The section provides that:

1. Where any compromise or arrangement is proposed between a company and its creditors or any class of them or between a company and its members or any class of them, the Court may, on the application of the company or any creditor or member of the company… order a meeting of the creditors or class of creditors, or of the members of the company or class of members (as the case may be), to be summoned in such manner as the Court may direct.

2. If the compromise or arrangement is agreed to by -

1. …; or
2. a majority representing three-fourths of the votes exercisable by the members or class of members, (as the case may be) present and voting either in person or by proxy at the meeting, such compromise or arrangement shall, if sanctioned by the Court, be binding on all the creditors or the class of creditors, or on the members or class of members (as the case may be) and also on the company…

The Van Straaten Family Trust (“VSFT”), the majority shareholder of Verimark, proposed a scheme whereby it would acquire all the minority shares in Verimark for 50c per share.

At the meeting, VSFT and Prime Rentals CC which were beneficially owned by MJ Van Straaten, voted for the scheme while the minorities voted against the scheme. The obvious outcome was that the scheme was approved.

The minorities opposed the scheme on the following basis:

• that the majority and the excluded members should not have been allowed to vote as they were not participants of the scheme; and
• that the majority and the excluded members were a different class of shareholder to the minority shareholders and should not have been allowed to vote.

The Court emphasised that the legal issue was not whether the VSFT and minorities belonged to the same class, having similar rights and interest, but whether the VSFT was eligible to vote at the scheme meeting. In other words, it was necessary to determine whom the offer was made to and who could vote in order to accept this offer.

After considering case law and s 311, the court decided that while, in common law, an offer must be accepted by all parties to whom it is made, section 311 requires that only the class of members affected by the proposal have a right to vote in acceptance of the proposed scheme. The reference to “all” the creditors or members in s311(2) is a reference to those creditors or members to whom the offer on a true analysis is made.

The Court decided that the Verimark offer was made to the minority shareholders; therefore, only they were entitled to reject or accept the proposal. Since the majority shareholder and the excluded members were not affected by the scheme, it was incorrect for them to vote at the scheme meeting.

This case has been heralded for demystifying the controversy regarding who has the right to vote in a scheme of arrangement whereby there is a proposed minority buy out.

It is important to look at the agreement governing the proposed scheme and the particular circumstances of each case when applying section 311.

The effect of the judgment was also to prevent a majority shareholder from voting in favour of a proposal made by itself, and thereby accepting a compromise or arrangement on behalf of the whole Company. Any acceptance should originate from the parties to whom the proposal is made, and not necessarily by all parties who have an interest in the proposal. Whatever the outcome of the vote, it will be binding on the company.