In the recently reported judgment of BNS Nominees (RF) Proprietary Limited and Another v Arrowhead Properties Limited and Others 2023 (1) SA 478 (GJ), the Johannesburg High Court provided clarity regarding certain provisions of section 164 of the Companies Act No. 71 of 2008 (“Companies Act”) relating to the appraisal rights of shareholders and the determination of “fair value”.
Appraisal rights are rights granted to a shareholder who has voted against the implementation of certain proposed corporate actions. Such shareholders are typically regarded as “dissenting shareholders”. Section 164 entitles a dissenting shareholder to sell its shares to the company for fair value. If the dissenting shareholder is of the view that the offer from the company does not constitute fair value, then it can bring an application for the court to determine that value or to appoint one or more appraisers to assist it in that task.
Factual background
In April 2019, Arrowhead Properties Limited (“Arrowhead”) and Gemgrow Properties Limited advised the market of a potential transaction between them by way of a scheme of arrangement. The two companies later indicated that the scheme of arrangement would take the form of a share swop.
The first applicant, BNS Nominees (RF) Proprietary Limited (“BNS”) voted against the resolutions proposed by Arrowhead. BNS demanded to be paid the fair value for its shares and subsequently Arrowhead made an offer of R3,75 per share, which was rejected by BNS.
The application by BNS and Breede Coalitions Proprietary Limited (“Breede”) (the second applicant and beneficial owner of the Arrowhead shares held by BNS) was brought in terms of section 164 of the Companies Act.
The applicants sought to exercise their rights as dissenting shareholders to request the Court to appoint appraisers to make the determination of the fair value of the Arrowhead shares. The Applicants also sought further information from the company which would allow the appraisers to make the relevant determinations. In its counter-application Arrowhead sought an order from the Court determining the fair value of the Arrowhead shares to be R3,75 per share.
As part of its argument BNS contended that the fair value of the Arrowhead shares should be based on the net asset value (NAV) of Arrowhead because Arrowhead constituted a Real Estate Investment Trust (REIT). A REIT is a vehicle comprising mainly immovable property. The Applicants argued that the JSE listing requirements for REITs require independent valuations to be done for the purpose of its yearly and interim financial reporting. Ultimately, the Applicants’ argued that the fair value of the relevant shares should be R 6.90 per share.
Key points of the decision of the High Court
The Court acknowledged that the Companies Act did not define the concept of “fair value”. It offered a tentative definition for purposes of section 164 as follows:
“Fair value is the value a share would realise in an undistorted market, in the medium term, with free interaction between buyers and sellers with proper information, and without any exceptions being made for minority holdings or the effect of the corporate action which has led to the dissent.”
The Court held that, in the present case, a variety of methods can be used to establish fair value, and none appear to rely on NAV as the sole or proximate indicator of fair value. As to appointing an appraiser, the Court held that in this case it would amount to the abdication of a judicial function to an expert. The Court further found that the applicants have not made out a case that the offer of R 3,75 per share did not represent fair value. The main application was therefore dismissed, and the counter application was upheld.
While the High Court has offered a tentative definition of fair value which should be welcomed, it is clear that what constitutes fair value for purposes of an offer in terms of section 164 will depend on the facts and circumstances in question as various methods to determine the value may be applied depending on the circumstances.