THE RIGHTS OF MINORITY SHAREHOLDERS

Article by listed attorney: NICOLENE SCHOEMAN

Introduction

The broad concept of a company and business law by its nature is that its affairs are managed by a board of directors and that shareholders are bound by resolutions approved by the majority of them. The problem however arises when minority shareholders disagree or are prejudiced by the majority rule. Even where they wish to exit, they often find that their shareholding is unmarketable. The Companies Act[1] has introduced a number of remedies that may alleviate this.

The provisions contained in the Companies Act

Section 161 allows a holder of issued securities (loosely, “the shareholder”) to apply to court for an order determining any of his or her rights in terms of the Act (declaratory order), the Memorandum of Incorporation (“MOI”) any rules of the company or any applicable debt instrument. The Shareholder may also apply to court in order to protect any of his or her other rights, which presumably may include an interdict. In that application the Shareholder may also seek an  order to remedy any harm done to him or her on the basis of the breach of any provision or violation of any right as enshrined in the MOI or rules or applicable debt instrument. Alternatively, the Shareholder may bring such an application to rectify any harm done to him or her by any of the company’s directors, to the extent that they may have breached any of their fiduciary duties.  [2]

The problem with this newly introduced remedy is that “rights” are not very clearly defined – not clear whether they are to be  narrowly interpreted or widely interpreted.[3] Thus, the basic problem with this remedy is that rights (to determine or protect or the basis for claiming for harm suffered) may be restricted to that as contained in the MOI or rules only, or the definition may also include personal rights.[4]

Section 163 of the Act provides for a court action remedy against oppressive or prejudicial conduct. This is a new addition to our corporate law regime.

Section 163 determines that a Shareholder or director 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.[5]

From the above it is clear that this section requires that the conduct need not necessarily be unlawful (rights were deprived or compromised as enshrined in the MOI for example), instead it enables the court to take account of the applicant’s interests together with wide equitable considerations. Moreover, since the broad concept of a company by its nature is that its affairs are managed by a board of directors and that Shareholders are bound by resolutions approved by the majority of them, this is therefore a valuable remedy for minority shareholders specifically.

Some writers, as well as the court in the case of inter alia Re Baltic real estate No2 1993 BCLC 503 among others, hold the view that this remedy is one exclusive to minority Shareholders due to the fact that majority Shareholders have the ability to remedy any oppressive measure by way of exercising their majority vote or voting power.[6] It must be made clear that this is not a consideration of lack of locus standi (right to appear) but the absence of unfairly prejudicial conduct.[7]

So, this remedy is available to minority Shareholders (according to the views above) and may be invoked where conduct or omissions unfairly prejudice the interests of these shareholders. This is in my view may thus be a far wider approach to the enforcement of rights or protecting interests than the remedy contained in section 161. Furthermore (and in confirmation of my view), according to other writers, the test of the remedy is on fairness as opposed to unlawfulness. It should be noted however that the precise meaning of interests has not been defined in the Act, but can be assumed to include a wider definition than simply legal rights as enshrined in the Act or an MOI (for example). Accordingly, legitimate expectations created by preceding agreements may also be included (thus this may include the enforcement of negotiations or agreements preceding the shareholders agreement and MOI). It further relates to any claims arising from past, present of future conduct. [8]

In terms of section 165 court action termed the derivative action may also be applicable.

Simply put, this action is one taken by an aggrieved Shareholder against the managers of the company, a.k.a. the directors. Some writers described this action as follows:

“The statutory derivative action is an important minority shareholder protection measure. It shields the minority shareholders from the effects of corporate personality and majority rule. It enables a minority shareholder who knows of a wrong that is done to the company that has remained un-remedied by management to institute proceedings on behalf of the company.” [9]

The remedy is available to both Shareholders (including minority Shareholders but not limited to them) and directors which is vastly different from its predecessor.

The appraisal remedy, provided for in section 164 of the Companies Act, allows a Shareholder to opt out of the company for a fair cash consideration 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:[10]

-          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:[11]

·         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.

It should be noted however that the provisions of directors’ liability as well as piercing the veil may also be considered as tools to remedy any harm done.

Conclusion

The reality is, all the remedies involve approaching court which may be out of reach of many minority Shareholders financially. It is therefore of the utmost importance that Shareholders consult with their attorneys before investing.

Nicolene Schoeman, Schoeman Attorneys (Cape Town)

Tel: 0214255604

 

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