NGL Attorneys | Commercial, Business and Property Law

Section 163 focuses specifically on the interest of minority shareholders. The protection of minority shareholders’ rights must be understood within the context of the provisions set forth by the Act, the common law, the Memorandum of Incorporation (MOI) of the Company and the Shareholders’ Agreement (if applicable). In terms of this section, an applicant may apply to the Court where the conduct of the company or one of its prescribed officers is considered unfairly prejudicial or oppressive of the applicant’s rights or interests. This section highlights two essential requirements, being (i) conduct and (ii) the interpretation of what is prejudicial or unfair.

Either a director (directors often apply on behalf of the minority shareholders they represent) or a shareholder may apply for relief as prescribed in terms of section 163. The difficulty lies in the fact that the minority shareholder has is to prove prejudicial or unfair conduct. The test for proving such unfair or prejudicial conduct is an objective one, evidenced by factual circumstances and not mere allegations. Based on these premises, the court has a wide discretion in respect of the relief granted.

In the matter of Garden Province Investment and Others v Aleph (Pty) Ltd and Others 1979 (2) SA 525 (D) the respondent company owned a building that was its only real asset. The shareholders of the company, by majority vote, resolved to sell the building and it was sold to a third party at a fair and reasonable price. The minority shareholders sought to retain their investment and, accordingly, sought relief in terms of section 252 of the old Act, claiming that the transaction was unfairly prejudicial, unjust and inequitable to them. The court dismissed the application, stating that when a person acquires shares in a property-holding company as a minority shareholder, he or she knows that he or she is a minority shareholder and it is not unfairly prejudicial, unjust or inequitable to him or her if his or her investment is sold against his or her wishes, provided that it is sold at a fair and reasonable price. Further, the court stated that the only thing that the majority had done was to decide against the wishes of the minority, which conduct cannot be said to be unfairly or unreasonably prejudicial, unjust or inequitable. Finally, it was stated that, in order to be successful, an applicant had to establish a lack of probity or fair dealing, or a visible departure from the standards of fair dealing, or a violation of the conditions of fair play on which every shareholder is entitled to rely on, or unfair discrimination against the minority.

This principle was further affirmed by the Supreme Court of Appeal (SCA) in the matter of Grancy Property Ltd v Manala 2015 (3) SA 313 (SCA), when the court commented on the wide ambit of section 163 of the Act. The conduct complained of must not merely be prejudicial or disregardful of the minority shareholders’ interest but must do so unfairly. The court had to determine whether the appellant, a minority shareholder, had made out a case for relief under section 163. The court held that in determining whether the conduct complained of was oppressive, unfairly prejudicial or unfairly disregarded the interests of the applicant it is not the motive for the conduct complained of that the court must look at but the conduct itself and the effect which it has on the other members of the company.

Based on the particular facts of this case, the court found that the directors and majority shareholders had misappropriated large sums of money from the company in the form of directors’ remuneration and fees, and various unauthorised payments were made to the majority shareholders, to the exclusion of the appellant who was a minority shareholder. The court took into consideration the fact that the company’s internal auditors had reported certain irregularities and the directors could not provide a cogent explanation as to why such payments were made in the first place. The lack of openness justified the appointment of independent directors to investigate and report thereon. According to the court, the report may even be relevant to make a final determination on such issues at a trial court.

Therefore, a minority shareholder has to prove a lack of probity or fair dealing on the part of the company or the majority, or a visible departure from the standards of fair dealing, or a violation of the conditions of fair play, or unfair discrimination against the minority in order to succeed in terms of section 163.

The court in the Grancy judgment approvingly cited the views expressed by FHI Cassim in Contemporary Company Law 2ed (Cape Town: Juta 2012), wherein he states that the provisions of section 163 are of a wide import and constitute a flexible mechanism for the protection of a minority shareholder from oppressive or prejudicial conduct. The list of orders under section 163(2) is non-exhaustive and open-ended. The court may, in terms of section 163(2), make any interim or final order it considers fit, including a variety of orders listed in section 163(2)(a)-(l), as the circumstances and facts of the case dictate. This flexibility was lacking under section 252.

Reference List:

  • The Companies Act 71 of 2008;
  • Cassim FHI “Contemporary Company Law” 2ed (Cape Town: Juta 2012)
  • Garden Province Investment and Others v Aleph (Pty) Ltd and Others1979 (2) SA 525 (D)
  • Grancy Property Ltd v Manala 2015 (3) SA 313 (SCA)

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

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