UNTRACEABLE SHAREHOLDERS COULD LOSE ALL CLAIM TO THEIR SHARES
This is particularly important for companies listed on the Johannesburg Securities Exchange (“JSE”) as the JSE continues to amend its Listings Requirements in order to harmonise its rules with the principles of the Act.
A potentially controversial clause that is included in the constitutional documents of most listed entities, that we encourage listed entities to interrogate, is one that grants the company the power to unilaterally sell shares of the company held by shareholders who, for a period of time, and despite reasonable efforts on the part of the company to ascertain their whereabouts, remain untraced (“Compulsory Share Sale”).
The controversy of a provision of this nature rests on a balance between two seemingly divergent interests: the interests of the company vis a vis the rights and interests of the shareholders and in particular the rights of minority shareholders. Including the option of Compulsory Share Sales in a company’s MOI presents clear advantages for the company as this inter alia reduces the administrative and reporting costs of the company, avoids greenmailing and protects the con- fidentiality of potentially sensitive commercial information. Compulsory Share Sales however also involve the extinction of property rights in the company which has wide reaching adverse effects on minority shareholders, and may arguably amount to expropriation.
As it stands, most listed entities make provision for the compulsory sale of the shares held by such untraced shareholders, the proceeds of which are retained by the listed entity in trust for the benefit of the untraced shareholder for a finite period of time, after which such proceeds may be forfeited to the company. Such Compulsory Share Sales are standard market practice for most companies listed on the London Stock Exchange (“LSE”) and an acceptable feature in Australian corporate law.
In South Africa there appears to be no statutory or regulatory prohibition of such Compulsory Share Sales in the Act and the JSE Listings Requirements and although the rules of the JSE make it incumbent upon companies to hold all monies (including dividends) due to shareholders in trust indefinitely, (but subject to the laws of prescription), the JSE Listings Requirements are silent on the issue of Compulsory Share Sales.
As no judicial precedent exists on this matter, it remains unclear whether such a provision, if challenged, would withstand challenge on public policy grounds. What remains clear is that there is a growing desire, particularly in the listed environment for companies to grant their directors the power, subject to strict procedures in terms of the MOI, to effect a Compulsory Share Sale particularly in relation to listed entities that are sitting with a large number of apathetic or un- traceable shareholders that make it difficult for the company to reach certain voting thresholds.
In the absence of statutory or regulatory prohibition of such actions by the company we, on the one hand, caution minority shareholders to be aware of the “Untraced Shareholders” provisions in the constitutional documents of the companies in which they choose to invest in order to avoid minority oppression and, on the other hand, encourage companies to interrogate the appropriateness of such a provision in the light of principles of fairness, equity and legal certainty in order to avoid minority dictation.
Although, in the South African context it is arguable that Compulsory Share Sales of this nature, notwithstanding that they are acceptable in Australia and the UK, would not withstand constitutional challenge. In our view, over and above the canvassed commercial expediency, the principles of (i) freedom of contract (Pacta Sunt Servanda) that provides that agreements (including the MOI of a company) freely entered into should be honoured by the parties thereto and (ii) buyer diligence (Caveat Emptor) that provides that a buyer should be cautious and ensure that he protects his own interests, which both form the basis of our law of contract are strong arguments for enforceability of Compulsory Share Sales in South Africa.
After concluding this assessment, if companies are of the view that such Compulsory Share Sales are an appropriate and acceptable feature of their corporate governance polices, notwithstanding that they override the proprietary rights of individual shareholders, we encourage companies to effect such corporate actions in line with pre-agreed and pre-communicated policies based on principles of fair treatment of all persons affected by such Compulsory Share Sales and full disclosure of all material facts relevant to the Compulsory Share Sale, and to establish sufficient room for arbitration and adequate scrutiny of such Compulsory Share Sales by the courts.