A fundamental transaction is one which fundamentally alters a company. One such transaction is a scheme of arrangement in terms of section 114 of the Companies Act, No. 71 of 2008 (“the Act”). A scheme of arrangement is a binding agreement entered into between a company and its shareholders as a legal mechanism to effect structural change within a company or to achieve change of corporate control of a target company.

The primary advantages of using a scheme of arrangement are to avoid the need to conclude numerous agreements between the parties that would otherwise be necessary to achieve the same outcome; to provide greater certainty concerning the timing and outcome of the proposal; and if approved by the statutory majorities and/or by the court, the scheme is binding on members who voted against the scheme.

A fundamental transaction can only be authorized by way of special resolution at a general meeting in terms of section 115 of the Act and an independent expert must be appointed to prepare a report to be submitted to all shareholders for consideration prior to them voting. Section 115 (2) of the Act provides that a proposed scheme of arranegement must be approved in one of three ways:

Firstly, by a special resolution adopted by members entitled to exercise voting rights on a scheme of arrangement at a meeting called for that purpose and at which sufficient members are present to exercise, in aggregate, at least 25% of all of the voting rights that are entitled to be exercised on that matter, unless a higher percentage is required by the company’s Memorandum of Incorporation (“MOI”).

Secondly, by a special resolution, adopted in the aforementioned manner, by the shareholders of the company’s holding company, if any, if: the holding company is a company or an external company; or the proposed transaction concerns a disposal of all or the greater part of the assets or undertaking of the subsidiary; or upon the consideration of the consolidated financial statements of the holding company, the disposal by the subsidiary constitutes a disposal of all or the greater part of the assets or undertaking of the holding company.

Lastly, a company may not proceed to implement a resolution without the approval of a court, despite a resolution having been adopted as contemplated above, if the resolution was opposed by at least 15% of the voting rights that were exercised on that resolution and, within five business days after the vote, any person who voted against the resolution requires the company to seek court approval; or the court, on an application within 10 business days after the vote by any person who opposed the resolution, is granted leave to apply to a court for review.

Transactions of this nature have extensive effects on the rights and obligations of a company and its shareholders, which inter alia include: reorganizing a company’s share capital; altering the rights of the shareholders and may even eliminate shareholders. It is for these reasons that it is the intention of both the legislature and the judiciary to protect the interests of the shareholders. The court only has an obligation to review the resolution if it is manifestly unfair to any class of shareholders or the vote was materially spoiled by a conflict of interests, inadequate disclosure, a material procedural irregularity or failure to comply with the Act or MOI.

The court will only grant an application if it is satisfied that the applicant is acting in good faith; appears prepared and able to sustain the proceedings; and has alleged facts which, if proved, would support an order setting aside the resolution.