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.