In review: shareholder rights and responsibilities in South Africa

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An extract from The Company Governance Overview, 10th Version

Shareholders

i Shareholder rights and powers

Shareholders are entitled to attend, communicate and vote at a gathering, both themselves or by way of proxy. This enables shareholders to ask troublesome questions of administrators, categorical their views or foyer help from different shareholders for a selected agenda (e.g., a ‘vote no’ marketing campaign).

Shareholders have the flexibility to requisition a shareholders’ assembly by delivering signed calls for to the corporate, specifying the aim for which the assembly is proposed. If the corporate receives, in mixture, calls for from holders of at the very least 10 per cent of the voting rights entitled to be exercised in relation to the matter proposed, it should name a gathering until the corporate or one other shareholder efficiently applies to courtroom to put aside the demand on the grounds that it seeks solely to rethink a matter that has already been determined by shareholders, or is frivolous or vexatious.

Any two shareholders of an organization could suggest {that a} decision regarding any matter in respect of which they’re every entitled to train voting rights (e.g., the removing of a director) be submitted to shareholders for consideration on the subsequent shareholders’ assembly, at a gathering demanded by shareholders or by written vote.

Though the board is imbued with wide-ranging statutory powers to handle firm affairs, the board should defer to shareholders on sure prescribed issues requiring their approval, both by means of an strange decision or particular decision (requiring a 75 per cent approval threshold). Key examples of issues requiring strange resolutions are the appointment and removing of administrators beneath the Corporations Act, and the coming into into of a Class 1 transaction (being principally substantial acquisitions and disposals) beneath the Listings Necessities. Particular resolutions are required for issues regarding basic firm affairs, comparable to amending the MOI or coming into right into a basic transaction (e.g., statutory mergers, schemes of association, and disposals of all or a higher a part of an organization’s property or endeavor). The Listings Necessities present an overlay of particular decision issues (e.g., the finishing up of a common repurchase of securities).

The Corporations Act comprises a variety of treatments and protecting mechanisms for shareholders. The statutory by-product motion contained in Part 165 permits a shareholder (amongst different stakeholders) to demand that the corporate carry or proceed proceedings, or take associated steps, to guard the authorized pursuits of the corporate. A firm could apply to courtroom to put aside the demand solely on the grounds that it’s frivolous, vexatious or with out advantage.

In excessive instances, a shareholder could apply to courtroom for an order essential to guard any proper of the shareholder, or rectify any hurt carried out to the shareholder by: (1) the corporate because of an act or omission that contravened the Corporations Act, the MOI or the shareholder’s rights; or (2) any director of the corporate, to the extent that she or he is or could also be responsible for a breach of fiduciary duties. Equally, a shareholder could apply to courtroom for applicable aid if: (1) any act or omission of the corporate has had a consequence; (2) the enterprise of the corporate is being carried on in a way; or (3) the powers of a director, prescribed officer or associated individual are being exercised in a way that’s oppressive or unfairly prejudicial, or unfairly disregards the pursuits of that shareholder. Having thought-about the applying, the courtroom could make any interim or last order it considers match, together with an order restraining the conduct complained of, ordering a compensation cost, or various or setting apart an settlement or transaction.

Shareholders even have the correct to carry a declare for damages in opposition to some other one that deliberately, fraudulently or because of gross negligence causes the corporate to do something inconsistent with the Corporations Act.

Dissenting minority shareholders could, in sure prescribed circumstances (e.g., basic transactions), pressure the corporate to buy its shares in money at a value reflecting honest worth. It is a ‘no fault’ appraisal proper that permits a shareholder to promote all of its shares and exit the corporate. It applies if the shareholder notified the corporate of its objection to the decision to approve the motion or transaction, and the shareholder voted in opposition to the decision (which was nonetheless permitted) and complied with varied exacting procedural necessities.

If 15 per cent or extra of shareholders vote in opposition to a decision proposed for implementing a basic transaction, any dissenting shareholder could require the corporate, at its expense, to acquire courtroom approval earlier than implementing the decision. A single dissenting shareholder may apply to courtroom, at its expense, to have a decision put aside. A courtroom could solely put aside the decision whether it is glad that there’s manifest unfairness to shareholders or a fabric procedural irregularity.

