It is a common international corporate principle that directors run the day to day affairs of a company whilst the shareholders, although they do have decision making power based on democratic principle, are investors.

Moreover, section 66 of the Companies Act 68 of 2008 as amended (the “Act”), gives formal recognition of the board of directors and places a statutory obligation on the board to manage the affairs of the company. This has, therefore, codified the position that a shareholder does not participate in the management of the day-to-day business affairs of the company. According to Mbuli, the shareholder does not have an entitlement to the assets of the company but merely acquires a proprietary interest in the company by virtue of his or her shareholding in the company.

Accordingly, the protection of minority shareholder’s rights must be understood within this context in addition, the context of the Act, the common law, the Company’s Memorandum of Incorporation (MOI) of the company and the Shareholders Agreement (in the event that the shareholders have entered into a shareholder’s agreement).

Generally speaking, minority shareholders are afforded two types of remedies, one – to address any unfairly prejudicial conduct (ie where they mostly elect to stay) and two – to exit the company against a reasonable payment for their shares. These options will be briefly investigated hereunder.

Minority shareholder rights

Under the old Act, the position was as set out below:

“Any member of a company who complains that any particular act or omission of a company is 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.”

Shareholders holding minority rights often would have little or no recourse under Section 252 of the old Act because of the wording, which limited the protections to majority and was ‘unfairly prejudicial, unjust, or inequitable’ towards them as the minority.

The position under Section 163 of the 2008 Act:
“(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 disregards the interests of, the applicant;
(b) The business of the company, or a related person, is being 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.”

Accordingly, 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. Furthermore, even a director has locus standi to enforce the remedy on behalf of a minority shareholder, not just the shareholder itself.

As such, some of the remedies provided for in Section 163 (2)(a)(1) 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 amend its shareholder 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.”

The court has a wide discretion in determining whether the conduct complained of is oppressive or unfairly disregarded the interests of the applicant. In Gancy Property Ltd v Manala, the court held that a minority shareholder has to prove a lack of probity or fair dealing on the part of the company or the majority shareholder/s, 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 shareholder/s, in order to succeed with a claim in terms of Section 163.

Appraisal rights

According to Mashabane, the concept of appraisal rights originated in the United States of America (US) and the idea behind it was to enable shareholders, who disagree with a corporate decision of a company, to exit the company and have their shares purchased at a fair value.

Section 164 of the 2008 Act now also introduces such an appraisal right into our law. Section 164 provides as follows:

“164 (1)  ……..
(2)  If a company has given notice to shareholders of a meeting to consider    adopting a resolution to:
(a)  amend 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 the holders of that class of shares, as    contemplated in section 37(8); or
(b)  enter into a transaction contemplated in section 112, 113, or 114, that notice  must include a statement informing shareholders of their rights under this   section.
(3)  At any time before a resolution referred to in subsection (2) is to be voted on,   a dissenting shareholder may give the company a written notice objecting to   the resolution.
(4)  …..
(5)  A shareholder may demand that the company pay the shareholder the fair  value for all of the shares of the company held by that person if –
(a) The shareholder –
(i)  Sent the company a notice of objection, subject to subsection (6); and
(ii) In the case of an amendment to the company’s Memorandum of Incorporation , holds shares of a class that is materially and adversely  affected by the amendment;
(b) The company has adopted the resolution contemplated in subsection  (2); and
(c) The shareholder –
(i) Voted against that resolution; and
(ii) Has complied with all of the procedural requirements of this section.
(6) 
(9)    A shareholder who has sent a demand in terms of subsections (5) to (8) has no further rights in respect of those shares, other than to be paid their fair value, unless –
(a)   the shareholder withdraws that demand before the company makes an offer under subsection (11), or allows an offer made by the company to lapse, as contemplated under subsection (12)(b);
(b)   the company fails to make an offer in accordance with subsection (11) and the shareholder withdraws that demand; or
(c)   the company revokes the adopted resolution that gave rise to the shareholder’s rights under this section.
(10)   …..”

It is interesting to note however, that in the case of Justpoint Nominees (Pty) Ltd and Others v Sovereign Food Investments Limited and Others (BNS Nominees (Pty) Ltd and Others Intervening) (ECP)  one of the first cases heard on appraisal rights. Importantly, the court adopted an equity based approach in this case, which means that companies will not be able to rely on technical arguments to deny minority shareholders the rights to participate in the affairs of the company, including exercising or withdrawing their appraisal rights. As such, these matters are complex and require the assistance / guidance of a specialist legal practitioner.

Conclusion

Although company law is founded in democratic principle, it is important that shareholders consider the impact of decisions on all shareholders. It is therefore important to seek professional legal advice when considering any decision that could adversely affect any party.