What constitute the inappropriate vote according to the South African Companies Act 71 of 2008 and international company law?

Abstract

Until 2008, company law in South Africa was largely regulated by the Companies Act 61 of 1973 (hereafter “the 1973 Act”).1 The 1973 Act was amended by the new Companies Act 71 of 2008 (hereafter “the Act”).2 The Act basically provides for the incorporation, registration, organisation as well as the management of companies.3 It also identifies and regulates the relationship between a company and its respective shareholders and directors, and it also provides for the efficient rescue of a financially distressed company.4 A company is a registered juristic person incorporated in terms of the Act.5 Along with the above mentioned amendments, judicial management in terms of the 1973 Act was replaced by a similar, but more practical and modern process of business rescue, which mainly entails the rehabilitation of a financially distressed company.6 During the business rescue process, the business rescue practitioner, which is appointed in terms of the Act,7 will compile a business rescue plan that sets out exactly how the business rescue proceedings will commence as well as how the business will be rehabilitated.8 The affected parties9 will have a chance to vote on this proposed business rescue plan at the meeting which the business rescue practitioner has organised10. These parties will have the chance to vote to either approve the business rescue plan or to reject it.11 It is when the business rescue plan is rejected by the affected parties, that the inappropriate vote in terms of section 153(1)(a)(ii) of the Act comes into play. When a business rescue plan is not accepted, the business rescue proceedings will not be able to commence, as the acceptance and adoption of the business rescue plan sets the business rescue proceedings into motion.12 The business rescue practitioner will have certain remedies to his or her disposal, such as section 153 of the Act, where he or she will be able to approach a court to set the rejection vote of the affected parties aside, on the grounds that it was inappropriate. Alternatively, the affected parties can make use of the binding offer in terms of section 153(1)(b)(ii) of the Act. This entails that affected parties, who placed a rejection vote for the business rescue plan, voting interests can be bought out by other affected parties who have voted in favour of the proposed business rescue plan, at a fair and reasonable value, and wish for the business rescue proceedings to commence.13 The courts have not yet determined exactly what constitutes an inappropriate vote, and the Act is also silent about this definition, but certain criteria has been laid out that has proven useful to the courts to determine exactly what an inappropriate vote is. For a vote against the proposed business rescue plan to be deemed inappropriate, the first task of the court is to determine if the vote is indeed inappropriate. If the court finds that the vote is not inappropriate, then the application to set the vote aside will have failed. If the court finds that the vote was indeed inappropriate, then the court may only set aside the outcome of an inappropriate vote if, in the prevailing circumstances, it is fair and reasonable to do so.14 The court must base its decision on if the information or evidence meets the requirements of the objective of the business rescue plan, whatever it is to allow it to achieve the continued existence of the company on a solvent basis or to be manage for an interim period to allow for better returns for creditors and affected persons than immediate liquidation would.15 Whatever the objective of the business rescue plan is, it must be proved that the objective has been met. Thus when there is the reasonable prospect of the company being rehabilitated, then business rescue should be granted.16 The purpose of the Act also plays a vital role in determining whether or not the vote is an inappropriate vote.