Home » Contract Law » Drafting Share Repurchase Agreements – Important Considerations When reviewing a share repurchase transaction, the Company`s Board of Directors must ensure that the Company passes the solvency and liquidity test immediately after the closing of the transaction. Thus, valuation fees that are not related to whether or not the business is a regulated corporation continue to apply. Rather, it is the fact that Article 115(8) of § 164 refers to divergent shareholder rights. The operational part governing assessment rights, namely Article 164, appears to cover only the design schemes referred to in Article 114. If the proposed amendments to § 48 para. 8, a special resolution is required for all share repurchases (including a share repurchase by a director and a 5% share repurchase), unless this is done through a pro rata offer to all shareholders or a normal course repurchase on a recognized exchange on which the shares are traded. As we will see below, share repurchase and subscription agreements are sometimes used by corporate shareholders as a more “tax-efficient” way to sell their stakes in corporations. Even low-value transactions can lead to various unintended consequences, such as a mandatory offer, as provided for in the above provisions. The structuring of these transactions must be carefully planned and usually requires the input of the legal and financial teams.
Compared to the old Act (sections 85 to 87 of the 1973 Act), section 48 of the Companies Act 2008 (the “Act”) appears to create a “simpler process” and, in some situations, only allows a share repurchase on the basis of a board resolution. However, there are some pitfalls. Share repurchase transactions may be structured to trigger a capital gains tax (“TGC”) or to be treated as a dividend. In this case, Capital Appreciation Limited (“CPL”) issued a circular to its shareholders informing them that it would repurchase a number of shares held by certain shareholders. The circular states that the transaction triggered sections 48, 114 and 164 of the Companies Act. CPL acquired more than 5% of its own issued shares. However, CPL later changed its position, claiming that Article 164 had not been triggered. Paragraph 48(8)(a) of the Act determines whether the shares are repurchased by a prescribed director or officer of the Corporation or a person associated with a prescribed director or officer of the Corporation, at which time a special resolution of the corporation`s shareholders is required. If the seller sells all or part of its assets or companies and an exclusion under Article 112(1) of the Act does not apply, the seller`s shareholders must approve the transaction by special resolution. A share buyback transaction may be accompanied by another transaction, for example one. B subscription contract.
The purpose of this announcement is to discuss share buyback operations in general and not with reference to any particular set of facts. Section 48 of the Companies Act 71 of 2008, as amended (the Companies Act or the Act), provides for the repurchase of own shares by a corporation. If the shares are repurchased by a director or officer of a corporation, section 48(8)(a) of the Act states that a special resolution of the Company`s shareholders is required. This applies to both large companies and SMEs. A redemption falls within the definition of “distribution” under section 1 of the Act. This means that in addition to the resolution approving the redemption, the Board of Directors must apply the solvency and liquidity test by ensuring that the Company`s assets are equal to or greater than the Company`s liabilities and that the Entity will be able to pay its debts as they fall due in the ordinary course of business for a period of 12 months after the redemption. CPL`s argument was that a plan for the deal is, after all, to bind an entire group of shareholders through a special resolution, whether the minority voted against the program or even did not participate in the vote. It is fundamentally different from what is in paragraph 48(8)(b). Redemption involves a voluntary seller in a typical contractual environment. With the introduction of § 43A Abs. 4 of the Eighth Annex to the ITA, caution should also be exercised when concluding share subscription transactions, as such transactions now also fall within the scope of the anti-dividend stripping rules. In addition, it is important to determine whether the corporation in which the shares are held is also a “regulated corporation” within the meaning of Part B – Expert Panel Power and Takeover Provisions of the Act.
If a director does not vote against the completion of the share repurchase transaction because he or she knows that the transaction does not meet the requirements set out in section 46 of the Act, the director may be subject to potential personal liability under paragraph 77(3)(e)(vi) of the Act. If the Corporation is a regulated corporation and both of the above questions are answered in the affirmative, the person concerned is required to make a binding offer to the remaining shareholders of the Corporation within the meaning of section 123 of the Act. Paragraph 48(8)(b) of the Act provides that if the repurchase of shares (considered alone, B. and other transactions in an integrated series of transactions) involves the acquisition by the Corporation of more than 5% of the issued shares of a particular class of shares of the Corporation, the requirements of sections 114 and 115 of the Act apply. This means: (a) a company repurchases shares from one or more shareholders on or after the date of publication of this announcement for a total amount of more than R10 million; and (b) that the Company has issued or is required to issue Shares within 12 months of the termination of this Agreement or the date of a redemption within the meaning of this Agreement.  2017 SA Merc LJ 305 Maleka Femida Cassim “The valuation appeal and the suppression appeal under the Companies Act 2008 and the overlap between them”.  TSAR 288 of 2010. Prof. Dr. Kathleen van der Linde. “Share Buybacks and Shareholder Protection”.  Supra 2017 SA Merc LJ à 313 MF Cassim “The Introduction of the Statutory Merger in South African Corporate Law: Majority Rule Offset by the Appraisal Right (Part I)” (2008) 20 SA Merc LJ 1 19 Article 48(8)(b) of the Act provides that a decision of the board of directors of a company to acquire its shares, is subject to the “requirements” of sections 114 and 115 of the Companies Act.
When considered alone or in conjunction with other transactions in an integrated series of transactions, it involves the acquisition by the Company of more than 5% of the issued shares of a particular class of shares of the Company. A share repurchase agreement is used when a company buys back shares from one or more of its shareholders or investors. Buyouts are also a tax-efficient way to return money to shareholders. Once the shares are repurchased, they are considered cancelled, but may be retained for redistribution in the future. The agreement must detail the amount of the purchase, the method of purchase and the timing, as well as any representations or warranties made by the buyer and seller to each other. There are a number of tax and legal implications that need to be considered when creating a share repurchase agreement, so it`s important that you ask your legal representative to review the agreement to avoid potential problems. A recent judgment in First National Nominees Pty Ltd and Others v Capital Appreciation Limited (Case No. 19/41679, 5. February 2021) has, to some extent, provided much-needed clarification as to whether the acquisition of more than 5% of its shares issued by a company is actually a system or simply subject to procedural rules? In any event, are valuation fees triggered when the company proposes such a buyout? If the redemption is structured as a dividend, the following considerations are relevant: Dividends are generally exempt from income tax within the meaning of section 10(1)(k)(i) of the Income Tax Act, 58 of 1962 (the “ITC”) and dividends paid to companies resident in South Africa are exempt from dividend tax within the meaning of Section 64F(1)(a) of the ITA. The obligation to obtain a special resolution from shareholders If the proposed amendments to Article 48(8) are introduced, the above-mentioned requirements of Articles 114 and 115 of the German Law on Joint Stock Companies would no longer apply to share buybacks in the amount of 5% – so that, in such circumstances, it would no longer be necessary to comply with the binding provisions of Articles 114 and 115 of the Companies Act by actions. According to the court, the practical effect of all this has been that it creates a confusing anomaly. .