Section 164 of the Companies Act is a statutory mechanism designed to provide a dissenting shareholder with a remedy to exit a company if the majority of shareholders resolve to pursue a transaction the dissenting shareholder disagrees with. The provision prescribes an onerous process that ultimately allows the dissenting shareholder to demand that the company pay them fair value for all the shares they hold.
This concern arises from the advent of appraisal arbitrage as a calculated hedge fund investment strategy, which is illustrated by the increase in appraisal rights litigation. The trend shows a growing awareness among opportunistic investors that section 164 can be misused to extract profits through appraisal rights litigation. The bottom line is that appraisal rights are open to abuse by the minority at the expense of the majority.
The board applies the volume weighted average price of the issued share capital as a valuation method for a period of 90 days immediately preceding the resolution date to determine a fair value, and consequently makes an offer to the dissenting shareholder in terms of section 164 . The costs and delays caused by court processes may render the appraisal mechanism a costly and protracted affair with no end in sight. A motion procedure on affidavit may lead to the filing of additional affidavits or the referral to trial and oral evidence.
Fortunately, the determination of a fair value for the shares of dissenting shareholder is not the courts’ first rodeo. There is a rich reef of case law arising from the Companies Act of 1926, the Companies Act of 1973, and most recently the Companies Act of 2008, in which our courts have opined on the relevant principles applicable to the determination of fair value of a dissenting shareholder’s shares.
requires expert valuers familiar with the specific assets in question, which will increase the cost and time required to determine the fair value of the shares.International Financial Reporting Standards The courts are also not intended to be super-valuers. They are limited to logical deductions flowing from credible evidence presented by the parties and their experts. They may also not delegate responsibility to determine fair value to an expert, and must remain mindful of the fact that appointed experts may prolong the duration and increase the cost of legal proceedings.
Fair value is outcome based and must result in a fair, equitable and reasonable value by balancing the interests of the company, the majority shareholders and dissenting shareholders.
Source: News Formal (newsformal.com)
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