13 May 2019

Minority Shareholders Investing in South African Companies

After weeks of political campaigns rallying through the country in last minute efforts to secure votes, the elections finally fell upon us on the 8th of May 2019.   It is time for all South Africans to patiently await the results with bated breath. What happens immediately after the winning party is announced? There are several questions on the lips of companies, shareholders, local individuals, foreign investors and the general South African population alike. At the forefront of these is the present state of unresolved enquiries that are currently underway, such as the State Capture debacle and the PIC enquiry, and the questions surrounding BOSASA, ESKOM and Steinhoff for example, and what the subsequent outcome of these issues will be.

We are all experiencing uncertainty as to how the General Election results will affect socioeconomic equality, employment statistics, poverty, the economy, businesses and local and foreign investment in our country. Concerning the everyday middle class South African, a current minority shareholder or first-time potential investor can rest assured that if they hold wealth in shares invested in South Africa companies, the value of their investments and subsequent wealth. This is according to The Companies Act 71 of 2008 (“The Act”) as it is currently drafted, which has aimed its purpose at protecting the rights of minority shareholders.

The Act ensures that adequate and transparent information is provided to shareholders who are participating in the selling and buying of securities as well as placing greater emphasis on directors’ responsibilities. It further aims at creating social and economic equality amongst investors by providing a stable platform for investment in which both the interests of the minority shareholders as well as the majority shareholders are considered.

When acting in your capacity as a shareholder, it is important to know that in the context of fundamental transactions, takeovers and offers, the form of protection afforded to both the minority and majority shareholders is governed by the takeover provisions contained in  Part A, B and C of Chapter 5  of the Act and is provided for by sections 112 to 127, and the takeover regulations 81-122. Furthermore, there is additional protection provided by sections 163 and 164 through recourse to the courts.

Shareholders must be aware that there are three types of transactions which will, if completed, will affect the ownership of a company or the shareholding in the company, thus influencing the shareholders concerned. The provisions governing fundamental transactions are applicable to all companies, public or private and furthermore in the circumstances that a fundamental transaction involves a regulated company, the transaction will constitute an affected transaction. Section 117(1)(i) and section 118 of the Act set out the meaning of an affected transaction.

An affected transaction is governed by the Takeover Regulation Panel and it will only be an affected transaction if it involves a regulated company. Section 117(i) and 118(1) of the Act define the meaning of a regulated company.

In summary, there are several provisions within the Act that attempt to ensure minority shareholder rights are protected whilst at the same time providing a stable platform for investment where the economy is not siphoned off by inequality amongst different shareholders.

Our legislature has drafted the Act in such a way that its purpose, in terms of the application to affected transactions is to facilitate the support and the development of the South African economy. It does so by creating flexibility and simplicity in the formation and maintenance of companies, to balance the rights and obligations of shareholders and directors within companies and tries to provide a predictable and effective environment for the efficient regulation of companies. Under the Act, the protection provided to minority shareholders is necessary in an emerging economy such as ours, where there is an over-arching need to achieve both social and economic equality in our young democracy.

Whilst the intentions of the Companies’ Act are clear, we should continue to save and invest in the shares of South African Companies, however always being mindful of the fact that those companies are operating within an increasingly complex financial and regulatory environment and in accordance with ever changing parameters that will influence the determination of the market value of our shares.

Let us forfeit the fact that not all things can be governed by the law.