Recent developments in shareholder protection

In any commercial enterprise with multiple shareholders, disputes are bound to arise. Such disputes may result in the interests of some shareholders being unfairly prejudiced. Section 163 of the Companies Act 71 of 2008 (the Act) plays a critical role in safeguarding the interests of shareholders against such prejudice.

S163(1), otherwise known as the ‘oppression remedy’, 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 prejudicial to, or that unfairly disregards the interests of, the applicant;

b) any act or omission of the company, or a related person, has had a result that is oppressive or unfairly prejudicial to, or that unfairly disregards the interests of, the applicant;

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’.

Recent court judgments have highlighted several key issues, including locus standi, shareholder litigation, and the meaning of ‘prejudice’ in the context of s163.

Locus standi

It is often minority shareholders – prejudiced by the decisions of the majority – who approach the courts seeking relief in terms of s163. This often leads to the misconception that, in the case of shareholders, only minority shareholders have locus standi (the standing) to apply for relief in terms of s163. This is incorrect.

In the recent Van Der Watt v Schoeman and Others ruling, the court considered the applicability of s163 in instances where there is a deadlock in shareholder voting power.¹ In this case, the two shareholders had equal voting rights, as each held 50% of the shares in the company. A dispute arose between them in respect of the management of the company, with one shareholder (the Applicant) accusing the other (the Respondent) of excluding her from the affairs of the company. The applicant approached the court for relief, claiming that her exclusion was oppressive and constituted unfairly prejudicial conduct.

The Respondent argued that the oppression remedy does not apply to a shareholder that is not an oppressed minority, and that as a holder of 50% of the voting rights, the Applicant had no standing to seek relief under s163. In rejecting this interpretation, the court considered the wording of s163, its purpose, and whether a deadlock between shareholders may satisfy the requirements of s163.

The court first examined whether s163 contains any wording that specifies what kind of shareholder may apply for relief. In this regard, the court held that there is nothing in the wording of s163 that suggests that the remedy is only limited to the prejudicial conduct of a majority shareholder, or that only minority shareholders may seek relief. All that is required of a shareholder to be entitled to ask for relief under s163 is to simply be a shareholder.

Secondly, the court examined the purpose of s163 and referred to Benjamin v Elysium Investments (Pty) Ltd, where it was held that:

‘It is a question of fact whether the affairs of a company are being conducted in a manner oppres­sive to some part of the members’.²

While the above remark was made in relation to the oppression remedy under the old Companies Act, it is clear that determining whether an act constitutes prejudicial conduct is an objective exercise that has little to do with the number of shares that a shareholder owns.

Thirdly, the court considered whether a deadlock can result in prejudicial conduct that satisfies the requirements of s163. The court found that if a deadlock unjustly impacts a shareholders’ ability to exercise an element of control in the company, then it constitutes prejudicial conduct that falls within s163.

It is evident from this judgment that the oppression remedy is not only available to minority shareholders. A shareholder prejudiced due to a deadlock in voting rights is just as entitled to relief. A majority shareholder may, of course, simply exercise their voting power to eliminate the prejudicial conduct.

In Briers and Another v Dr J Bruwer and Assoc no.78 Inc, the court had to determine locus standi where a shareholder had instituted legal proceedings for s163 relief, and then ceased to be a shareholder while the matter was still before the court.³ The court found that locus standi is established at the inception of the legal proceedings, and that an applicant is not stripped of that right by a subsequent buyback of their shares while the matter is still before the court.

The meaning of ‘prejudice’ in s163

To succeed with a claim for s163 relief, a shareholder must first prove that there is prejudicial conduct. The ruling in Edmunds and Another v Supreme Mouldings Investments (Pty) Ltd places emphasis on the meaning of ‘prejudice’.⁴

Two minority shareholders approached the court with allegations of prejudicial conduct and asked the court for an order directing that the company buy them out.

The dispute arose when the company, through the majority shareholder, entered into a guarantee and cession agreement in favour of a bank, standing good for the debts of two of its subsidiaries. This transaction, which amounted to financial assistance in terms of section 45 of the Act, was concluded without the minority shareholders’ participation and without passing the necessary resolutions. The effect was to create a contingent liability of R10m in the books of the company.

The minority shareholders argued that should the bank call upon the guarantee and cession, it would result in a diminution of their shareholding in the company. They claimed that this constituted conduct that is unfairly prejudicial.

In its ruling, the court emphasised the effect of the conduct, rather than whether the act itself was irregular. It is not enough that the applicants allege oppressive conduct; the conduct must have actually resulted in unfair prejudice. In the case of a guarantee that had not been called on by the bank, the shareholders were deemed to have failed to show any clear diminution in the value of their shares and, by extension, any discernible prejudicial effect. S163 relief was denied on the basis that no actual prejudice had resulted.

It is important for shareholders who seek relief under s163 to be mindful of the requirements that they must satisfy in order to be entitled to relief. The judgments also serve as a caution to companies and shareholders that, once a shareholder has instituted proceedings for s163 relief, a subsequent buyback of the aggrieved shareholder’s shares is not a shortcut to put an end to the matter.

1.(3393/2022) [2023] ZAECQBHC 61.
2.1960 (3) SA 467.
3.(19726/2023) [2024] ZAWCHC 76 (30 May 2024).
4.(2021/36175) [2023] ZAGPJHC 635 (5 June 2023).

David Hoffe is a Partner, Siyabonga Nyezi an Associate, and Ashishaa Kasipersad a Candidate Attorney | Fasken.

This article first appeared in DealMakers, SA’s quarterly M&A publication.

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