Rights of minority shareholders in terms of the South African company laws

08 Feb 2024

The directors of a company are tasked with the management and control of the day-to-day operations of a company. Shareholders own the company through the shares which they hold. Shareholders are bound by the decisions of the board of directors as enacted by its resolutions.

In principle, the rights which accrue from the ownership of shares in a company are the same for all shareholders. However, shareholders holding a majority of the voting rights in a company can rectify actions that are detrimental or oppressive to their interests through the exercise of their majority voting powers. But what rights and remedies are available to aggrieved minority shareholders?

The term ‘minority’ is a relational concept, which is defined in contrast to the concept of ‘majority’. Both terms can be further specified in a company’s constitutional documents and shareholders agreements. For the purposes of the discussion below the term ‘minority shareholder’ refers to an individual or entity that owns less than 50% of the shares in a company and thereby possessing limited control over the company’s operations and decision-making processes.

Despite this lack of control, minority shareholders are still entitled to certain rights and protections under our company laws.

Participation rights

Minority shareholders remain entitled to attend and vote at shareholder meetings, and through this, participate in the decision-making processes of the company and have a say in important matters such as the election of directors, the approval of financial statements, and the distribution of dividends. Minority shareholders also have the right to receive notice of shareholder meetings and to receive copies of all relevant documents, such as meeting minutes, as well as have access to the company’s financial statements and other relevant information about the company’s operations and performance.

Protection rights

The Companies Act 71 of 2008 (“the Act”) also provides minority shareholders with the right to take legal action against the company if their rights are being infringed.

Application for determination and protection of rights

In terms of the provisions of section 161 of the Act, a shareholder may approach the court for an order for a determination or protection of any of their rights in terms of the Act, the company in question’s Memorandum of Incorporation, the rules of the company or any debt instrument such as bonds, debentures, loan, lines of credit etc, by way of, for example, a declaratory order or an interdict.

The provisions of this section also entitles a shareholder to approach the court for an order to remedy any harm which they may have sustained as a result of the conduct of the company, which was in contravention of the Act, the MOI, the rules of the company or an applicable debt instrument, and to hold any director liable for such harm where such director has breached their fiduciary duties.

Application to declare a director delinquent or under probation

Another mechanism available to minority shareholders is section 162 of the Act which contains detailed provisions on approaching the court to declare a director delinquent or to have them placed under an order of probation.

The effect of an order of delinquency is that a person is disqualified from being a director of any companies. The order may under certain circumstances be unconditional and subsist for the lifetime of the person declared a delinquent director.

Similarly, a person who has been placed under probation may not serve as a director of a company, except to the extent permitted by the order of the court. The probation order may be subject to any conditions the court deems appropriate and for a period of up to five years. A court may also order that the director be supervised by a mentor in any future participation as a director while the probation order remains in force.

A court may also order the director concerned to pay compensation to any person adversely affected by their conduct.

Remedy against oppressive or prejudicial conduct

In terms of section 163 of the Act, a minority shareholder may apply to the court for relief if:

• any act or omission by the company, or a person related to the company, has had a result that is oppressive or unfairly prejudicial to, or that unfairly disregards the interests of the shareholder; and
• the business of the company, or a person related to the company, is being conducted in a manner that is unfairly prejudicial to, or that unfairly disregards the interests of the shareholder;
• 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 shareholder.

It should be noted that it is not a requirement under this section that the conducted being complained of must necessarily be unlawful, but merely that the conduct is unfairly oppressive or prejudicial to the interests of the minority shareholder. The test is therefore not lawfulness but fairness.

Dissenting shareholders appraisal rights

In essence, the appraisal rights in terms of section 164 of the Act allows a dissenting shareholder, in certain prescribed circumstances, to compel the company to buy back its shares at a fair market value.

This provision entitles minority shareholders the opportunity to exit the company where they are unable to prevent a transaction which they disagree with.

This provision is triggered when certain fundamental transactions occur as set out in sections 112 to 115 of the Act, which includes the disposal of all or a greater part of the company’s assets, amalgamations or mergers and schemes of arrangement.

This provision is also triggered if the company gives notice of a meeting to pass a resolution to amend its Memorandum of Incorporation by altering the preferences, rights, limitations or any other terms of any class of shares in a manner materially adverse to the rights or interests of holders of that class of shares.

Derivative action

Section 165 of the Act entitles a minority shareholder (among others) to institute legal proceedings on behalf of the company.

Provided that they are acting in good faith and in the best interest of the company, and that the basis of the claim relates to a serious question of material consequence to the company,  a minority shareholder would be entitled to institute proceedings on behalf of the company in terms of this section without being stifled by the principle of separate legal personally (i.e. the distinction between the shareholders and the company itself as managed by the directors), or the rule of the majority shareholders.

In conclusion, the rights of minority shareholders under the South African company laws, and in particular the Companies Act 71 of 2008 are an important aspect of the legal framework that governs the functioning of companies in the country. These rights and protections help to ensure that minority shareholders are treated fairly and that their interests are protected. As such, it is important for minority shareholders to be aware of their rights and to assert them, when necessary, to ensure that they are not unfairly prejudiced by the actions of the majority shareholders or the company’s directors.

Article sourced from Adams & Adams.

See also:

• Drafting a Shareholders Agreement: The fundamentals (part 1)
• Delinquent directors and directors on probation
• Amendments to Companies Act on the cards
• Is it time to broaden the traditional concept that directors owe a duty to the company only?

(This article is provided for informational purposes only and not for the purpose of providing legal advice. For more information on the topic, please contact the author/s or the relevant provider.)