The place a suggestion for a goal firm has been accepted by at the very least 90 per cent of the goal firm’s disinterested shareholders, the Corporations Act permits a purchaser to provoke a minority ‘squeeze out’, by compulsorily buying the remaining shares held by non-accepting shareholders. Nonetheless, Part 124 supplies a measure of safety to minority shareholders in such cases, by not solely empowering them to compel the client to take up their shares, but additionally permitting them to use to courtroom for an order prohibiting the ‘squeeze-out’ or imposing situations thereon (normally on the idea that the provide is unfair).

ii Shareholders’ duties and obligations

Shareholders, be they controlling or in any other case, owe no fiduciary or statutory duties to the corporate or different shareholders. Based mostly on the precept of separate authorized character, shareholders are usually not responsible for the corporate’s acts or omissions. Solely beneath distinctive circumstances could a courtroom attribute private legal responsibility to a shareholder who has abused the precept of company character beneath the frequent legislation, or depend on the statutory mechanism within the Corporations Act to ‘pierce the company veil’ the place an ‘unconscionable abuse’ of an organization’s separate juristic character has transpired.

The Corporations Act comprises disclosure obligations impacting on-market or off-market stake-building by shareholders. Individuals who purchase or eliminate a useful curiosity in securities, such that they maintain or now not maintain 5 per cent or any additional a number of of 5 per cent of the voting rights attaching to a selected class of securities, should notify the issuer inside three enterprise days thereof. This is applicable no matter whether or not the acquisition or disposal was made straight, not directly, individually or in live performance with some other individual, and choices and different pursuits in securities should be taken into consideration.

Institutional buyers, comparable to pension funds, mutual funds, and insurers, could also be required to interact in stewardship actions by advantage of obligations to responsibly handle their investments in JSE-listed firms – notably insofar as sustainability and environmental, social and governance (ESG) components are involved. For instance, pension funds in South Africa are obliged, earlier than investing in and whereas invested in an asset, to think about any issue which will materially have an effect on the sustainable long-term efficiency of the asset, together with these of an ESG character. A current steerage notice issued on such requirement by the Monetary Sector Conduct Authority (FSCA) – the physique accountable for imposing the market conduct guidelines of economic establishments beneath the Monetary Markets Act 19 of 2012 (FMA) – contemplates ‘lively possession’ by pension funds, being the prudent fulfilment of obligations referring to the possession of, or an curiosity in, an asset. These obligations embrace tips to be utilized for the identification of sustainability issues in that asset, and mechanisms of intervention and engagement with the accountable individuals in respect of the asset when issues have been recognized.

iii Shareholder activism

Shareholder activism has steadily been on the rise in South Africa. This pattern might be attributed to quite a few components, together with South Africa’s regulatory and company governance framework, which creates an enabling setting for shareholder activism or activist-like interventions. Along with the array of shareholder rights and protections beneath the Corporations Act, every iteration of the King Report has included ever-increasing suggestions relating to higher shareholder participation, thereby entrenching the place that shareholders have an lively function to play in policing good governance.

Traditionally, most shareholder campaigns in South Africa have targeted on govt compensation and board composition. On remuneration, following the introduction of ‘say-on-pay’ guidelines, sure JSE-listed firms have needed to rethink their remuneration insurance policies following important shareholder opposition to such insurance policies or implementation studies. On board composition, campaigns have pressured firms to take steps to vary the make-up of their boards or pushed for the resignation of the CEO. Probably the most notable instance of this was in 2014, involving PPC, a cement producer, the place activists sought to take away your complete board. Within the M&A context, the affect of shareholder activism can also be steadily growing. Shareholders have intervened to dam or pressure sure M&A exercise. Current examples of the previous embrace shareholder opposition to a proposed takeover of PPC, and Prudential’s opposition to an tried takeover of poultry producer Sovereign Meals by Nation Chicken Holdings. An instance of the latter is Grand Parade Funding’s disposal of its pursuits in sure franchises.

JSE-listed firms which might be concerned in or fund carbon-intensive industries are experiencing elevated shareholder activism in respect of sustainability and ESG points, from each institutional buyers and NGOs (comparable to Simply Share, the Raith Basis and the Centre for Environmental Rights). Current cases of this activism have sought to compel firms to: (1) report on and disclose data on their evaluation of greenhouse gasoline emissions attributable to their actions or portfolio; (2) develop insurance policies on the funding of carbon-emitting operations; and (3) develop and disclose plans to guard shareholder worth within the face of climate-related ‘transition dangers’.

