Remedies for minority shareholders in terms of the South African Companies Act 71 of 2008
It is in the context of a private company (where shares cannot always simply be sold on an open market as recourse to an undesirable resolution being passed) that the need for protective mechanisms for minority shareholders' interests is highlighted. The Companies Act 71 of 2008 ("the Act") makes provision explicitly for the protection of minority shareholders in cases where a resolution, which adversely affects their rights or interests, is passed by the majority. This article will discuss these, along with various other remedies.
Court approval / review (A handy option!)
Section 115 of the Act deals with the requirements for the passing of a resolution relating to the implementation of an amalgamation, merger, scheme of arrangement, or the disposal of all or the greater part of the company assets. It provides that a special resolution (at least 75% of the voting rights exercised on the resolution) must be obtained in order to implement any of the mentioned arrangements or schemes. If, however, 15% or more of the voting rights exercised on that resolution voted against it being adopted, any of those may require the company to obtain the court's approval for the resolution to be implemented. The company will then have to either apply to court for its approval within 10 business days or treat the resolution as a nullity. If the 15% minimum is not achieved, anyone who voted against its adoption can still apply directly to court for the resolution to be reviewed. In the latter case the court will only grant leave for the application provided that the applicant is acting in good faith, appears prepared and able to sustain proceedings and has alleged facts which, if proven, would support an order to set the resolution aside.
There are only two bases upon which the court may set the resolution aside, the first being that the resolution is "manifestly unfair to any class of holders of the company's securities." The second basis is that "the vote was materially tainted by conflict of interest, inadequate disclosure, failure to comply with the Act, the Memorandum of Incorporation or any applicable rules of the company, or other significant and material procedural irregularity."
Majority of creditors' or members' approval of a resolution has been held to be an indication that it is indeed fair and reasonable.1 The court is especially careful not to impose its view over that of a creditors' majority.2 It has been argued that the court would have sufficient justification to refuse approval of a resolution if decisive votes to the resolutions adoption have been 'bought' (i.e. consideration given or promised for an undertaking to vote in a certain manner) and that our courts would take into consideration general commercial morality and public interest.3
Appraisal rights (If you can't beat them – force them to pay you!)
Section 164 of the Act also provides for the remedy of appraisal rights for dissenting shareholders in cases where the company:
- has given notice of its intention to "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 holders of that class of shares"; or
- considers any resolution relating to transactions or arrangements which require a special resolution – such as the implementation of an amalgamation, merger, scheme of arrangement, or the disposal of all or the greater part of the company's assets.
The requirement that a shareholder's interests or rights must be affected in a 'materially adverse' manner is broad and possibly unclear, even perhaps including cases of potential, rather than probable prejudice and dilution of shareholder's relative voting rights. 4
Where the requirements of this section are met, shareholders who have given written notice of their intention to object to the resolution, and have in fact exercised their vote against it, will have the right to demand payment of the fair value of their shares from the company as recourse upon such resolution being passed. There will be no requirement to give notice of intention to object to the resolution if the company either failed to send notification of that proposed resolution or, having sent such notice, failed to include the shareholders rights in terms of section 164. The demand for payment of the shares' fair value must be sent within 20 business days after receiving notice of the resolution being adopted or, where no notice of the adoption has been sent, within 20 business days after becoming aware of its adoption. It must also be delivered to the Takeover Regulation Panel (a regulatory body) stating the details of the shareholder, the class of shares and the fair value payment demanded for it.
Once a shareholder demands such payment, all his or her rights with regard to the shares - apart from the right to payment of their fair value - fall away. These rights may be reinstated if the offer made by the company has not been accepted by the shareholder within 30 business days after it was made, or if the demand has been withdrawn by the shareholder. This withdrawal can be done prior to the company making an offer or if the company fails to make a valid offer.
A shareholder may also apply to court for the determination of a fair value if the company has not made an acceptable offer or if it has not made an offer at all. If there are reasonable grounds to believe that paying the demands made will result in the company not being able to meet its debts as they fall due for the ensuing year, the court may, on application by the company, amend the payment demanded according to what is just and equitable in the financial circumstances of the company.
1. Dundas & Miller (Pty) Ltd v Burton NO 1971 (1) SA 106 (E) at 108; Ex Party Utility Shoe ManufacturingCompany: In re ABC Store (Pty) Ltd 1948 (4) SA 1 (W) at 5; Delport P, Henochsberg on the CompaniesAct 71 of 2008 (Vol. 1, Service issue 4, December 2012) at 419.
2. Lordan v Dusky Dawn Investments (In Liquidation) 1998 (4) SA 519 (SEC)
3. Delport P, Henochsberg on the Companies Act 71 of 2008 (Vol. 1, Service issue 4, December 2012) at 419.
4. Ibid at 578.
Originally published July 2013
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.