Appraisal Remedy: Introduction - Part One

The appraisal remedy, found in Section 164 of the Companies Act, is a novel concept in our corporate law. It is derived in large part from the equivalent provision in the Canada Business Corporations Act.

The remedy is available to registered shareholders only. It may be invoked by dissident shareholders (dissidents), after a company gives notice of a meeting at which a special resolution pursuant to a fundamental transaction (or an amendment of the MoI) is proposed (in circumstances other than business rescue). The notice must inform shareholders that the appraisal remedy is available.

Provided that the process set out in the Companies Act is followed, dissidents may 'opt out' of the company and withdraw the fair value of their shares. Effectively, the appraisal remedy amounts to a 'put option' against the company.

Whilst the process set out in the Companies Act appears to be straightforward, there are hidden complexities. In our courts, there are no reported judgements on the appraisal remedy. There is therefore little guidance available to lawyers. We look to the commentary in comparable jurisdictions, such as Canada. However, Canada's rules of civil procedure are such that the case law is rarely helpful, particularly in relation to the procedure.

That said, Pike Law has assisted and advised private and institutional investors in relation to the appraisal remedy. We have therefore been able to develop some insight into how companies undertaking fundamental transactions should avoid the pitfalls we have identified. From the dissident's perspective, we have identified how best to employ transactional shortcomings to achieve a positive appraisal outcome.

The structure of Section 164 is relatively straightforward:
  • when a company gives notice of a transaction, it must include a copy of Section 164 in the notice of the meeting
  • the dissident is then required to give the company notice of the objection, attend the meeting (in person or by proxy) and vote against the resolution
  • once the company has given the dissident notice that the resolution was adopted, the dissident may demand that the company acquire its shares, and pay it the fair value for the shares
  • if the dissident disagrees with the consideration offered by the company, the dissident is entitled to approach a High Court to determine the fair value of the company's shares

Whilst it may appear trite, many would-be dissidents fail to appreciate that their shares are registered in the name of nominee companies, managed by stockbrokers or investment advisers. It follows that the registered owner of the share is the nominee, not the investor. In the circumstances, the investor holds no more than a beneficial interest in the shares.

To properly engage the remedy and in order to comply with Section 164, the would-be dissident should secure a letter of representation, a special power of attorney and/or a proxy to give the objection notice, attend and vote against the resolution at the general meeting, and to make the demand. Given that the procedure is rigid, the failure to meet any one of the numerous requirements will have the result that the would-be dissident is unable to invoke and enjoy the appraisal remedy.

In the next newsletter, we will discuss incidents of independence, insofar as it relates to the valuation of the transaction consideration and the appraisal remedy.  We will also discuss how a transacting company should treat the incidents of independence, in order to prevent or diminish the effects of an unfavourable appraisal of the fair value of its shares.