Bezuidenhout Lak Attorneys

Minority Shareholder Protection

DESCRIPTION OF A MINORITY SHAREHOLDER.

A majority shareholder is a shareholder who owns 75% (Seventy Five Percent) or more of the shares in a company, whereas a minority shareholder is the opposite – anyone owning less than 75% of shares. The majority is Goliath to the minority’s David[1], and it is because of this disparity that shareholders owning less than 25% of shares are sometimes “bullied” by special resolutions of the majority.

THE RIGHT TO VOTE.

When purchasing shares in a company, shareholders acquire the right to vote, which is exercised at the annual general meeting of the company.[2] The voting rights encapsulate your power as shareholder, and the number of shares you have in a company will directly affect the impact of your vote i.e. during the formulation of special resolutions.

SUBJECT TO THE RULE OF THE MAJORITY.

Decision making in a company is subject to majority rule, which has the inherent consequence of the majority shareholder holding the lion’s share of the power when there is a disagreement, with regard to a particular decision once voted upon, as they can in effect, decide, or force a particular outcome[3].

This seems to leave minority shareholders unprotected, without a voice, and feeling as if their vote is without impact or purpose.

Furthermore, courts are reluctant to interfere with the internal affairs of a company, save for exceptional circumstances[4], as the freedom of contract principle allows persons with contractual capacity, the freedom to contract with whomever they choose, and on whichever terms they so choose (to a reasonable extent).

When a shareholder purchases shares, in effect, they undertake by way of a Shareholders Agreement to be bound by the decisions of the majority, even when those decisions adversely affect their interests in the company.[5]

THE FIRST STEP IN PROTECTING MINORITY SHAREHOLDER RIGHTS.

A Shareholders Agreement is the first place a shareholder should seek relief from. It is prudent, when provided with a Shareholder’s Agreement, to determine whether provision is made for the contractual protection of a minority shareholder, and to review, or revisit the Agreement should you, as minority shareholder, feel that a decision was made incorrectly. Whilst you may have read the Agreement when you first purchased the shares, it is always best to refresh your memory and check if the terms contained in the Agreement offers any protection.

Notwithstanding the above, an aggrieved shareholder does have recourse in law. The Companies Act 71 of 2008 (hereinafter “the Act”) provides for the protection of the rights of shareholders, as well as other parties such as directors.

UPPING THE ANTE THROUGH THE COMPANIES ACT 71 OF 2008.

While the Act has many protective measures in place, Section 161 and 163 makes specific provision for the protection of the rights of shareholders and directors in instances where there are acts, or decisions made which can be regarded as oppressive or unfairly prejudicial to them, or that unfairly disregards their interests.

In the case of Aspek Pipe Co (Pty) v Mauerberger 1968 (1) SA 517 oppressive conduct is defined as: “unjust or harsh or tyrannical, or burdensome harsh and wrongful, or which involves at least an element of lack of probity or fair dealing, or a visible departure from the standards of fair dealing and a violation of the conditions of fair play on which every shareholder who entrusts his money to a company is entitled to rely.”[6]

The test used to determine whether such acts or decisions made were oppressive of unfairly prejudicial is an objective test, which meets the requirement of the reasonable bystander. Simply put, the question will not be that of motive, but rather whether a reasonable bystander would objectively regard the act or decisions made, as oppressive or unfair towards the minority shareholder in the given circumstances[7], in which instance Section 163 of the Act provides for certain interim and final orders to be made, which may include restraining the act that the complaint concerns or ordering that the company amend its Memorandum of Incorporation or unanimous shareholder agreement.[8]

SPECIFIC PROTECTION FOR MINORITY SHAREHOLDERS.

High Court Application to restrain the company or its directors.

Section 20(4) and 20(5) of the Act allows one or more of the shareholders of a company to apply to the High Court to restrain any conduct of a company or its directors, which is inconsistent with the Act or its Memorandum of Incorporation.

Shareholder’s claim for damages.

