An extract from The Corporate Governance Review, 10th Edition

Shareholders

i Shareholder rights and powers

Shareholders are entitled to attend, speak and vote at a meeting, either themselves or via proxy. This allows shareholders to ask difficult questions of directors, express their views or lobby support from other shareholders for a particular agenda (e.g., a 'vote no' campaign).

Shareholders have the ability to requisition a shareholders' meeting by delivering signed demands to the company, specifying the purpose for which the meeting is proposed. If the company receives, in aggregate, demands from holders of at least 10 per cent of the voting rights entitled to be exercised in relation to the matter proposed, it must call a meeting unless the company or another shareholder successfully applies to court to set aside the demand on the grounds that it seeks only to reconsider a matter that has already been decided by shareholders, or is frivolous or vexatious.

Any two shareholders of a company may propose that a resolution concerning any matter in respect of which they are each entitled to exercise voting rights (e.g., the removal of a director) be submitted to shareholders for consideration at the next shareholders' meeting, at a meeting demanded by shareholders or by written vote.

Although the board is imbued with wide-ranging statutory powers to manage company affairs, the board must defer to shareholders on certain prescribed matters requiring their approval, either by way of an ordinary resolution or special resolution (requiring a 75 per cent approval threshold). Key examples of matters requiring ordinary resolutions are the appointment and removal of directors under the Companies Act, and the entering into of a Category 1 transaction (being principally substantial acquisitions and disposals) under the Listings Requirements. Special resolutions are required for matters concerning fundamental company affairs, such as amending the MOI or entering into a fundamental transaction (e.g., statutory mergers, schemes of arrangement, and disposals of all or a greater part of a company's assets or undertaking). The Listings Requirements provide an overlay of special resolution matters (e.g., the carrying out of a general repurchase of securities).

The Companies Act contains a range of remedies and protective mechanisms for shareholders. The statutory derivative action contained in Section 165 enables a shareholder (among other stakeholders) to demand that the company bring or continue proceedings, or take related steps, to protect the legal interests of the company. A company may apply to court to set aside the demand only on the grounds that it is frivolous, vexatious or without merit.

In extreme cases, a shareholder may apply to court for an order necessary to protect any right of the shareholder, or rectify any harm done to the shareholder by: (1) the company due to an act or omission that contravened the Companies Act, the MOI or the shareholder's rights; or (2) any director of the company, to the extent that he or she is or may be liable for a breach of fiduciary duties. Similarly, a shareholder may apply to court for appropriate relief if: (1) any act or omission of the company has had a result; (2) the business of the company is being carried on in a manner; or (3) the powers of a director, prescribed officer or related person are being exercised in a manner that is oppressive or unfairly prejudicial, or unfairly disregards the interests of that shareholder. Having considered the application, the court may make any interim or final order it considers fit, including an order restraining the conduct complained of, ordering a compensation payment, or varying or setting aside an agreement or transaction.

Shareholders also have the right to bring a claim for damages against any other person who intentionally, fraudulently or due to gross negligence causes the company to do anything inconsistent with the Companies Act.

Dissenting minority shareholders may, in certain prescribed circumstances (e.g., fundamental transactions), force the company to purchase its shares in cash at a price reflecting fair value. This is a 'no fault' appraisal right that enables a shareholder to sell all of its shares and exit the company. It applies if the shareholder notified the company of its objection to the resolution to approve the action or transaction, and the shareholder voted against the resolution (which was nonetheless approved) and complied with various exacting procedural requirements.

If 15 per cent or more of shareholders vote against a resolution proposed for implementing a fundamental transaction, any dissenting shareholder may require the company, at its expense, to obtain court approval before implementing the resolution. A single dissenting shareholder may also apply to court, at its expense, to have a resolution set aside. A court may only set aside the resolution if it is satisfied that there is manifest unfairness to shareholders or a material procedural irregularity.

