Handling the Complexities of Section 112 of the Companies Act
Businesses frequently find themselves in situations where they must dispose of assets, whether it’s through internal restructuring, selling a division, or dumping subsidiary shares. Although this seems simple, there can be significant difficulties due to the intricacies of Section 112 of the Companies Act, No. 71 of 2008 (the Act). This provision is designed to regulate the sale or disposal of assets that may affect the business’s operations, ownership, and control. Ignoring its complexities can lead to serious consequences.
SPECIAL RESOLUTION: A CRUCIAL STEP IN ASSET DISPOSAL
A special resolution approved by the shareholders is required in terms of Section 112 for any disposal of all or a significant portion of a company’s undertaking or assets. While it may seem like a straightforward legal step, there are several nuances involved in ensuring compliance with this requirement.
Failure to adhere to the provisions of Section 112 can result in severe repercussions, such as the invalidation of the transaction or potential claims from shareholders. Additionally, if the transaction is deemed unlawful, directors could be held liable for any losses incurred as a result of the non-compliant disposal.
Since non-compliance has serious repercussions, it is imperative that businesses conduct in-depth investigations into their asset disposal strategy, ensuring that all requirements are met. Shareholder approval should not only be obtained in writing but also at a formal shareholder meeting, which brings us to the next key element of Section 112.
IMPORTANT QUESTIONS TO POSE BEFORE ASSET DISPOSAL
To steer clear of such hazards, businesses must ask themselves several important questions when considering asset disposal. Understanding these questions can help ensure that a company remains compliant with the law and mitigates any potential risks.
Is the transaction exempt?
Certain transactions, such as those occurring within a wholly-owned group or as part of a corporate recovery plan, are exempt from the provisions of Section 112. However, determining whether an exemption applies requires a close examination of the corporate structure and the nature of the transaction.
For example, intra-group transactions may be exempt, but Section 112 can still be triggered if a minority shareholder within the group raises an objection. In some cases, the issue of whether the transaction qualifies for exemption may only arise after a shareholder has raised a concern, making it critical to evaluate every potential angle.
Does the removal make up the “bigger part”?
A careful valuation is necessary to determine if a disposal constitutes a “greater part” of the company’s assets or undertaking. Section 112 allows for a broad definition of what constitutes a significant portion, but it does not provide specific rules for how assets should be valued. This lack of precise guidelines creates considerable uncertainty in determining whether the threshold for a special resolution is met.
For example, a company may divest a division that it views as non-core to its operations. While the division may represent a small percentage of overall revenues, it could hold significant strategic value or operational importance that would make it a “greater part” of the company. This means businesses must carefully consider the financial, operational, and strategic impact of an asset disposal before proceeding.
A third-party valuation expert may be necessary to provide an independent and objective assessment of the assets in question. This expert can help prevent any missteps that could later lead to compliance issues or shareholder disputes.
Is the Special Resolution compliant?
Section 112 requires the approval of shareholders through a special resolution passed at a formal meeting. A “round robin” procedure – where resolutions are approved in writing by shareholders without a meeting – is insufficient to meet this requirement. Businesses must ensure that proper notice is given, that the meeting follows all relevant regulations, and that shareholders are fully informed before voting on the resolution.
The resolution must also be presented in a clear and transparent manner, outlining the details of the asset disposal and the rationale behind it. Without this, the resolution may be deemed invalid, rendering the disposal ineffective.
THE CONSEQUENCES OF NON-COMPLIANCE
If a business disposes of assets without the necessary shareholder approval or fails to comply with other aspects of Section 112, the consequences can be severe. These may include:
- Invalidation of the transaction: If the disposal is found to be non-compliant, it can be declared void. This means the company may be forced to reverse the transaction, leading to potential financial losses and reputational damage.
- Legal action: Shareholders or third parties may take legal action to challenge the disposal. If a court finds that the transaction was not properly approved, it may order the company to compensate affected parties.
- Director liability: Directors of the company may be held personally liable for losses resulting from a non-compliant asset disposal. This can extend to financial penalties and damage to their professional reputations.
KEY TAKEAWAYS
Section 112 of the Companies Act is a crucial provision for businesses considering asset disposal. The intricacies of the law underscore the necessity of thorough analysis and professional advice when thinking about asset sales.
Even in the face of uncertainty, ensuring compliance and reducing risks can be achieved by being aware of the possible consequences and seeking expert guidance.
By addressing these complexities head-on, businesses can protect themselves from legal and financial pitfalls and proceed with asset disposals confidently and legally.
By Koos Benadie | Director
RMI4law members enjoy the benefit of legal advice from an attorney 24 hours a day. If you wish to join RMI4law, call 0861 668 677.
Auto & General Insurance Company Limited is a licensed non-life Insurer and Financial Services Provider.