Section 20(6) of the Act entitles minority shareholders to a claim for damages against any person who intentionally, fraudulently, or due to gross negligence causes the company to do anything inconsistent with the Act or its Memorandum of Incorporation.

Shareholder’s derivative action.

Section 165 affords the minority shareholder (amongst others), the right to bring a derivative action in terms of which legal proceedings can be instituted against the company or its directors to ensure the legal interests of said company are protected.

Shareholder’s Appraisal rights.

Section 115 of the Act makes provision for a new type of protection for the rights of a minority shareholder affording the minority shareholder who has given written notice of objection to a resolution adopted by the company, the opportunity to request the company to pay the fair value of the shares, held by the minority shareholder in the company (the appraisal remedy), subject to the minority shareholder following the correct procedure to invoke his appraisal right as enshrined in Section 164 of the Act.

Civil Actions.

Lastly Section 218(2) and 218(3), contains a general right to civil actions, which entails that any party who contravenes any provision of the Act, is liable to any other person for any loss or damage which they have suffered as a cause of said contravention.

AN UMBRELLA OF PROTECTION

Based on the above, it is safe to state that minority shareholders have protection in law, and should they feel aggrieved by certain acts and/or decisions made by majority shareholders and/or directors, by means of resolutions passed, or at general meetings, they should seek legal advice from their trusted attorney in order to ensure the protection of their interests at all times.

 

BEZUIDENHOUT LAK ATTORNEYS

 

WE LOOK AFTER YOUR BUSINESS

WHILE YOU LOOK AFTER BUSINESS!

 

[1] Minority Shareholders Rights. E. Meakin. Accessed 17/06/2021. Available: https://fleximize.com/articles/001356/minority-shareholder-rights

[2] Section 1, The Companies Act 71 of 2008.

[3] Minority Shareholders Rights. E. Meakin. Accessed 17/06/2021. Available: https://fleximize.com/articles/001356/minority-shareholder-rights

[4] Yende v Orlando Coal Distributors (Pty) Ltd 1961 (3) SA 314 (W) Par316 and Hahlo’s South

African Company Law Through the Cases 6e page381 par2 and page403 par2.

[5] Sammel v President Brand Gold Mining Co Ltd 1969 (3) SA 629 (A) par678.

[6] Max Rainer Companies Act provides relief for prejudiced minority shareholders, De Rebus in

2019 (Aug) DR 14.

[7] Grancy Property Ltd v Manala and Others 2015 (3) SA 313 (SCA) para27.

[8] Section163, The Companies Act 71 of 2008.

 

September 2, 2021 by Leandre 0

Tying The Knot And The Possible Effect On Business Men And Women

In South Africa, the law makes provision for three different types of marital regimes, and each of these have their own requirements and consequences. Business men and women can expose themselves, or worse their marriage partners, to potential business risks, depending on which marital regime they decide to enter into. It is therefore of paramount importance to make an informed decision regarding the marital regime one wishes to enter into, before “tying the knot” so to speak.

The Matrimonial Property Act 88 of 1984 (hereinafter “the Act”) makes provision for three types of marital regimes, namely a marriage which is concluded in community of property; a marriage which is concluded out of community of property with inclusion of the accrual system and a marriage which is concluded out of community of property which excludes the accrual system.[1]

Position #1:

Marriage in community of property

A marriage in community of property, is a marriage which is concluded in the absence of a duly executed Antenuptial contract. Such a marriage, which is deemed or alternatively intended to be concluded in community of property, has the following effects on any business individual.

Firstly, the Act provides that persons who conclude a marriage in community of property, will have both their respective estates joined into one joint estate. All assets acquired before and after entering into the marriage, by either of the spouses form part of the joint estate (unless specifically excluded by the Act. Each spouse is deemed entitled to a 50% (Fifty Percent) share of such an asset, together with any fruits that it may bear. Therefore, any business bought by one spouse, will form a part of the joint estate, and the other spouse will be entitled to a 50% (Fifty Percent) share thereof.

