Protection of Minority Shareholders in South Africa – A brief overview of Section 163 of the Companies Act 71 of 2008

Talha Kazi | Secretariat Dept.Corporate Governance Officer

In most corporate environments, the rule of the majority shareholder votes, combined with the decisions taken by the board of directors, may lead to the interests of minority shareholders being prejudiced. ‘Minority shareholder protection’ refers to the measures put in place to safeguard the rights and interests of shareholders who generally own less than 50% of the shares in a company.

Section 163 of the Companies Act 71 of 2008 (Section 163), also known as the ‘oppression remedy’, therefore plays a critical role, amongst the various legislative provisions, in safeguarding the interests of minority shareholders.

Section 163 provides that a shareholder of a company may apply to court for any form of 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 applicant (shareholder); or
  • 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 applicant(shareholder); or
  • 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 (shareholder).

When considering an application in terms of Section 163, a court must therefore be satisfied that the following two elements are present:

  1. the existence of the relevant conduct, by way of a positive act or omission; and
  2. that the relevant conduct was either oppressive or unfairly prejudicial; or unfairly disregards the interests of the applicant.

What constitutes unfair prejudicial conduct?

In determining the test for unfairly prejudicial conduct, the court, in the case of Geffen and Others v Martin and Others [2018] 1 All SA 21, held that prejudicial conduct can be objectively proved if it had the effect of adversely or materially affecting the financial interests of the applicant. This would be proved by way of reference to objective evidence, such as financial statements, and market prices.

In the case of Grancy Property Ltd v Manala and Others 2015 (3) SA 313 (SCA) the court held that when determining what constitutes unfair conduct, one must look not at the motive of the conduct but rather look objectively at the act itself and the effect of such conduct on the shareholder of the company. If the two requirements are satisfied, the court will have a wide discretion to grant any relief, which it deems just and equitable under the circumstances.

Forms of Relief

Section 163 gives a court vast remedied powers to applicants, such as –

  • restraining the conduct complained of;
  • placing the company under supervision and commencing business rescue proceedings;
  • directing the company to amend its Memorandum of Incorporation or to create or to amend its 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; or
  • for the trial of an issue as determined by the court.

In conclusion, Section 163 offers substantial relief to a prejudiced minority shareholder. The test for proving such unfair or prejudicial conduct is an objective one which should be evidenced by factual circumstances. It should also be borne in mind that fairness is a flexible concept, and the court may have wide discretion in any relief granted which must be just and equitable in the circumstances for both the company and the minority shareholder.