Sec.112(2) of the Companies Act states:
“A company may not dispose of all or the greater part of its assets or undertaking unless-
(a) the disposal has been approved by a special resolution of the shareholders in accordance with Section 115; and
(b) the company has satisfied all requirements set out in Section 115 to the extent those requirements are applicable to such disposal by that company”
Section 115 requires a special resolution of the shareholders at a shareholder meeting.
Section 115(5) states:”A resolution contemplated in subsection (2) is effective only to the extent that it authorises or ratifies a specific transaction”
It is more than 50% of the gross assets of the business fairly valued.
“Fairly valued” is not defined in more detail. Valuations must thus be done in accordance with normally accepted valuation principles. Unfortunately there are various ways of valuating business which are all deemed correct. Furthermore such valuations are mostly based on management accounts combined with possibly outdated audited financials. These factors mean that decisions as to whether “the greater part of the assets” are being sold, could sometimes be made on doubtful(incorrect) assumptions. From a company’s internal governance side it would, in cases of doubt, thus be wise to follow the Sec.112 (Sec.115) procedures when there is doubt as to whether it applies.
Directors of companies are authorised to manage and run the company (to promote its business) to the best of their abilities. Meaning that they are in general authorized to attend to the day to day business of the company; but where all or most of the assets are being sold it goes beyond “managing” the business and thus requires the business owners’ (shareholder) consent.
The special resolution must be taken by the shareholders at a meeting called for that purpose and the resolution must authorize the specific transaction.
From the wording of the Act it seems that a meeting must be held. It is uncertain whether a written resolution (round robin resolution) taken by all shareholders will suffice. To be on the safe side an actual meeting would need to be held.
It must be a specific resolution. This means a resolution taken with the specific sale in mind. It cannot be a general authority to the directors to dispose of properties. The exact detail of every term of a proposed sale does not need to be stated but the specific asset should be referred to.
In our Common Law the English Law principle called the “Turquand Rule” previously applied. This rule creates a presumption in favour of a person dealing with any company. This presumption is that such person may assume that the company has complied with all internal governance rules before entering into a transaction with outside parties. Meaning that the company cannot afterwards cancel an agreement just by stating that the internal governance (decision making rules) were not complied with. This rule thus protected third parties when dealing with companies from being prejudiced by the company not following internal rules; as it is mostly nearly impossible for third parties to verify whether internal procedures have been followed.
The South Supreme Court of Appeal (in the case of Stand 242 Hendrik Potgieter Road Ruimsig Pty Ltd v Göbel NO 2011) has ruled that Section 228 of the old 1973 Companies Act prevails over the Turquand Rule. This means a company is not bound to an agreement whereby all or the greater part of its assets are disposed of unless the shareholders have given their approval by way of a special resolution.
Section112 of the 2008 Companies Act is substantially the same as Section 228 and there is no reason why it would be dealt with differently.
The risk for buyers of assets (for example land & property) in dealing with companies are thus substantial, as a strictly internal company matter could result in the whole transaction being unenforceable!
From a buyer’s side it would be wise to insist on written proof from such company that Section 112 and 115 have been complied with before the agreement is entered into. This would be for example a copy of the resolution as well as a letter from the company’s auditor confirming compliance.
From the seller’s (company disposing) side due steps must be taken to ensure compliance.
If property(land) is involved the conveyancer attending to the transfer should take reasonable steps to verify that Section 112 and 115 have been complied with to ensure that the ensuing transfer is legally in order.
Jacques van der Merwe
Jacques van der Merwe Maja Inc.
15 November 2020
*The views expressed here are my personal views on this theme and are not to be used or copied in any manner. It may not be interpreted as anything else ,as my personal opinion. It is not legal advice in any case. Should you wish to obtain specific advice on any matter this should be done by taking up personal contact with myself or any one of our attorneys.