Secondly, any liability incurred by a spouse, becomes the liability of the other spouse as well. The spouses are said to be jointly and severally liable towards any of the debts incurred by the other spouse, or that of his or her business, in the event of a sole-proprietor or partnership setup. This means that such a creditor can claim the debt from either of the spouses. It should be borne in mind that registered companies comprise of their own separate legal entities and does not fall within the ambit of exposure contained in a marriage which is concluded in community of property. However, should your business be run a sole proprietorship or partnership, the risk is imminent.

Thirdly, the Act sometimes requires a spouse who is married in community of property, to obtain the consent, or in some cases, the written consent of the other spouse, before entering into certain types of agreements. This requirement can for obvious reasons complicate the business atmosphere and delay decision making, which delays may be unwanted in the modern era.

Fourthly, for obvious reasons, a person who owns a business runs the risk of the business failing, which may affect their personal financial position. In such an event, it could have a serious effect on the joint estate. Thus when one spouse is declared insolvent, the joint estate becomes insolvent, which subsequently renders the status of the other spouse insolvent as well.

Lastly, when a marriage in community of property dissolves by means of divorce or by death of a spouse, the entire joint estate winds-up, which could have the possible effect of serious cash-flow problems, should the joint estate contain a business which is being run in the name of an individual, or should a business be exposed in the form of loans and the like towards such joint estate.

Position #2:

Marriage out of community, with inclusion of the accrual system

When a marriage is concluded out of community with the inclusion of the accrual system, i.e. if an Antenuptial contract is duly executed and registered in the deeds office, which indicates that the accrual system is applicable, such a marriage will have the following effects on any business individual.

Firstly, each of the spouses has their own separate estate in lieu of a marriage which is concluded in community of property (the joint estate). All assets which either of the spouses respectively acquire, forms part of the estate of the spouse which acquired the said asset and does not form part of a joint estate.

Secondly, the same principle applies to all liabilities incurred by the respective spouses. In this marital regime the respective spouses are protected against the claims that creditors might have against the other spouse. In simple language, it means that you as a business-individual will only be liable towards the debts incurred by yourself and not that of your spouse, as opposed to a marriage which is concluded in community of property.

Lastly, when such a marriage is dissolved due to divorce or death, the accrual claim is calculated, and the estate of the spouse which after being calculated, accrued lesser between the spouses, becomes entitled to an accrual claim against the other spouses’ estate. In this instance there is little to no effect on the business operations of the business person/owner.

However risks towards creditors may still exist in other forms such as, sureties, long- and short-term agreements, pledges and other forms of security. One should still take care in managing one’s business affairs to protect the marital assets.

Position #3:

Out of community of property, without the accrual system

A marriage which is concluded out of community of property and which specifically excludes the accrual system has the effect of each spouse having their own separate estate, which acquires its own assets and liabilities, and which are independent from one another. When this type of marriage dissolves, no accrual is calculated (as in the case of a marriage concluded out of community of property with inclusion of the accrual system), and a clean separation is drawn between the two estates.

It is important to note that the latter two regimes pose less possible business risks, in not being jointly liable towards possible business related creditors; not having to obtain consent of the other spouse to enter into agreements; the solvency-status of one spouse not having an effect on the solvency-status of the other spouse, and avoiding the inevitable protraction of business cash-flow should the marriage dissolve. One must however still take care where other risk aggravating factors are produced that may expose the other spouse such as suretyships, long- and short-term agreements, pledges and other forms of securities.

Be sure to contact your trusted attorney to ensure your business interests are safeguarded at all times.

 

BEZUIDENHOUT LAK ATTORNEYS

 

WE LOOK AFTER YOUR BUSINESS

WHILE YOU LOOK AFTER BUSINESS!

 

[1] The Matrimonial Property Act 88 of 1984.

 

September 2, 2021 by Leandre 0

Guarantee and Surety – what’s the difference and why do you need to know

Many institutions and entities including small businesses providing credit, services or products, protect their financial exposure when entering into agreements with their clients, by implementing different forms of security, such as a guarantee or a suretyship agreement.

One should be quite clear regarding which form of security will be implemented, as they give rise to different forms of obligations. 

