Section 164 of the Companies Act, 2008 introduced the right of appraisal as a remedy for dissenting minority shareholders into South African law. Provided dissenting shareholders follow the procedures set forth in this section, they may elect to be bought out at fair value in an instance where the company is proposing to enter into a transaction in terms of inter alia section 112 of the Companies Act to dispose of all or the greater part of the company’s assets or undertaking.
Section 164(5) stipulates that, provided the shareholder has followed the prescribed process, the shareholder may demand that the company pays to it the fair value for all the shares it holds in the company. Should such shareholder consider the offer made by the company to be inadequate, it may in terms of section 164(14) apply to court to determine a fair value in respect of the shares. Section 164(15) leaves it to the court to determine the fair value in respect of those shares and empowers the court, in its discretion, to appoint one or more appraisers to assist it in this task.
In the matter of BNS Nominees (RF) (Pty) Ltd and Another v Arrowhead Properties Ltd and Others the Gauteng Local Division of the High Court had cause to consider the meaning of “fair value” as contemplated in section 164. At the outset, Manoim J. observes that “despite its far reaching and novel implications, [section 164] has attracted little judicial scrutiny to date.” He further notes that the concept of “fair value” is pointedly not defined in the Companies Act (notwithstanding a plethora of definitions of other concepts in that Act). The concept is well-known in a number of other jurisdictions where appraisal rights form part of their corporate law regime, but as Manoim J. notes: “…even a cursory examination of some other jurisdictions… suggests none have defined the term with any precision either…those hoping for a definitive answer, a grand definition that covers the field in all situations, will be disappointed.”
Notwithstanding the constraints noted by the learned judge, this is precisely what the court was called upon to do in the present matter, a task with which it grappled admirably. The case turned on whether the offer of R3.75 per share made by the company in response to the applicants’ demand in terms of section 164 to be bought out at fair value, did indeed constitute fair value for their shares. Arrowhead Properties Limited, as respondent, contended that the offer was fair since it exceeded the market value of the shares and was based on the higher of two valuations by independent analysts. The applicants, on the other hand, contended that the fair value of the shares should be based on the net asset value (NAV) of the company, since the company is a property holding company, and the value of the shares on the basis of such value in the accounts of the company would come to a figure of R6.90.
The court proceeded to analyse the concept of fair value. It noted that a consideration of case law shows that value is a product of market forces and that it is generally accepted by economists that markets are prone to various kinds of distortion. The judgment illustrates the different types of distortion which may come into play in determining value –
- a share may be thinly traded; the share price might be influenced in the short term by market speculation; or in the medium term by external events like wars or natural disasters;
- distortions may be created because of informational asymmetries, for example where a company holds information of which the general market is unaware, this might result in the under or overvaluation of a share;
- the very corporate action forming the basis for the exercise of the appraisal remedy may itself give rise to an appreciation or depreciation of the shares.
Having considered all the vagaries which may impact the value of a share, the learned judge then offers what he terms a “tentative definition” of fair value –
“Fair value is the value a share would realise in an undistorted market, in the medium term, with free interaction between buyers and sellers with proper information, and without any exceptions being made for minority holdings or the effect of the corporate action which has led to the dissent.”
The next issue which the court carefully considers is the fact that various methodologies are adopted to determine value and no single method can be considered superior to any other. In particular, Manoim J. emphasises that one should be cautious to use accountancy standards in valuations so as to arrive at fair value, since the concept constitutes an economic value as opposed to an accounting value.
In the present case, the two methodologies advanced for valuation were effectively an NAV approach versus the approach adopted by two independent analysts appointed by the company, which was to value the shares on the basis of whether they would advise their clients in the circumstances to sell, buy or hold the stock in question. This of necessity entails determining the value of the share, not as priced in the stock market (being, as it is, subject to the possible distortions already noted) but based on its economic value in the circumstances.
A very important issue considered by the court was the applicants’ contention that, in view of section 164 giving the court a discretion to appoint appraisers to assist it in the determination of fair value, the court should obtain such assistance by appointing its own expert appraisers. This the court expressly declined to do. Manoim J stated that “to resort to this ‘outsourcing’ of a judicial obligation would not only amount to an improper use of a discretion but would amount to the abdication of a judicial function to an expert." The learned judge considered that he had enough in the record to make a decision and that the subsection clearly contemplates a discretion and not an injunction to make use of appraisers.
Finally, the court also made an important finding regarding the onus of having to establish the fair value. Both sides were in agreement that section 164 does not impose an onus on either side to establish fair value. However, the court pointed out that when one party had presented satisfactory evidence in support of its claim for a particular fair value and had moreover argued why the other party’s claim was not established, it would be acceptable for the court to determine that there was “at least an evidential burden to discharge the prima facie case made out by the one contending for fair value." The court took the view that the respondents had put up evidence in support of the offer which relies on valuations of independent expert parties and had put up reasoning from an expert as to why NAV was not the appropriate measure for fair value on the facts. Accordingly, the application was dismissed.
This decision constitutes a thorough and well-reasoned analysis of the factors a court should consider when being called upon to determine fair value in the context of section 164. It is also a clear indication that our courts will not abdicate the responsibility to make this kind of determination and would likely only utilise the discretion to appoint appraisers to assist it in circumstances where the evidence on the record before it was insufficient to enable it to reach its own conclusion.