PROTECTION OF MINORITY SHAREHOLDERS: UNFAIR AND PREJUDICIAL CONDUCT

Introduction

Whilst it is widely accepted that companies operate under the “majority rule”, there are many instances where minority shareholders are placed in a position of vulnerability to oppression by majority shareholders as a result of the imbalance in voting rights. This would occur where shareholders holding the majority of the voting rights make a decision about the company without taking the concerns of the minority shareholders into consideration.

Fortunately for minority shareholders, section 163 of the Companies Act No.71 of 2008 (the “Act”), provides a mechanism for redress where the boundaries of fair play are overstepped.

The position under the Companies Act

Section 163 (1) of the Act provides that a shareholder or 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; or (b) the business of the company, or 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.

There are two main elements that an applicant must satisfy to obtain relief under section 163, namely:

1. There must be relevant conduct: This includes an act or omission, conduct of business, or exercise of powers by a director or prescribed officer of the company or related person; and
2. Such conduct must be oppressive or unfairly prejudicial to the applicant or unfairly disregard the interest of the applicant.

What constitutes unfair or prejudicial conduct?

In the case of Aspek Pipe Co Pty Ltd v Mauerberger, the court held that in order for the conduct to be oppressive, there must be a visible departure from fair standards of dealing and fair play to which a shareholder is entitled to. The court will therefore consider whether a director or a shareholder had acted contrary to the fiduciary duty and standard of care owed to the company.

In the matter of Grancy Property Ltd v Manala 2015 (3) SA 313 (SCA), the court commented on the wide ambit of section 163 of the Act. It held that the conduct complained of must not merely be prejudicial or disregardful of the minority shareholders interest but must do so unfairly. In this case the court had to ascertain whether the appellant (a minority shareholder), had made out a case for relief under section 163. The court held that in ascertaining whether the conduct complained of was oppressive, unfairly prejudicial or unfairly disregarded the interests of the applicant, it is not the motive of the conduct complained of that the court must look at but the conduct itself and the effect which it has on other shareholders of the company.

In the more recent case of Geoffen and Others v Martin and Others [2018] 1 All SA 21 (WCC), the court held 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.

Who may apply for relief under the Act?

The Act states that either a shareholder or a director may apply for relief under section 163. Unlike the 1973 Act (which only provided locus standi to shareholders of a company), the Act also gives directors locus standi to enforce the remedy on behalf of minority shareholders. This is specifically relevant in practice as some directors are appointed to the board of directors to protect the interest of certain specific shareholders.

Remedies that may be claimed

Section 163 (2) (a) – (l) of the Act provides that a court may make several interim or final orders, including (but not limited to) an order:

• restraining the conduct complained of;
• appointing a liquidator if the company appears to be insolvent;
• placing the company under supervision and commencing business rescue proceedings;
• to regulate the company’s affairs by directing the company to amend its Memorandum of Incorporation or to create or amend its Shareholders Agreement;
• appointing directors in place of or in addition to all or any of the directors; or
• declaring any person delinquent or under probation.

Conclusion

Section 163 of the Act offers considerable relief to minority shareholders who are prejudiced by the decisions of majority shareholders. The test for proving unfair or prejudicial conduct is an objective one evidenced by factual circumstances. It is important to keep in mind that the principle of fairness is a flexible concept thus a court may have a wide discretion on the just and equitable relief under the specific circumstances.