MINORITY PROTECTION UNDER THE COMPANIES ACT 71 OF 2008

Introduction

A minority shareholder often has no voice in the management of the company, and can be outvoted at shareholders’ meetings. Majority shareholders owe no fiduciary duty to the minority and are entitled to act in a way that advances their own interests, even if this may be detrimental to a minority. The directors of the company are subject to fiduciary duties, but under the Common Law these duties are generally owed to the company itself and not to the shareholders.  Protection under the Companies Act, 61 of 1973 ("the Old Companies Act") was limited but under the Companies Act, 71 of 2008 ("the Companies Act") there are a number of statutory measures which provide shareholders with protection in certain circumstances.

Section 163: Relief from Oppressive or Prejudicial Conduct

Section 163 of the Companies Act enables a shareholder or a director to apply to the 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 that unfairly disregards the interests of, the applicant;

the business of the company, or a related person, is being or has been carried on in a manner that is oppressive or unfairly prejudicial to, or that unfairly disregards the interests of, the applicant; or

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.

It is clear that the relief is open to a shareholder or a director (which is wider than a similar provision in section 252 of the Old Companies Act).  Importantly this remedy is not only enforceable against the company, but is also enforceable against a related person thereby including the company's holding company, any subsidiary and any of its controlling shareholders.  The use of the words "interests", instead of "rights", also widens the application of this section because "interests" has a far wider meaning than "rights".  In terms of section 163, the court has a wide discretion to make an interim or final order which it deems fit, including restraining the conduct complained of (section 163(2)(a)), directing an amendment of a company's memorandum of incorporation ("MOI") (section 163(2)(d)), directing an issue or exchange of shares (section 163(2)(e)) or varying or setting aside the transaction complained of and awarding compensation to the company and/or the other party (section 163(2)(h)). 

Section 163 of the Companies Act now specifically enables a shareholder to claim personal relief for the wrongful exercise by directors of their power as well as extraordinary relief for the company such as the setting aside of the terms of a transaction.  Importantly though, to invoke the provisions of section 163, a court application must be launched which can be an expensive and lengthy process.

Section 165: the Derivative Action

The derivative action empowers various categories of persons to demand that a company commence or continue legal proceedings, or take related steps to protect the interests of the company.  The derivative action is generally utilised where the person who acts prejudicially in respect of a company also controls decision making within that company and that person uses that control to prevent the company from instituting or continuing legal proceedings, or taking related steps, against himself/herself or a third person to protect the company's interests.

In order to invoke the provisions of section 165, a person must serve a demand on the company demanding that the company commences or continues legal proceedings, or takes related steps to protect the interests of the company (section 165(2)).  Once a company has received such a demand, it has 2 options.  It can, within 15 business days of receiving the demand, apply to court to set aside the demand only if the demand is frivolous, vexatious or without merit (section 163(3)) or it must proceed in terms of section 163(4).

Section 163(4) sets out a procedure which the company must follow.  In essence, the company must appoint an independent and impartial person or committee to investigate the demand and report to the board on whether or not it is in the best interest of the company to comply with the demand.

If the company is non-compliant with the demand, then the person who made the demand may apply to court for leave to bring or continue proceedings on behalf of the company.  The court will only grant the leave if it is satisfied that the applicant is acting in good faith, there is serious question of material consequence to the company and it is in the best interests of the company. 

The following points are important in respect of the derivative action under the Companies Act:

the derivative action is available to various categories of persons, including even trade unions (thereby widening the accountability of directors);

the derivative action can be used to compel the company to take action against any person (including third parties and directors);

the derivative action refers to the "legal interests of the company" which significantly broadens the scope for support of such an action because the word "interests" is much wider than the word "rights";

the person wishing to invoke section 165 need only serve a notice of demand – the remedy is easily accessible to the average businessman because the preliminary steps do not involve a court application ; and

the appointment of an independent and impartial person to investigate and report is at the company's cost.

Section 164: The Appraisal Remedy

The Appraisal Remedy is new to South Africa although similar remedies have been operation in other jurisdictions such as the United Sates and New Zealand.  It is essentially a put option against the company by dissenting shareholders of their shares in the event of certain triggers.  In other words, a shareholder can compel a company to buy back his shares for fair value in certain circumstances.  “Fair value” is not defined and will most likely provide ample ground for dispute between unwilling companies and their dissenting shareholders.

The Appraisal Remedy will be triggered when:

a company amends its Memorandum of Incorporation by altering the preferences, rights, limitations or other terms of any class of its shares in any manner materially adverse to the rights or interests of holders of that class of shares, as contemplated in section 37 (8); or

a company enters into any of the following transactions:

the disposal of all or the greater part of the assets or the undertaking of a company  (section 112);

the conclusion by a company of a transaction of amalgamation or merger (section 113); and

a scheme of arrangement (section 114).

In the event that a Company wishes to implement a transaction which triggers section 164, the dissenting shareholder can avail himself of this benefit provided that shareholder carefully follows the procedure laid out in the section.  The procedure is somewhat convoluted and if it is not strictly complied with the dissenting shareholder will lose his rights.

Whilst section 164 is certainly beneficial for a minority shareholder who is unhappy with what the company is proposing, it will be difficult to comply with the section and it is advisable to secure legal advice before attempting to do so.

Section 20(9) – Piercing the Corporate Veil

Section 20(9) of the Companies Act provides that if a court finds that there has been "an unconscionable abuse" of the company's juristic personality a court may "declare that the company is to be deemed not to be a juristic person in respect of any right, obligation, or liability of the company or of a shareholder of the company...".  Essentially, this is referred to as "piercing the corporate veil" where the court can hold shareholders or other responsible persons personally liable, and possibly criminally liable, for any unlawful or illegal act or omission of the company.  This remedy is open, by way of court application, to any "interested person".  The determining factor to invoke this provision is that there must be "an unconscionable abuse".  There are no reported judgments of our courts on the meaning of this expression and so it remains to be seen exactly what conduct will (or will not) constitute "unconscionable abuse" and how far the courts will go in attributing liability.

Conclusion

In our view, the Companies Act has certainly improved the ability of a minority shareholder to obtain relief against unacceptable behaviour by other shareholders and directors.  However the relief will, in most cases, require an application to court and/or strict compliance with the applicable section.