The rights of minority shareholders in fundamental transactions : a critical analysis of the appraisal right

Abstract

The appraisal remedy is contained in section 164 of the Act and is an exit mechanism for shareholders who feel that the actions or decisions of the company alter their interests in the company and, because of these fundamental changes, the company no longer meets their investment expectations. In other words, it prevents dissenting shareholders from being locked into a drastically changed or restructured company in defeat of their expectations. The obvious solution for dissenting shareholders, once majority rule prevails, is to sell their shares. However, there is not always a ready market and therefore minority shareholders are given the right to be bought out by their companies, if they disagree with resolutions approving certain fundamental changes. The shares are bought back at a price reflecting the fair value of the shares, which value may in certain instances be determined judicially. Therefore, dissenting shareholders may rely on the appraisal remedy to challenge and dispute the fairness of the price offered for their shares. There are, however, several requirements that have to be complied with in order for a shareholder to be entitled to have standing with regard to section 164. For shareholders to have standing in terms of the appraisal right, they have to be firstly a shareholder. Secondly, they would have to dissent against a resolution taken by the company. Thirdly, they need to be dissenting shareholders in a profit company and lastly, in terms only of the amendment of the Memorandum of Incorporation, they need to hold shares of a class that will be materially and adversely affected. The appraisal right is a no-fault remedy and allows dissatisfied or dissenting minority shareholders to withdraw their shares instead of being compelled to go along with the decisions of the majority. The appraisal right is thus a remedy that balances the rights and interests of minority shareholders with those of the majority. On one hand, it provides flexibility to the majority to fundamentally change or restructure the company and, on the other hand, to allow the minority shareholders to retain their investments together with their expectations thereof. It should be noted, however, that the appraisal procedure is an intricate procedure wherein all mandatory steps must be taken and each step must be ‘perfected’ as required by the Act in order for the dissenting shareholders to be entitled to institute such a proceeding and eventually to be paid the fair value of their shares. The appraisal procedure is complex and technical.