GUARANTEE:

Primary obligations, are created when entering into a guarantee, wherein one undertakes to pay or fulfil an obligation to the creditor of the transaction, upon the occurrence of a certain event[1]. The guarantee entails an irrevocable and unconditional guarantee by the guarantor, that the principal debtor will make due and punctual payment in terms of a debt owed to a creditor, failing which on demand the guarantor will settle the whole outstanding debt owed to the creditor as a primary obligation. 

The obligation is described as primary in nature, due to it not being dependant on the existence on any other agreement or obligation. A guarantee can objectively be seen as a stronger form of security, compared to a surety, as it establishes an independent liability for the principal obligation, and the guarantor cannot rely on the defence of excussion (to demand that the creditor seek payment from the principal debtor first) as a surety would be entitled to[2].

SURETY:

On the other hand, a surety gives rise to obligations which are accessory in nature, in that they are dependant on the existence (or the coming into existence) of a valid and effective principal obligation. A surety cannot exist where the underlying agreement to which it relates to is void or does not (and will never) exist[3]. Similarly, a surety will cease to exist where the principal debtor has fulfilled their obligations in terms of the principal agreement[4]. 

In lay man’s terms, a surety is a person or entity other than the principal debtor (a third party, as one cannot stand as surety for one’s own debt[5]), that binds themselves via written agreement, that if the principle debtor fails without lawful excuse to settle the outstanding debt owed to the creditor, they will be liable to settle the outstanding amount of debt owed to the creditor. A surety’s obligation is thus the same as the obligation of the principal debtor, and as such a surety cannot be liable for anything other than the principal debt[6]. 

LOOK OUT FOR:

The wording of the agreement  is paramount in determining whether such an agreement is one of guarantee or surety. Words such as ‘guarantee’ have been used in agreements which, in reality, constituted a suretyship. One needs to look at the obligation created by the agreement. If a guarantee is given conditional upon the breach of a separate contract or the default of a principal debtor, the obligations of such a guarantee would be accessory in nature, and thus such a guarantee would actually constitute a suretyship. However, if the guarantee is given as an absolute and unconditional promise, then the obligations arising from such a promise will be primary or principal in nature, and such a promise would constitute a true guarantee[7]. 

When entering into(or expecting debtors to enter into) a guarantee or a suretyship agreement, it is best to be certain of its provisions, and the intent behind the wording used. Look at the obligations it creates and be certain of one’s ability to comply with its’ provisions, as the obligations created by such an agreement are not easily evaded. It is the responsibility of the person signing such an agreement to ensure they know and understand what they are signing.  In the same token its your responsibility of you are the credit grantor, to ensure you protect your rights with the correct form of security.

Do not hesitate to contact our team to assist in drafting your suretyship agreements and guarantees in order to keep your business transactions safe and secured.

 

BEZUIDENHOUT LAK ATTORNEYS

 

WE LOOK AFTER YOUR BUSINESS

WHILE YOU LOOK AFTER BUSINESS!

 

[1] Drafting Suretyships – Important considerations: https://www.golegal.co.za/drafting-suretyship-creditors.

[2] THE CONTRACT OF “GUARANTEE” IN SOUTH AFRICAN LAW: https://www.bowmanslaw.com/insights/finance/the-contract-of-guarantee-in-south-african-law/

[3] Joubert The Law of South Africa 2nd Edition par 287 

[4] THE CONTRACT OF “GUARANTEE” IN SOUTH AFRICAN LAW: https://www.bowmanslaw.com/insights/finance/the-contract-of-guarantee-in-south-african-law/

[5] Joubert The Law of South Africa 2nd Edition par 284; Nedbank Ltd v Van Zyl [1990] 4 All SA 637 (A) 475 

 [6] Joubert The Law of South Africa 2nd Edition par 286

 [7] THE CONTRACT OF “GUARANTEE” IN SOUTH AFRICAN LAW https://www.bowmanslaw.com/insights/finance/the-contract-of-guarantee-in-south-african-law/

December 9, 2020 by Leandre 0