During these tough economic times many companies, in the interest of their businesses surviving, are faced with decisions to restructure so as to avoid possible over indebtedness, which may in turn lead to liquidation proceedings.
Restructuring of a business may lead to the disposal of company assets. Such disposal must comply with all the provisions of relevant legislation, some of which are discussed below.
Proposal to dispose of all or greater part of assets or undertaking
Section 112 (2) of the Companies Act 71 of 2008 (‘’the Act’’) provides that a company may not dispose of all, or the greater parts of its assets or undertaking, unless such disposal has been approved by a special resolution of its shareholders. Disposal in this context refers to an act of donating or selling assets to another person or company. “All or the greater part of the assets or undertaking ” means (in the case of the company’s assets), more than 50% of its gross assets fairly valued, irrespective of its liabilities.
A special resolution is defined as resolution adopted with the support of at least 75% of the voting rights exercised on the resolution. The company’s Memorandum of Incorporation may, however, permit a different percentage of voting rights on any special resolution, provided that there must be a margin of at least 10 percentage points between the requirements for approval of an ordinary resolution, and a special resolution. It is noteworthy that voting rights of an acquiring party must not to be included when calculating the number of voting rights.
The purpose of the afore-said resolution is to give effect to the lawful disposal of company assets or undertaking, as required by the Act. The only exception would be when the disposal constitutes a transaction which is pursuant to a business rescue plan, between a wholly owned subsidiary and it’s holding company, or among subsidiaries of the same company.
Required approval for transactions contemplated in Part
Section 115(2) of the Act provides that a proposed transaction for the disposal of all or a greater part of a company’s assets or undertaking must be approved by a special resolution, adopted by persons entitled to exercise voting rights on such a matter, at a meeting called for that purpose and at which sufficient persons are present to exercise, in aggregate, at least 25% of all the voting rights that are entitled to be exercised on that matter. The company is therefore obliged to hold a meeting when adopting the resolution and the quorum required at such meeting is 25% of all the voting rights.
Where the shareholders of the company intend to adopt the aforesaid resolution, the notice (which is accompanied by the precise terms of the proposed transaction) needs to be delivered within the prescribed time and in the prescribed manner as required by the Act. “Prescribed time” in this context means delivery of the notice at least 15 business days before such a meeting, in case of public company or non-profit company, or at least 10 business days if the company does not fall under the above-mentioned categories. Thus, the content of the notice, together with the manner and time of delivery, must adhere to all the provisions of the Act.
Court approval may under certain circumstances be required in addition to the above requirements. Court approval is required where the resolution has been opposed by at least 15% of the voting rights that were exercised on the resolution. Court approval may also be required when the court, on application by any person who voted against the resolution, grants that person a leave to apply for a review of the transaction. Under these circumstances, the Company may not implement the resolution until the order approving the resolution has been granted.
Considering the provisions of the Act and the effects of non-compliance therewith, it is vital that directors pay close attention to the value of the assets to be disposed of in every transaction. Simple selling of the company’s immovable property / shares and subsequent transfers may be highly problematic, if the provisions of the Act have been overlooked. In case of doubt as to whether a proposed transaction amounts to the disposal of a greater part of the Company assets or undertakings, it is recommended that the company adopt the required resolution, as it is always better to err on the side of caution.
Written by Mawande Delani
This article is for general information purposes and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact us At DKVG Attorneys for specific and detailed advice.