28.5 APPRAISAL REMEDY
The appraisal rights of dissenting shareholders are relatively new to South Africa. It is currently active in the USA and more recently Canada and New Zealand. It is really not viewed with much success in those jurisdictions. It can best be described as the right of dissenting shareholders who do not approve of certain triggering events to have their shares bought out by the company in cash at a price reflecting fair value. In certain cases, the value can be determined judicially.
The appraisal right is a no-fault remedy. “The grant of appraisal rights in these triggering circumstances involves the implicit acknowledgement that such events may have significant and far-reaching consequences for shareholders. This is because the nature of the company as well as the rights of shareholders could be drastically altered”- Cassim. Appraisal rights allow a minority or dissenting shareholder to opt out of the company if they do not wish to go along with the triggering event which in effect is a minority buy out.
There are 2 very important conflicting values here; -
1. For the company to change the structure of the company in order to create value by changing shareholders rights in order to adapt to a changing business environment.
2. This may not be in the interests of minorities as they would want to retain their investment and have the same expectations of preserving rights and interests on the same basis in which they invested.
The majority rules and the fundamental transaction or change in shareholder rights will go ahead irrespective of what the minority wants. The appraisal remedy is an exit strategy for dissenting minorities. This could be great where a minority is locked in and disappointed with the way the company is being run. It gives that minority a chance to receive fair value in cash. It’s the director who drive the transaction and it may be that they have other vested interests or they are looking at their own future which may not be in the interests of the minority. This right allows the minority an opportunity to show their dissent. “The appraisal right may thus be used to challenge the fairness of the price. It also functions as a check on opportunism by directors.” – Cassim. The remedy also serves as a deterrent or a restraint on bad business judgements by the directors.