant to shareholder rights and engagement. Certain principles in the King Code are incorporated into the Listings Requirements, making it mandatory for JSE-listed companies to comply with them, with the balance of the King Code’s principles and recommendations to be implemented on an ‘apply and explain’ basis.
Additionally, certain other regulatory avenues, although not intended as a means for shareholder activism, indirectly create opportunities for shareholder intervention and engagement. For example, shareholders, acting alone or with other stakeholders, may use the ‘public interest’ considerations assessed by the competition (antitrust) authorities as part of the merger approval or clearance process as a means to delay or thwart a transaction.
Some of the legal and regulatory avenues for shareholder activism are set out below.i Ability to influence shareholders’ meetings and approvals
Shareholders are entitled to attend, speak at and vote at a meeting, either themselves or via proxy. This allows shareholders to ask difficult questions of directors, express their views or lobby support from other shareholders for a particular agenda (e.g., a ‘vote no’ campaign).
Shareholders have the ability to requisition a shareholders’ meeting by delivering signed demands to the company, specifying the purpose for which the meeting is proposed. If the company receives, in aggregate, demands from holders of at least 10 per cent of the voting rights entitled to be exercised in relation to the matter proposed, it must call a meeting unless the company or another shareholder successfully applies to court to set aside the demand on the grounds that it seeks only to reconsider a matter that has already been decided by shareholders, or is frivolous or vexatious.
Any two shareholders of a company may propose that a resolution concerning any matter in respect of which they are each entitled to exercise voting rights (e.g., the removal of a director) be submitted to shareholders for consideration at the next shareholders’ meeting, at a meeting demanded by shareholders or by written vote.
Corporate actions that require shareholder approval present opportunities for shareholder intervention. Generally, ordinary resolutions may be passed by a majority of 50 per cent plus one share, and special resolutions with a majority of at least 75 per cent, of the voting rights exercised on the resolution. Blocs of shareholders may therefore cooperate to block or pass resolutions. In particular, a minority shareholder holding 25 per cent of the voting rights may block special resolutions (e.g., to approve a buy-back, an issue of securities or a fundamental transaction).
In certain instances, the Companies Act and the Listings Requirements impose special approval requirements. For example, resolutions proposing fundamental transactions (statutory mergers, schemes, certain business or asset disposals) require approval at a quorate meeting of 75 per cent of disinterested shareholders present and voting (i.e., excluding voting rights of the acquirer and related or concert parties). Similarly, in respect of JSE-listed companies undertaking related party transactions, the votes of related parties and their associates will not be taken into account in the approval of any resolution in connection with the related party transaction.ii Access to company records and information
A shareholder can access certain company records to assist with activist proposals and seek the cooperation of other shareholders. A holder of a beneficial interest in a company’s securities has the right to inspect and copy the company’s MOI, securities register, register of directors, reports and minutes of annual meetings, and annual financial statements. If additional information is required for the exercise or protection of a right, a shareholder may be able to rely on the Promotion of Access to Information Act 2 of 2000, enacted to give effect to the constitutional right of access to information.iii Dissenting shareholders
Dissenting shareholders may frustrate or even prevent the implementation of a proposed scheme, merger or sale of all or a greater part of the assets or undertaking. Despite shareholders having approved a special resolution in respect of such a transaction, a company may not implement it without the approval of a court if (1) the resolution was opposed by at least 15 per cent of the voting rights exercised thereon, and any of the dissenting shareholders, within five business days of the vote, requires the company to obtain court approval; or (2) any dissenting shareholder who voted against the resolution, within 10 business days of the vote, successfully applies to a court for a review of the resolution. A court may set aside the resolution only if it is satisfied that the resolution is manifestly unfair to a class of shareholders or the vote was materially tainted by a conflict of interest, inadequate disclosure, a failure to comply with the Companies Act or the company’s MOI, or some material procedural irregularity.iv Appraisal rights
In certain prescribed circumstances – including schemes, mergers or sales of all or a greater part of a company’s assets or undertaking – a dissenting shareholder may force the company to purchase its shares in cash at a price reflecting the fair value of the shares. This is a ‘no fault’ appraisal right that enables a shareholder to sell all of its shares and exit the company. It applies if (1) the shareholder notified the company of its objection to the resolution to approve the action or transaction; and (2) the shareholder voted against the resolution (which was nonetheless approved) and complied with procedural requirements to demand that the company buy its shares for fair value.v Actions and remedies
In extreme cases, a holder of issued securities may apply to court for an order necessary to protect any right of the securities holder, or rectify any harm done to the securities holder by (1) the company due to an act or omission that contravened the Companies Act, the MOI or the securities holder’s rights; or (2) any director of the company, to the extent that he or she is or may be liable for a breach of fiduciary duties.
Similarly, a shareholder may apply to court for appropriate relief if (1) any act or omission of the company has had a result; (2) the business of the company is being carried on in a manner; or (3) the powers of a director, prescribed officer or related person are being exercised in a manner that is oppressive or unfairly prejudicial, or unfairly disregards the interests of that shareholder. Having considered the application, the court may make any interim or final order it considers fit, including an order restraining the conduct complained of, ordering a compensation payment, or varying or setting aside an agreement or transaction.
The Companies Act also introduced a statutory derivative action that enables a shareholder (among other stakeholders) to demand that the company bring or continue proceedings, or take related steps to protect the legal interests of the company. A company may apply to court to set aside the demand only on the grounds that it is frivolous, vexatious or without merit.vi Stakebuilding
Activists should carefully structure any on-market or off-market stakebuilding, taking into account the legal and regulatory obligations applicable to their particular circumstances.
Disclosure obligations require persons who acquire or dispose of a beneficial interest in securities, such that they hold or no longer hold 5 per cent or any further multiple of 5 per cent of the voting rights attaching to a particular class of securities, to notify the issuer within three business days of the acquisition. This applies irrespective of whether the acquisition or disposal was made directly, indirectly, individually or in concert with any other person, and options and other interests in securities must be taken into account.
If an acquisition takes the acquirer’s beneficial interest in voting rights to 35 per cent or more (whether acting alone or in concert), the acquisition will trigger a mandatory offer to the remaining shareholders, unless a whitewash resolution waiving the mandatory offer is approved by a majority of independent shareholders.
Where a stakebuilding involves two or more persons cooperating for the purposes of proposing an ‘affected transaction’ or offer, concert party rules in the Companies Act and the Takeover Regulations will apply. The latter also impose strict requirements in relation to dealings in securities before, during and after an offer period.
Activists should be mindful of the insider trading offences and the broader framework regulating market abuse under the Financial Markets Act.vii Defences available to companies and directors’ duties
There are various strategies available to companies when faced with shareholder activism. Companies that have anticipated and prepared for activism will be better placed to respond quickly, and to defend against proposals that are not, or may not be, in the best interests of the company. Strategic private engagements with various stakeholders, tactics such as ‘bear hugs’ and accounting for potential activist activity in the course of creating transaction timelines will also play an important role in preventing or resolving activist issues in a transactional context.
The legal and regulatory framework described above includes various rules that boards may use to defend against activism, particularly if the activism is frivolous, vexatious or without merit.
As a general principle, it is the board that has primary legal responsibility for managing the business and affairs of the company. In doing so, the directors are subject to various fiduciary duties, all of which flow from the overarching duty to act in the best interests of the company at all times. There is no list of factors that a director must consider when assessing what is in the best interests of the company. The Companies Act includes a statutory business judgement rule, which affords directors some latitude and a degree of protection in responding to shareholder activism.
Directors need to take care not to engage in any conduct that is directed at, or could have the effect of, frustrating an offer made in good faith.