Companies Act provides relief for prejudiced minority shareholders

August 1st, 2019
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Picture source: Gallo Images/Getty

It is not uncommon for many shareholders to find themselves in an undesirable position. Shareholders may wish to dispose of their shares for any number of reasons, such as –

  • a breakdown in relations;
  • not being able to actively exercise their rights; or
  • purely for business reasons.

Such a position can be particularly detrimental where shareholders are in the minority and find themselves being prejudiced by the majority shareholders. Currently the Companies Act 71 of 2008 (the 2008 Act) makes provision for the protection of shareholders’ rights. This is primarily provided for in s 163 of the 2008 Act.

Section 163 of the 2008 Act

Section 163 of the 2008 Act focuses specifically on the interests of minority shareholders. In contrast to s 161, s 163 states that an applicant may apply to court where any act of omission or conduct by the company or one of its prescribed officers is unfairly prejudicial or oppressive of the applicant’s rights or interests. Section 163 can thus be broken down into two requirements, namely –

  • conduct; and
  • what is seen as prejudicial or unfair.

Background and s 252 of the Companies Act 61 of 1973

Prior to the 2008 Act, prejudicial conduct was regulated by s 252 of the Companies Act 61 of 1973 (the 1973 Act). In the case of Grancy Property Ltd v Manala and Others 2015 (3) SA 313 (SCA) the court confirmed (at para 22) that s 163 of the 2008 Act is in all material respects the same as the s 252 of the 1973 Act. The biggest difference between s 163 and s 252, is arguably that the former, accommodates the interests of shareholders rather than just the rights of the shareholders.

Section 163: Who may apply?

Section 163(1) of the 2008 Act states that either a director or shareholder may apply for relief. Interestingly s 163 does not state that it must be a minority shareholder who may apply, but rather that any shareholder may make use of s 163. The difficulty for a majority shareholder, however, is arguably proving prejudicial or unfair conduct. Furthermore, directors may often apply on behalf of minority shareholders they represent.

Section 163: What constitutes unfair or prejudicial conduct?

An act or omission, which is unfair or prejudicial need not necessarily be unlawful, and the fact that an action is unlawful does not on its own make it prejudicial or unfair. In determining what the test for unfairness is, South African courts have had to largely rely on English case law and similar cases under s 252 of the 1973 Act. In the English case Re a Company (No 00709 of 1992) O’Neill and Another v Phillips and Others [1999] 2 All ER 961, the court held (at paras 966H–967E) that the concept of ‘fairness’ is wider than conduct merely affecting rights, and that it involves rather a consideration of what is just and equitable. In the case of Donaldson Investments (Pty) Ltd and Others v Anglo-Transvaal Collieries Ltd: SA Mutual Life Assurance Society and Another Intervening 1979 (3) SA 713 (W) the court held (at 722 E–G) that in order to succeed under s 252 of the 1973 Act, 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.’

South African courts have further emphasised that in assessing unfairness one must look at the conduct itself rather than the motive, although the motive may be of some assistance (see Donaldson Investments (Pty) Ltd and Others v Anglo-Transvaal Collieries Ltd and Others 1983 (3) SA 96 (A)).

In the case of Geffen and Others v Martin and Others [2018] 1 All SA 21 (WCC) the court held at para 78 that prejudicial conduct can be objectively proved if it had the effect of adversely or materially affecting financial interests. This would be proved by way of reference to objective evidence, such as financial statements, and market prices.

In the Geffen case, the court suggested a unique remedy – namely to actively involve the applicants in the managerial decisions of the company, if the applicants can prove that they have a right or legitimate expectation to be involved in the managerial decisions of the company (at para 30).

In the Grancy case, the court held (at para 27) that when determining what constitutes unfair or prejudicial conduct, one must look not at the motive of the conduct, but rather look objectively at the act itself and the effect of such conduct on members of the company.

In De Sousa and Another v Technology Corporate Management (Pty) Ltd and Others 2017 (5) SA 577 (GJ) the court held (at paras 44–45) that the applicant had been excluded from the activities and management of the company, by the majority who refused to engage in any good faith negotiation to buy him out at a fair value. The court further held the test used for unfair prejudice is an objective one (at para 35), and the so-called ‘reasonable bystander’ test is used. In other words, would a reasonable and external bystander looking in, see the alleged conduct as unfair and prejudicial?

Available relief under s 163

Section 163 of the 2008 Act gives a court vast remedied powers, such as –

  • restraining the conduct complained of;
  • placing the company under supervision and commencing business rescue proceedings;
  • directing the company to amend its Memorandum of Incorporation or to create or to amend its shareholders’ agreement;
  • directing an issue or exchange of shares;
  • appointing directors in addition to existing directors;
  • directing the company or any person to pay a shareholder any part of the consideration paid for shares or the equivalent value thereof;
  • setting aside a transaction to which the company is a party and payment of appropriate compensation; or
  • for the trial of an issue as determined by the court.

South African courts have determined that one possible remedy under s 163 is to force the company to buy out a shareholder at a fair value, as confirmed in the case of Bayly and Others v Knowles 2010 (4) SA 548 (SCA).  In the Grancy case, the court held (at para 27) that when determining what constitutes unfair or prejudicial conduct, one must look not at the motive of the conduct but rather look objectively at the act itself and the effect of such conduct on members of the company. If the two requirements are satisfied, it is clear that the court has a wide discretion to grant any relief, which it deems just and equitable under the circumstances (at para 25).

In the Bayly case, a director, K, faced prejudicial circumstances as a director and was offered a buyout by the company, albeit at an unreasonable value. K proposed a counter-offer and instead offered to buy out the majority shareholder by way of s 252. The High Court granted the application stating that there was no other way for K to protect his investment, as the company had not responded to his counter-offer. The SCA, however, rejected this relief sought by K, and held that the interest of the non-warring shareholders must also be considered. The court held in this case (at para 24) that a minority’s refusal to accept a fair value buyout offer constitutes strong evidence of a willingness by the minority to endure oppressive treatment.

Conclusion

In conclusion, s 163 of the 2008 Act offers substantial relief to a prejudiced minority shareholder. The test for proving such unfair or prejudicial conduct is an objective one, evidenced by factual circumstances, and not mere allegations. It should also be borne in mind that fairness is a flexible concept and the court may have wide discretion in the relief granted which must be just and equitable in the circumstances.

Max Rainer BA (International Studies) LLB (Stell) is a candidate legal practitioner at SchoemanLaw Inc in Cape Town.

This article was first published in De Rebus in 2019 (Aug) DR 14.