Where an offer for a target company has been accepted by at least 90 per cent of the target company's disinterested shareholders, the Companies Act allows a buyer to initiate a minority 'squeeze out', by compulsorily purchasing the remaining shares held by non-accepting shareholders. However, Section 124 provides a measure of protection to minority shareholders in such instances, by not only empowering them to compel the buyer to take up their shares, but also allowing them to apply to court for an order prohibiting the 'squeeze-out' or imposing conditions thereon (usually on the basis that the offer is unfair).

ii Shareholders' duties and responsibilities

Shareholders, be they controlling or otherwise, owe no fiduciary or statutory duties to the company or other shareholders. Based on the principle of separate legal personality, shareholders are not liable for the company's acts or omissions. Only under exceptional circumstances may a court attribute personal liability to a shareholder who has abused the principle of corporate personality under the common law, or rely on the statutory mechanism in the Companies Act to 'pierce the corporate veil' where an 'unconscionable abuse' of a company's separate juristic personality has transpired.

The Companies Act contains disclosure obligations impacting on-market or off-market stake-building by shareholders. Persons who acquire or dispose of a beneficial interest in securities, such that they hold or no longer hold 5 per cent or any further multiple of 5 per cent of the voting rights attaching to a particular class of securities, must notify the issuer within three business days thereof. This applies irrespective of whether the acquisition or disposal was made directly, indirectly, individually or in concert with any other person, and options and other interests in securities must be taken into account.

Institutional investors, such as pension funds, mutual funds, and insurers, may be required to engage in stewardship activities by virtue of obligations to responsibly manage their investments in JSE-listed companies – particularly insofar as sustainability and environmental, social and governance (ESG) factors are concerned. For example, pension funds in South Africa are obliged, before making an investment in and while invested in an asset, to consider any factor that may materially affect the sustainable long-term performance of the asset, including those of an ESG character. A recent guidance note issued on such requirement by the Financial Sector Conduct Authority (FSCA) – the body responsible for enforcing the market conduct rules of financial institutions under the Financial Markets Act 19 of 2012 (FMA) – contemplates 'active ownership' by pension funds, being the prudent fulfilment of responsibilities relating to the ownership of, or an interest in, an asset. These responsibilities include guidelines to be applied for the identification of sustainability concerns in that asset, and mechanisms of intervention and engagement with the responsible persons in respect of the asset when concerns have been identified.

iii Shareholder activism

Shareholder activism has gradually been on the rise in South Africa. This trend can be attributed to numerous factors, including South Africa's regulatory and corporate governance framework, which creates an enabling environment for shareholder activism or activist-like interventions. In addition to the array of shareholder rights and protections under the Companies Act, each iteration of the King Report has included ever-increasing recommendations regarding greater shareholder participation, thereby entrenching the position that shareholders have an active role to play in policing good governance.

Historically, most shareholder campaigns in South Africa have focused on executive compensation and board composition. On remuneration, following the introduction of 'say-on-pay' rules, certain JSE-listed companies have had to reconsider their remuneration policies following significant shareholder opposition to such policies or implementation reports. On board composition, campaigns have forced companies to take steps to change the make-up of their boards or pushed for the resignation of the CEO. The most notable example of this was in 2014, involving PPC, a cement manufacturer, where activists sought to remove the entire board. In the M&A context, the influence of shareholder activism is also gradually increasing. Shareholders have intervened to block or force certain M&A activity. Recent examples of the former include shareholder opposition to a proposed takeover of PPC, and Prudential's opposition to an attempted takeover of poultry producer Sovereign Foods by Country Bird Holdings. An example of the latter is Grand Parade Investment's disposal of its interests in certain franchises.

JSE-listed companies that are involved in or fund carbon-intensive industries are experiencing increased shareholder activism in respect of sustainability and ESG issues, from both institutional investors and NGOs (such as Just Share, the Raith Foundation and the Centre for Environmental Rights). Recent instances of this activism have sought to compel companies to: (1) report on and disclose information on their assessment of greenhouse gas emissions attributable to their activities or portfolio; (2) develop policies on the funding of carbon-emitting operations; and (3) develop and disclose plans to protect shareholder value in the face of climate-related 'transition risks'.

