Protecting minority shareholders

People who hold minority shares in a company often express concern about their rights being bulldozed by majority shareholders. But being the minority doesn’t necessarily mean you’re left without recourse where you find that you’re being unfairly treated. The rights of minority shareholders came under the spotlight in a recent court case.

In 1987 two enterprising individuals decided to start a business together and registered a company in which they were both named as the shareholders and directors. In due course new shareholders bought into the company, bringing the total number of shareholders to five. Over a period of time, three of the shareholders, who collectively held the majority shares in the company, started operating the business in a manner that undermined and prejudiced the two minority shareholders. Amongst other things, the majority shareholders:

• increased the remuneration paid to the majority shareholders (in their capacity as directors in the company);
• decreased the remuneration paid to the minority shareholders;
• permitted the company to give financial assistance to one of the three majority shareholders so that he could pay for his acquisition of shares in the company;
• excluded the minority shareholders from the management and operational affairs of the business;
• voted against the payment of dividend payments, which detrimentally impacted the minority shareholders;
• misappropriated funds from the company’s account; and
• deliberately hampered the minority shareholders’ efforts to sell their shares.

At their wits end, the minority shareholders became determined to both extricate themselves from the company and protect the value that they had invested in the company. Thus it was that they approached the court in terms of section 252 of the old Companies Act. This section granted minority shareholders protection and recourse against their fellow shareholders abusing their majority shareholding.

In considering the minority shareholders’ claim, the court considered whether:

• there was unfair business dealing in the affairs of the company;
• whether the majority shareholding had been abused;
• whether the minority shareholders had been treated unfairly, or in a prejudicial, unjust or inequitable manner.

The court agreed that the minority shareholders were indeed being unfairly prejudiced. In compensation, the company was ordered to buy the minority shareholders’ shares at a fair market value to be determined by an independent referee. In addition, the majority shareholders found themselves having to foot the minority shareholders’ legal bill.

Section 252 of the old Companies Act has been superseded by section 163 of the new Companies Act, which provides relief to minority shareholders against conduct that is unfairly prejudicial. The section states that “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 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.”

While the law may give minority shareholders some degree of protection, this is lengthy, costly and stressful. An alternative approach is for the shareholders to enter into a Shareholders Agreement. A written agreement between the shareholders can reduce the risk of unresolvable conflict, protect against abuse by majority shareholders, and even help to avoid litigation altogether.

Please note that this information is supplied for general information and does not constitute legal advice. It is advisable for you to contact a legal practitioner for guidance in respect of your unique requirements.