Acquisition of securities : section 48 of the Companies Act 71 of 2008

Abstract

This work comprises a critical analysis of the section 48 acquisition of shares. Various predicaments inherent to such distributions are noted, and the financial, accounting, economic and statistical aspects pertaining to such distributions are used as yardstick in an effort to come to terms with the provisions of the Companies Act 71 of 2008. Initially, the section 48 distributions are analysed from a capital-related perspective in order to describe the application of the solvency and liquidity test, the fiction of beneficial interest in the current Act, as well as the effect of the exclusion of shareholder-specific distributions. Apart from capital rules, the internal actions’ description extends to the iusta causae of and minority protection relating to the section 48 distributions. Specific attention is given to board resolutions, the capacity of management to effect such transactions, as well as the duties of directors that have been rendered ineffective due to a change in the role of principal in the principal-agency problem underlying companies. Shareholder protection (specifically the effect of substituting shareholder’s resolutions with impractically phrased board resolutions) and creditor protection (specifically the cumbersome inclusion of “debt instruments” and its illogical nature) are discussed and, where possible, solutions are submitted. As a pragmatic step as an addition to director’s duties, targeted share repurchases have also been discussed. Apart from discussing the common misperceptions inherent to some common terminology, an indication to the meaning of “acquisition of own shares” in section 48(2)(a) is sought, and the different forms that such distributions can take are briefly discussed (including the possibilities pertaining to introducing equity derivatives to create synthetic share repurchases). As for take-overs and fundamental transactions, the relevant scheme of arrangement provisions are taken note of, and themes underlying that topic – disclosure to shareholders, mandatory offers and share repurchases in order to deter take-overs – are included. The section 48(2)(b) subsidiaries’ acquisition of shares in a holding company is not only compared to its version in the 1973 Act, but is also discussed from the perspective of the subsidiaries and of the holding company. Central to the latter is also the possibility of treasury shares and the liberal approach to financial assistance in the current Act. Copyright