Background:

The Companies Act No. 71 of 2008 (“Companies Act”), provides certain mechanisms to aggrieved minority shareholders of a company which can be utilised when such shareholders wish to seek relief.

It is not rare for minority shareholders to find themselves in an undesirable position – fortunately, they are not left without recourse. This article will briefly examine the statutory remedies available to minority aggrieved shareholders and the mechanisms to be applied to seek relief.

Relief available to minority shareholders:

Section 163 of the Companies Act allows minority shareholders to apply to a court for relief if:

• any act or omission by the company or a related person has had a result that is oppressive or unfairly prejudicial to the shareholder, or unfairly disregards the interests of the shareholder;
• the business of the company or a related person is being, or has been, carried on or conducted in a manner which is oppressive or unfairly prejudicial towards the minority shareholder or unfairly disregards the interests of the minority shareholder; or
• the powers of a director or prescribed officer of the company, or a related person to the company, has been exercised in a manner which is oppressive or unfairly prejudicial towards the minority shareholder, or unfairly disregards the interest of the minority shareholder.

A minority shareholder of a company may apply to a court for relief from oppressive or prejudicial conduct or abuse which unfairly disregards the interests of such aggrieved minority shareholders.

Unfair or prejudicial conduct can be in a form of an act or an omission, which is not necessarily unlawful. Should the action be unlawful, the mere fact that it is unlawful does not on its own make it prejudicial or unfair. The prejudicial conduct can be in a form of an act or omission on behalf of the company or a related person who acted in a manner that is oppressive or unfairly prejudicial to the interests of the minority shareholder.

The onus is on the minority shareholder to prove that the conduct of the company or related person is oppressive or unfairly prejudicial to the minority shareholder or has led to the minority shareholder being unfairly prejudiced or oppressed.

Case law regarding minority shareholders:

In De Sousa and Another v Technology Corporate Management (Pty) Ltd and Others 2017 (5) SA 577 (GJ) the court had to decide whether the minority shareholders suffered as a result of oppressive or prejudicial conduct of the company and to make a determination on whether the company should repurchase the minority shareholders shares.

The court held that the company continuously conducted its affairs in a manner that was unfairly prejudicial, unequal and discriminatory to the minority shareholders. The minority shareholders were disregarded from participating in the management of the company and were not given the opportunity to dispose of their shares at a fair value. In addition to this, the majority shareholders did not engage in good faith negotiations to allow the minority shareholders to appropriately dispose of their shares.

The court further held that the minority shareholders were unfairly prejudiced, as they had been forced to remain passive shareholders which emerged to be mismanaged by the majority shareholders, and the company was required to buy back the shares from the prejudiced minority shareholders with the shares being valued at the date of the court order as determined by an independent referee.

The court noted even though shareholders do not owe a fiduciary duty to the company or the other shareholders, the majority shareholders are not beyond a challenge. If the decisions of majority shareholders are oppressive or unfairly prejudicial, the court has wide powers to give recourse to minority shareholders, which recourse may include ordering the company to buy back its shares.

The Companies Act offers substantial relief to a prejudiced minority shareholder. The test applicable for proving such unfair or prejudicial conduct is an objective one, which is based on factual considerations. It should also be taken into account that fairness is a flexible model, and the court has a wide discretion in relief granted which must be just and equitable in all considerations.

Concluding remarks:

Even though section 163 of the Companies Act does not specifically mention minority shareholders who find themselves being prejudiced, section 163 makes provision for the protection of shareholder’s rights, be they majority or minority shareholders.

It is important to note that the onus is on the shareholder to prove lack of probity or fair dealing by the company, or that there is a discernible change in the standards of fair dealings, unfair discrimination, or a violation of fair play in order to succeed in terms of section 163 of the Companies Act.

Section 163 of the Companies Act is therefore a power mechanism which can be invoked by minority shareholders who feel that they have been aggrieved by the actions of the directors of a company or even by the action, or inaction, of the majority shareholders of a company.

VDMA’s team of experts are available to assist you and your business with any company law matters.

Published 09 June 2022