With regard to short-selling, while the regulatory framework recognises the important role that short-sellers can play in holding management accountable and ensuring that markets operate efficiently, it does not permit market abuse, which is prohibited under the FMA. In November 2018, following campaigns conducted by short-sellers that had a disruptive effect on the markets, the FSCA published a 'Discussion Paper on the Implementation of a Short Sale Reporting and Disclosure Framework'. Discussions on the proposed framework are ongoing.

Insofar as debates around 'short-termism' versus the creation of long-term shareholder value are concerned, the King Code encourages boards to avoid prioritising narrow, short-term objectives at the expense of the company's prospects for growth and profitability over the long term.

Takeover defences

Takeovers and 'affected transactions' (e.g., statutory mergers, schemes of arrangement and disposals of all or a greater part of a company's assets or undertaking) are regulated under Chapter V of the Companies Act and the Takeover Regulations promulgated under that Act. In the context of such transactions, the Takeover Regulation Panel (TRP) is mandated to ensure the integrity of the marketplace and fairness to securities holders, and to prevent actions by offeree companies designed to impede, frustrate or defeat an offer or the making of fair and informed decisions by securities holders.

The Companies Act contains a 'catch-all' rule that restricts 'frustrating action' in the context of an offer. If the board of a regulated company has received a bona fide offer (or believes one may be imminent), it may not, without the approval of each of the TRP and the holders of the relevant securities, take any action in relation to the affairs of the company that could effectively result in: (1) a bona fide offer being frustrated; or (2) the relevant securities holders being denied an opportunity to decide on the merits. Examples of 'frustrating action' under the Companies Act include: (1) issuing or granting options in respect of unissued securities; (2) disposing or acquiring a material asset; (3) making an abnormal distribution; and (4) entering into contracts outside the ordinary course of business.

The rule against 'frustrating action' therefore makes it difficult for a board to ward off a hostile bidder by adopting takeover defences common in the US, such as a shareholder rights plan (poison pill). However, there are various steps that the board could legitimately take, which would have the effect of creating hurdles in the implementation of the hostile bid, without necessarily constituting 'frustrating action' – for instance, mobilising opposition by key stakeholders with respect to the takeover.

Contact with shareholders

Contact with shareholders is an important feature of corporate governance in South Africa. Shareholders regularly pursue one-on-one or collaborative engagement with listed companies on a range of issues. Good practice codes such as the United Nations-supported Principles for Responsible Investment (UN-PRI) and Code for Responsible Investment in South Africa promote 'active ownership', responsible stewardship, and collaborative engagement by institutional investors, particularly in respect of ESG issues.

The FMA includes rules prohibiting insider trading and market abuse. Shareholders must adhere to these provisions when engaging with management or pursuing stewardship activities, whether engaging with management one-on-one or collaboratively with other shareholders. A shareholder may become an 'insider' by becoming privy to 'inside information' for the purposes of the FMA, at which point insider trading rules would apply to it.

Collaborating shareholders should take into account 'acting in concert' rules under the Companies Act and Takeover Regulations. As a general principle, provided the collaboration is not for the purpose of proposing or entering into an 'affected transaction' or offer, the collaboration would not amount to acting in concert. As such, there is considerable scope for shareholders to come up with collaborative engagement plans to conduct stewardship and other activities. We expect a significant amount of contact with shareholders in relation to ESG and sustainability issues going forward.

The King Code promotes proactive shareholder engagement through a number of its recommendations. Among other things, the King Code recommends that the board encourage shareholders to attend the AGM, at which all directors should be available to respond to shareholders' queries. In line with the 'stakeholder inclusive' approach, the King Code recommends the adoption of comprehensive policies on stakeholder relationship management, and that engagement take place through media platforms designed to facilitate access by a broad range of stakeholders, such as websites, advertising and press releases.