Protection of ‘minority shareholders’ from oppressive or prejudicial conduct under s 163 of the Companies Act: Has anything really changed?

October 24th, 2016
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By Siphephelo Mbuli

The Companies Act 71 of 2008 (the Act) regulates the legal relationship between the company, as a separate legal entity with its own legal persona
(s 19(2)) on the one hand, and the company’s shareholders on the other hand. However, within the company’s structure itself internal politics and conflicts often occur – not only at a board level – but also within the different ranks of its shareholders.

Section 66 of the Act, for the first time, gives formal recognition of the board of directors and places a statutory obligation on the board to manage the affairs of the company. A shareholder, therefore, does not participate in the management of the day-to-day business affairs of the company. Nor does the shareholder have an entitlement to the assets of the company as the company is the owner of the assets. A shareholder merely acquires a proprietary interest in the company by virtue of his or her shareholding in the company (K van der Linde ‘The regulation of share capital and shareholder contributions in the Companies Bill 2008’ TSAR 2009 at 39).

In this article, I will examine the nature of minority shareholder’s rights in the case of oppression and what the courts consider as relevant in determining whether a shareholder has made out a case for relief under s 163 of the Act (the oppression remedy). I will also consider how the protection under the oppression remedy has been enhanced in contrast to the position that prevailed under s 252 of the Companies Act 61 of 1973 (the old Act).

Protection of minority shareholders’ rights

The protection of minority shareholder’s rights must be understood within the context of the rules set by the Act, the common law, the Memorandum of Incorporation (MOI) of the Company and the Shareholders Agreement, in the event that a company has a shareholders’ agreement. The MOI will set out the class of shares and preferences, rights and limitations and other terms associated with a class of shares.

  • The position under the old Act

Section 252(1) stated the following:

‘Any member of a company who complains that any particular act or omission of a company is unfairly prejudicial, unjust or inequitable, or that the affairs of the company are being conducted in a manner unfairly prejudicial, unjust or inequitable to him or to some part of the members of the company, may, … make an application to the Court for an order under this section.’

Under the old Act, the minority shareholder was often in a precarious position in instances where the majority of the company decided to follow a specific course. Often they would be discontent with a decision made by the board of directors or majority shareholders but have little or no recourse under s 252. The requirements of s 252 – because of the wording – limited the protection to minority shareholder as they had to prove that the conduct by the board or majority was ‘unfairly prejudicial, unjust or inequitable’ towards them as the minority.

In the event that a minority shareholder was to be successful in convincing the court that the conduct complained of in terms of s 252(1) was ‘unfairly prejudicial, unjust or inequitable’, the court could make an order that it deemed appropriate in the circumstances, which could include an order that the majority must buy the shares of the minority shareholder who were aggrieved, at a fair value (Bayly and Others v Knowles 2010 (4) SA 548 (SCA) at para 24).

  • The position under the Act

Section 163 provides that:

‘(1) A shareholder or a director of a company may apply to a court for relief if –

(a) any act or omission of the company, or a related person, has had a result that is oppressive or unfairly prejudicial to, or that unfairly disregards the interests of, the applicant;

(b) 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 unfairly disregards the interests of, the applicant; or

(c) 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.’

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.

A director has locus standi to enforce the remedy on behalf of a minority shareholder. This is particularly relevant in practice as some directors are appointed to the board of directors to safeguard the interest of certain specific shareholders.

Section 163(2) provides that the court could make various orders it deems fit to remedy the oppressive or unfairly prejudicial conduct on application by a shareholder or director. Section 163 has widened the scope of the relief in the event of oppressive or unfairly prejudicial conduct in two ways. It makes provision for not just shareholders but also directors to complain and access the remedy in respect of oppressive conduct. Section 163(2) also provides a far more extensive list of remedies than the remedies provided for in s 252(1).

Some of the remedies provided for in s 163(2)(a)-(l) include the following interim and final orders, an order –

  • restraining the conduct complained of;
  • placing the company under supervision and commencing business rescue proceedings;
  • directing the company to amend its MOI 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.

However, I submit 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.

In the matter of Garden Province Investment and Others v Aleph (Pty) Ltd and Others 1979 (2) SA 525 (D) the respondent company owned a building that was its only real asset. The shareholders of the company, by majority vote, resolved to sell the building and it was sold to a third party at a fair and reasonable price. The minority shareholders sought to retain their investment and, accordingly, sought relief in terms of s 252 of the old Act, claiming that the transaction was unfairly prejudicial, unjust and inequitable to them. The court dismissed the application, stating that when a person acquires shares in a property-holding company as a minority shareholder, he or she knows that he or she is a minority shareholder and it is not unfairly prejudicial, unjust or inequitable to him or her if his or her investment is sold against his or her wishes, provided that it is sold at a fair and reasonable price. Further, 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. Finally, it was stated that, 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.

This principle was further affirmed by the Supreme Court of Appeal (SCA) in the matter of Grancy Property Ltd v Manala 2015 (3) SA 313 (SCA) at para 27 when the court commented on the wide ambit of s 163 of the Act. The conduct complained of must not merely be prejudicial or disregardful of the minority shareholders interest but must do so unfairly. The court had to determine whether the appellant, a minority shareholder, had made out a case for relief under s 163. The court held that in determining whether the conduct complained of was oppressive, unfairly prejudicial or unfairly disregarded the interests of the applicant it is not the motive for the conduct complained of that the court must look at but the conduct itself and the effect which it has on the other members of the company. The court has a wide discretion in determining if the conduct complained of is oppressive, unfairly prejudicial or unfairly disregarded the interests of the applicant. On the particular facts of the case the court found that the directors and majority shareholders, had misappropriated large sums of money from the company in the form of directors’ remuneration and fees, and various unauthorised payments were made to the majority shareholders, to the exclusion of the appellant who was the minority shareholder. The court took into consideration the fact that the company’s internal auditors had reported certain irregularities and the directors could not provide a cogent explanation as to why such payments were made in the first place. The lack of openness justified the appointment of independent directors to investigate and report thereon. According to the court the report may even be relevant to make a final determination on such issues at a trial court. I submit that the court’s finding and reasoning in the Gardens Province and Grancy matter is correct. Therefore, a minority 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 s 163.

How has s 163 enhanced minority protection?

Section 163 makes provision for a director of the company to apply to court for relief. This is particularly relevant where the director has been appointed by the minority shareholders. This was not the case under s  252, which only permitted a member, being a shareholder, of a company to approach the court for relief. The director in this situation is placed in a unique position as they are privy to information and discussions that the shareholder(s) are not necessarily aware of that affects their interest in the company. They can bring an application in terms of s 163 to protect the interest of the minority shareholder in the case of oppressive or unfairly prejudicial conduct, or conduct that unfairly disregards the interest of a minority shareholder by the company, majority shareholder or any other director.

The court in the Grancy judgment cited with approval the views expressed by FHI Cassim (managing ed) in Contemporary Company Law 2ed (Cape Town: Juta 2012), wherein he states that the provisions of s 163 are of a wide import and constitute a flexible mechanism for the protection of a minority shareholder from oppressive or prejudicial conduct. The list of orders under s 163(2) is non-exhaustive and open ended. The court may in terms of s 163(2) make any interim or final order it considers fit including a variety of orders listed in s 163(2)(a)-(l), as the circumstances and facts of the case dictate.  This flexibility was lacking under s 252.

Siphephelo Mbuli LLB (UP) is a trainee underwriter at Salker Hutchinson Admiral in Johannesburg. Mr Mbuli wrote this article in his personal capacity.

This article was first published in De Rebus in 2016 (Nov) DR 30.

 

 

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