With regard to short-selling, whereas the regulatory framework recognises the essential function that short-sellers can play in holding administration accountable and guaranteeing that markets function effectively, it doesn’t allow market abuse, which is prohibited beneath the FMA. In November 2018, following campaigns performed by short-sellers that had a disruptive impact on the markets, the FSCA printed a ‘Dialogue Paper on the Implementation of a Brief Sale Reporting and Disclosure Framework’. Discussions on the proposed framework are ongoing.

Insofar as debates round ‘short-termism’ versus the creation of long-term shareholder worth are involved, the King Code encourages boards to keep away from prioritising slender, short-term goals on the expense of the corporate’s prospects for progress and profitability over the long run.

Takeover defences

Takeovers and ‘affected transactions’ (e.g., statutory mergers, schemes of association and disposals of all or a higher a part of an organization’s property or endeavor) are regulated beneath Chapter V of the Corporations Act and the Takeover Rules promulgated beneath that Act. Within the context of such transactions, the Takeover Regulation Panel (TRP) is remitted to make sure the integrity of {the marketplace} and equity to securities holders, and to forestall actions by offeree firms designed to impede, frustrate or defeat a suggestion or the making of honest and knowledgeable choices by securities holders.

The Corporations Act comprises a ‘catch-all’ rule that restricts ‘irritating motion’ within the context of a suggestion. If the board of a regulated firm has obtained a bona fide provide (or believes one could also be imminent), it might not, with out the approval of every of the TRP and the holders of the related securities, take any motion in relation to the affairs of the corporate that would successfully lead to: (1) a bona fide provide being annoyed; or (2) the related securities holders being denied a chance to resolve on the deserves. Examples of ‘irritating motion’ beneath the Corporations Act embrace: (1) issuing or granting choices in respect of unissued securities; (2) disposing or buying a fabric asset; (3) making an irregular distribution; and (4) coming into into contracts outdoors the strange course of enterprise.

The rule in opposition to ‘irritating motion’ due to this fact makes it troublesome for a board to beat back a hostile bidder by adopting takeover defences frequent within the US, comparable to a shareholder rights plan (poison capsule). Nonetheless, there are numerous steps that the board may legitimately take, which might have the impact of making hurdles within the implementation of the hostile bid, with out essentially constituting ‘irritating motion’ – as an example, mobilising opposition by key stakeholders with respect to the takeover.

Contact with shareholders

Contact with shareholders is a crucial function of company governance in South Africa. Shareholders frequently pursue one-on-one or collaborative engagement with listed firms on a variety of points. Good follow codes such because the United Nations-supported Ideas for Accountable Funding (UN-PRI) and Code for Accountable Funding in South Africa promote ‘lively possession’, accountable stewardship, and collaborative engagement by institutional buyers, notably in respect of ESG points.

The FMA consists of guidelines prohibiting insider buying and selling and market abuse. Shareholders should adhere to those provisions when partaking with administration or pursuing stewardship actions, whether or not partaking with administration one-on-one or collaboratively with different shareholders. A shareholder could develop into an ‘insider’ by changing into aware about ‘inside data’ for the needs of the FMA, at which level insider buying and selling guidelines would apply to it.

Collaborating shareholders ought to keep in mind ‘performing in live performance’ guidelines beneath the Corporations Act and Takeover Rules. As a common precept, supplied the collaboration shouldn’t be for the aim of proposing or coming into into an ‘affected transaction’ or provide, the collaboration wouldn’t quantity to performing in live performance. As such, there may be appreciable scope for shareholders to provide you with collaborative engagement plans to conduct stewardship and different actions. We count on a major quantity of contact with shareholders in relation to ESG and sustainability points going ahead.

The King Code promotes proactive shareholder engagement by way of numerous its suggestions. Amongst different issues, the King Code recommends that the board encourage shareholders to attend the AGM, at which all administrators needs to be accessible to reply to shareholders’ queries. According to the ‘stakeholder inclusive’ strategy, the King Code recommends the adoption of complete insurance policies on stakeholder relationship administration, and that engagement happen by way of media platforms designed to facilitate entry by a broad vary of stakeholders, comparable to web sites, promoting and press releases.

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