www.theartmey.co.za
 
 

News & Resources

 
 
 
 
 
 
 
 
 
 
Minority shareholder rights in a private company
12 October 2020
 
“I hold 20% shares in a private company that I bought into a few years ago. The majority shareholders heavily influence the directors who take decisions which in my view is not always in the best interests of the company or my own as a minority shareholder in the company. What remedies are available to me?”

Shares in a company afford a shareholder voting rights/voting power in a company, with the percentage of shares held representing the extent of such voting rights/voting power. In your case, as only a 20% shareholder this stake is usually not sufficient to provide the necessary voting power to sway matters resolved to by the majority shareholders of the company.

In order for shareholders meetings and decisions to be valid, the requirements contained in Sections 61 up to and including Section 65 of the Companies Act 71 of 2008 (“Companies Act”) must be complied with, and your first port of call as shareholder is to ascertain whether these formalities have been met. It should be noted that some of these provisions can be varied by a company’s memorandum of incorporation (MOI), and this would also need to be reviewed. Often the percentage of voting rights needed for certain types of resolutions to be taken are prescribed in the MOI.

Where decisions are validly taken, but a minority shareholder is of the opinion that other shareholders are oppressive and unfairly disregarding their interests, they have the option of approaching the court and applying for a relief in terms of Section 163 of the Companies Act. Section 163(1) sets out instances in terms of which a shareholder or director can approach the court, and can include the following:

  • An act or omission which is oppressive or unfairly prejudicial to the interests of the applicant or that unfairly disregards the interests of the applicant.
  • The business of the company is being or has been carried on or conducted in a manner that is oppressive or unfairly prejudicial to the applicant or that unfairly disregards the interests of the applicant.
  • The powers of a director or prescribed officer of the company have been exercised in a manner that is oppressive or unfairly prejudicial to the applicant or unfairly disregards the interests of the applicant.
Section 163(2) sets out a variety of remedies, including interim or final orders, which the court can make. These can include restraining the conduct complained of, placing the company under supervision and commencing with business rescue proceedings, directing the company to amend its MOI or to create or to amend a unanimous shareholders agreement, directing an issue or exchange of shares, appointing directors in addition to existing directors, directing the company or any person to pay a shareholder any part of the consideration paid for shares or the equivalent value thereof, setting aside a transaction to which the company is a party and payment of appropriate compensation etc.

Our courts will not always grant relief to a minority shareholder and to some extent a minority shareholder should be aware of their minority status and that there may be instances where the majority shareholders resolve a decision which he does not agree with. An applicant can only be successful if they can establish that the majority shareholders departed from the standards of fair dealing or they can rely on unfair discrimination against the minority. 
Legislation does provide minority shareholders with protection, although this is not open ended. Minority shareholders should therefore be proactive and request that certain additional measures be built into the MOI of the company and shareholders agreement which can, to a certain extent, afford greater protection to the minority shareholders. Such measures may include the following:

  • The inclusion of pre-emption rights. This will ensure that the shares are offered to the existing shareholders first before being sold to third parties. This curbs against minority shareholders’ shareholding in the company from being diluted.
  • The provision of specially protected matters. The shareholders agreement and/or MOI can set forth specific matters which can only be acted on if the minority shareholders agree to them. 
  • The representation at board and shareholder level. The shareholders agreement and/or MOI can set forth that minority shareholders must be present at shareholder meetings before a quorum is constituted for a meeting of shareholders. Provisions can further be included to stipulate that each and every shareholder, notwithstanding his/her/its voting rights, may appoint a director to the board of the company. 
  • The inclusion of a tag-along clause. The inclusion of such a clause would ensure that minority shareholders are given a chance to participate in any sales which the majority shareholders participate in and that minority shareholders are not forced to remain as shareholders in a company with a new majority shareholder. 
  • The conclusion of a pool shareholders agreement. Minority shareholders can pool their shares together and vote collectively as a unit to strengthen their voting position.
  • The variation of the standard percentages set out in Section 64 and Sections 65(8) and 65(9) of the Companies Act. 
A minority shareholder is afforded legislative protection to a certain extent. But before embarking in litigation it is advisable to try a softer angle and approach the majority shareholders with proposals for including greater minority protection in the founding documentation. Only if that does not succeed and conduct continues, would it be advisable to consult with your attorney regarding the merits in taking remedial steps in accordance with the Companies Act.
 
 
 
Related Services: