Shareholder Rights Under the Companies Act

The following article discusses some remedies available to aggrieved shareholders under the Companies Act (71 of 2008) (the Act).

It is interesting to note at the outset that the Act does not always distinguish between minority or majority shareholders. In fact the prominent clause dealing with “prejudicial conduct” is clause 163; and this clause does not refer to minority shareholders. The provisions of this clause are examined more closely hereinafter:

Section 163 determines that a Shareholder or Director (note that the inclusion of a Director is new to the Act of 2008 – and indeed places an onus on a Director if cases of prejudicial conduct are indeed at hand) may apply to court for relief if:

• any act or omission of the company or a related person has had a result that is oppressive or unfairly prejudicial to or has unfairly disregarded the interests of the applicant;
• the business of the company or a related person is being or has been carried on or conducted in a manner that is oppressive or unfairly prejudicial to or that disregards the interests of the applicant; or
• where the powers of a director or prescribed officer of the company or a person related to the company are being or have been exercised in a manner that is oppressive or unfairly prejudicial to or that unfairly disregards the interests of the applicant.

As regards this clause the following are pertinent:

• A shareholder or a director of a company may apply to court for relief in the event of oppressive or unfairly prejudicial conduct, or conduct that unfairly disregards the interest of a minority shareholder. The prejudicial conduct can be in the form of an act or omission in the part of the company, alternatively the business of the company or a related person is being conducted or carried on in an oppressive or prejudicial manner, or the powers of a director, prescribed officer of the company, or a related person of the company have been exercised in an oppressive or prejudicial manner.
• Despite this clause not mentioning minority shareholders, there is legal debate as to weather a majority (or equal in the case of a 50:50 shareholding) shareholder can utilise the provisions of this clause as they could (or should) have vetoed any such actions by way of their voting rights. As regards this it is held that:
  • Where a equal or majority shareholding it is effectively in a minority position as its position has been rendered impotent due to the provisions of funding arrangement; then the provisions of the section would be enforceable.
  • Those drafting the Act would not have deliberately left out specific mention of minority shareholders whereas in the very next clause they specifically mention minority shareholders.
• In a really informative article on this clause, Siphephelo Mbuli, writing in De Rebusin 2016 (Nov) DR 30, submits “that the court will not lightly grant relief to a minority shareholder in the event of alleged oppressive or unfairly prejudicial conduct, or conduct that unfairly disregards the interest of the minority shareholder.” He cites two decided cases which embellish the provisions of this Clause 163 in the following way:
  • The court stated that the only thing that the majority had done was to decide against the wishes of the minority, which conduct cannot be said to be unfairly or unreasonably prejudicial, unjust or inequitable.
  • In order to be successful,  an applicant had to establish a lack of probity or fair dealing, or a visible departure from the standards of fair dealing, or a violation of the conditions of fair play on which every shareholder is entitled to rely on, or unfair discrimination against the minority.
  • The conduct complained of must not merely be prejudicial or disregardful of the minority shareholders interest but must do so unfairly.

The crux can be summarised as follows:

• Therefore, a shareholder has to prove a lack of probity or fair dealing on the part of the company or the majority, or a visible departure from the standards of fair dealing, or a violation of the conditions of fair play, or unfair discrimination against the minority in order to succeed in terms of section 163.

It is important to note that there are other provisions of the Act that may be applicable to aggrieved shareholders. These are summarised as follows:

• Section 161 – this centres around a breach of the provisions of the Memorandum of Incorporation of the entity.
• Section 162 – relates to the application to declare director delinquent or under probation.
• Section 164 – relates to dissenting shareholder’s appraisal rights. This may be of use more frequently and as this is a proactive remedy and not a retroactive remedy it is elaborated on:
  • The appraisal remedy, provided for in section 164 of the Act, allows a Shareholder to opt out of the company for a fair cash consideration (i.e. it can sell its shares) if the company proceeds with certain corporate transactions with which the Shareholder does not agree.
  • There are broadly two types of resolutions which may be taken by a company that will trigger the shareholder’s appraisal right:
    • a resolution to amend the company’s Memorandum of Incorporation so as to alter the preferences, rights, limitations or any other terms of a class of its shares; and
    • a resolution to enter into a fundamental transaction, for example, to dispose of all or the greater part of the company’s assets or undertakings, to merge or amalgamate with another company or to enter into a scheme of arrangement.

• Once there is a triggering transaction, the dissenting Shareholder must:
  • Perfect his appraisal right by sending a written objection to the company  before the resolution is voted on;
  • Vote against the said resolution;
  • Deliver a written demand for the fair value of the shares to the company if the company adopts the resolution in question; and
  • Comply with all other procedural requirements.

As regards this broader topic it is relevant to note that section 166 – Alternative Dispute Resolution; allows the aggrieved party to file a complaint or apply for relief to the Companies Tribunal or an accredited entity for conciliation, mediation or arbitration. This too may be applicable.

We are hopeful that this has given you some insight into the relevant provisions of the Act. What is clear, as often is the case in such circumstances, is that the specifics of the situation need to be appreciated. We would welcome a deeper discussion in order to iterate towards a clear understanding of the options available and the best way forward. It would also be most useful to have sight of the Shareholder’s Agreement and Memorandum of Incorporation in order for us to be able to gain a full appreciation of the situation and to advise accordingly.