In a rare win for minority shareholders, the Supreme Court of Appeal has upheld hedge fund firm Rozendal Partners’ right for an asset appraisal when fintech company Capital Appreciation bought back the shares from a founding shareholder.
Paul Whitburn from Rozendal said yesterday that asset managers rarely take the companies they were invested in to court because they had to pay the legal fees themselves, if they wanted to represent their clients. Only recently did the Association for Savings and Investment South Africa allow fund managers to charge their funds for the legal fees, he said.
He said Rozendal, which owns about 2 percent of Capital Appreciation, had been fighting on behalf of its clients on this matter for three years.
Capital Appreciation had originally bought back the shares of the founder of the firm who had emigrated to Australia, and not believing that current management could manage the firm, Rozendal had wanted to exit its shareholding, but it had wanted to exit at fair value.
Capital Appreciation originally granted Rozendal rights to do an asset appraisal, then withdrew it.
“They offered 80 cents per share at the time…we thought it was worth R1.50,” said Whitburn. The share traded 0.54 percent higher at R1.85 yesterday on the JSE.
Capital Appreciation joint chief executive Michael Sacks said while the judgment was not material for the company, and he had not yet read it, it was “a disappointment for South Africa”.
He said the judgment meant a single minority shareholder, by way of appraisal rights, could gain access to a higher share price value than all the other shareholders.
He said while appraisal rights were an important protection for minority shareholders in circumstances where a major shareholder would benefit from a corporate action to the detriment of minorities, this was not the circumstance in question.
Capital Appreciation’s annual report for the year to March 31, 2022 lists its net asset value at 120.6c a share, a figure that had risen from 111.9c at the end of the previous year.
Whitburn said this legal case appeared to have been “swept under the carpet” by Capital Appreciation’s management, as there was no mention of it in the results or annual report, but the matter related to issues of good corporate governance.
Sacks said the matter was “not deemed material” to the group’s performance and the court proceedings were a matter of public record.
Adam Pike of legal firm Pike-Law, which represented Rozendal, said the ruling was good for minority shareholders because few minority shareholders took their matters as far as the Supreme Court of Appeal, but Rozendal had done so because they saw the fight as necessary to ensure the appraisal rights of minority shareholders, particularly when it came to share buybacks.
Capital Appreciation experienced a strong acceleration in business activity in the past year to March 31, and has a strong pipeline going into the 2023 financial year.
In cases of company directors doing share buybacks where minority shareholders might not approve, there are remedies for minority shareholders, including that an independent expert must be appointed to give a fairness opinion on the repurchase.
Then the company must seek shareholders’ approval by way of a special resolution. Finally, the company must alert shareholders to their right to a remedy if they object to the transaction terms.
The appraisal remedy gives dissenting shareholders a put option against the company. If exercised, the company is obliged to acquire the dissenting shareholders shares at fair value, not at the traded price.
Pike said the Companies Amendment Bill 2021 released for public comment on October 1, 2021 was aimed at eliminating some of the “red tape” of doing business, but it would also remove the need for a special resolution for share buybacks, which would strip dissenting minority shareholders of protection against share buyback abuses.
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