28.1 INTRODUCTION
In the researching of the new Companies Act the Government wanted to have a remedy to prevent the locking in of minority shareholders in inefficient companies. So, one of the sections, s 164 allows a shareholder provided certain conditions are met of finding a way out. There are quite a number of issues with the appraisal procedure. It in fact applies to all size companies, listed as well as smaller companies. So, it’s imperative as company secretarial practitioners that we know about appraisal rights. If you don’t know this then how can you advise your clients properly?
We have discussed pre-emption rights. This is where a minority shareholder does not get on with all the other shareholders and the minority has to find a mechanism to be bought out. This situation is in fact extremely complicated and one has to tread very carefully when dealing with the situation. The details or the way out of this situation should be built into the MOI or the rules or a shareholder’s agreement. This situation is where there are issues in the company between the shareholders and a settlement has to be negotiated. There could also be some in-fighting which impedes the growth and the future of the company which forces the minority to seek an exit.
The problem with being a minority shareholder is that the only way a minority can get rid of their shares is to sell them to the majority and in this situation the majority calls the tune. In other instances, the minority can perhaps be bought over by another minority shareholder where they can come to an agreement.
The appraisal rights section is fundamentally different from any method before or from methods contained in the MOI. Appraisal rights come into play when fundamental transactions are carried out causing the appraisal remedy to be triggered;
Section 112, Section 113 or Section 114 or
If there is a special resolution that alters the MOI and alters the rights of any class of the company’s shares in any manner which is materially averse to the rights or interest of the minority shareholders.
The above four events will trigger a Section164 appraisal rights action if the minority shareholder wishes to do so. The appraisal rights action is a no-fault action and can be executed by a minority shareholder where they are unhappy to stay in the company when the above events are triggered. Directors who are pursuing a fundamental transaction need to be aware of appraisal rights because it can affect their cash flow dramatically and cause the whole transaction to fail.
First before we get into the appraisal remedy let’s talk about fundamental transactions and in fact what they are.