The rights of minority shareholders in South Africa often come under strain when majority shareholders or directors wield their powers in ways that disregard the interests of those with less control. For many minority shareholders, decisions taken without their consent or against their interests can create a sense of exclusion and powerlessness. This reality shows the importance of having solid legal protections and remedies to ensure fair treatment and maintain the integrity of corporate governance.
The Companies Act 71 of 2008 (the “Act”) is a key safeguard for shareholders who feel oppressed or unfairly prejudiced by the actions of a company, its directors, or majority shareholders. Section 163 of the Act, also called the “oppression remedy,” is central to protecting the interests of minority shareholders. It allows a shareholder to apply to the court for relief when their interests have been unfairly disregarded or prejudiced.
Corporate governance in South Africa often gives significant decision-making power to majority shareholders, leaving minority shareholders with little influence over major decisions. Most Memoranda of Incorporation ("MOIs") require a 75% majority vote to pass special resolutions. This means minority shareholders can be outvoted even when they have strong objections. Common situations include the approval of major corporate transactions, changes to MOI provisions, or decisions that affect shareholding rights.
In these cases, minority shareholders often feel their rights and interests are being overshadowed. This has led to claims of oppression or unfair prejudice. Courts have recognised these challenges for a long time. For example, in Scottish Co-operative Wholesale Society Ltd v Meyer [1958] 3 All ER 66 (HL), the court described oppressive conduct as “burdensome, harsh, and wrongful.” South African courts have drawn from this reasoning to deal with shareholder disputes.
A recent example is the case of Technology Corporate Management (Pty) Ltd v De Sousa and Others [2024] 2 All SA 684 (SCA), where the court addressed how powers exercised in a way that oppresses or prejudices minority shareholders are unlawful. The court ruled that such conduct violates principles of fairness and transparency in company law. The case reinforced that directors and majority shareholders cannot misuse their positions to marginalise minority shareholders.
Section 163 of the Companies Act provides a legal remedy for minority shareholders. It allows any shareholder or director to seek relief when they have experienced oppressive or prejudicial conduct. Section 163(1) outlines the following scenarios where relief may be sought:
Oppressive or Prejudicial Acts or Omissions: Relief can be sought if any act or omission by the company, or a related person, results in oppression, unfair prejudice, or a disregard of the shareholder’s interests.
Business Conduct: Relief is available when the business is being run in a way that is oppressive or prejudicial to the minority shareholder.
Misuse of Powers: Directors or prescribed officers exercising their powers oppressively, prejudicially, or disregarding shareholder interests can be challenged.
When considering applications under Section 163, courts look for two key elements:
Conduct: There must be an act or omission by the company or a related person.
Effect: The conduct must be oppressive, unfairly prejudicial, or disregard the shareholder’s interests.
The remedies under Section 163(2) are broad, allowing courts to tailor solutions to each case. Remedies include:
Stopping the oppressive conduct.
Amending the company’s Memorandum of Incorporation.
Appointing new directors or replacing existing ones.
Ordering the buyout of the aggrieved shareholder’s shares at fair value.
Starting business rescue proceedings.
Directing the company to fix records or provide financial information.
Cancelling unfair transactions and awarding compensation.
These remedies show that courts can provide fair outcomes for all parties involved. The Act gives judges the tools to balance the interests of both the company and minority shareholders.
Examples of Oppressive Conduct to minority shareholders
Courts have considered various actions oppressive or unfairly prejudicial, such as:
Diversion of Business Opportunities- When majority shareholders redirect profitable opportunities away from the company to personal ventures, it can harm the minority shareholders' interests.
Excessive Remuneration- Cases where directors award themselves excessive salaries or bonuses at the expense of the company and its shareholders.
Manipulating Share Valuations- Artificially deflating share values to force a buyout of minority shareholders at an unfair price.
Strengthening Shareholder Agreements
Minority shareholders can also protect themselves through strong shareholder agreements. These agreements can include specific provisions to limit the risks of oppression, such as requiring consent for major decisions or restricting the issuance of new shares. Agreements might also offer tag-along rights, ensuring minority shareholders can sell their shares on the same terms as majority shareholders, or pre-emptive rights to prevent dilution by offering current shareholders the first chance to buy new shares.
Clauses like "shotgun clauses," which allow buyouts under agreed-upon terms to resolve deadlocks, and veto rights for critical decisions, can significantly enhance minority protections. Including arbitration or mediation clauses also ensures disputes are resolved without lengthy litigation.
The courts have supported the use of shareholder agreements to protect minority shareholders, provided that they are not contrary to the unalterable provisions of the Companies Act and further are not contra boni mores.
Alternative Dispute Resolution (ADR) to support shareholder rights
Minority shareholders should consider mediation, conciliation, or arbitration as alternatives to litigation to enforce their shareholder rights. These methods are faster, less adversarial, and can provide tailored solutions that preserve business relationships.
The Companies Act aligns with South Africa’s Constitution, which guarantees equality and fair treatment. Section 163 reflects these values by providing a pathway for minority shareholders to assert their rights. This alignment also supports broader goals like economic growth and corporate transparency, making the legal protections for shareholders an integral part of South Africa’s economic framework.
If you are a minority shareholder facing oppressive conduct, here are practical steps to protect your rights:
Check Agreements and the MOI- These documents outline the company’s rules and your rights as a shareholder.
Keep Detailed Records- Record decisions and actions that you believe are unfair or oppressive. Having a minute of meetings is essential.
Attempt to Resolve Issues Amicably- Open discussions or mediation can often resolve disputes without the need for litigation.
Consult an attorney- Seeking legal advice ensures you take the right steps and strengthens your position if legal action becomes necessary.
Pursue Legal Action if Needed- If other approaches fail, Section 163 provides a clear legal pathway to challenge oppressive behaviour.
Spence Attorneys offers expert legal advice for minority shareholders and corporate governance matters. We provide personalised strategies to help you protect your interests and achieve fair outcomes. Contact us today for a consultation at info@spencelaw.co.za
We offer specialised corporate and commercial law services in Cape Town and across South Africa.
This article is for informational purposes only and does not constitute legal advice. For specific advice, speak to a qualified attorney specialising in corporate and commercial law.
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