Protecting interests of minority shareholders

Introduction

Many times I have been asked by desperate clients to intervene when their rights as minority shareholders are at threat. This article seeks to explain some of the remedies available to minority shareholders.

Definitions

A shareholder is a natural or juristic person who owns shares in a company. A majority shareholder is one who owns over 50 percent of shares in a company. Conversely, a minority shareholder owns less than 50 percent of the company’s issued shares.

Measures or remedies to protect minority shareholder’s interests

Some of the measures or remedies include those explained below.

Corporate Governance Systems

Sound corporate governance structures and practices generally benefit all shareholders including minority shareholders. Examples include those explained below.

Board representation

A minority shareholder will have a voice if he or she is represented on the board of directors. At times the minority shareholder himself or herself can be a director of the company. Depending on the shareholding or what the shareholders’ agreement or company’s articles and memorandum of association say a minority shareholder may or may not have the right to nominate a director for appointment.

Internal control systems

This includes policies and standard operating procedures. Areas covered may include procurement, approval processes, approval limits, authorised signatories, payment systems, accounting and other systems, etc.

Internal and external audit

Internal audit reviews the adequacy and effectiveness of systems including controls in an organisation. Conversely an external audit involves an audit firm carrying out an evaluation of a company’s financial information and financial statements. They express an opinion on whether the financial statements so audited fairly present or give a true and fair view of the financial performance and position of the company. Again this is for the benefit of all shareholders including minority shareholders.

Specific protection at law

The Companies and Other Business Entities Act (Chapter 24:31) hereinafter the “COBE Act” or “Act”, has important provisions that protect the interests of minority shareholders.

Protection of minority shareholders — Sections 223-223

In terms of section 223 of the COBE Act a member (shareholder) may apply to the Court for an order in terms of section 225 on the grounds that the company’s affairs are being or have been conducted in a manner which is oppressive or unfairly prejudicial to the interests of some part of the members, including himself or herself, or that any actual or proposed act or omission of the company, including an act or omission on its behalf, is or would be so oppressive or prejudicial.

Section 224 of the COBE Act provides that the Registrar may also make a similar application to the High Court pursuant to sections 40 and 45 of the Act. In terms of section 40 a minority shareholder can request the Registrar to investigate the affairs of the company.

Powers of the High Court in terms of section 225

If the High Court is satisfied that the application made by a member or the Registrar in terms of sections 223 or 224, respectively, is well founded it may make such order as it thinks fit for giving relief in respect of the matters complained of. The Court order may:

◆ Regulate conduct of the company’s affairs in the future,

◆ Require the company to refrain from doing or continuing an act complained of by the applicant,

◆ Provide for the purchase of the shares of any member by other members or by the company itself.

Resolutions requiring special notice

Section 177 applies and regulates resolutions requiring special notice. Section 177(2) of the Act requires that if the status of any person in relation to a company will be affected by the terms of a resolution of which special notice has been given the company is obliged to serve the proposed resolution on the person to be so affected.

Special resolutions

These are important resolutions and require a higher threshold such as 75% vote, compared to an ordinary resolution which requires a simple majority vote. They are regulated by section 175.

Removal of directors

To avoid arbitrary or unfair removal of directors by majority or powerful shareholders for example, section 202 provides safeguards by requiring that such removal should be through a resolution made at a company’s general (shareholders’) meeting. Minority shareholders will have a say thereat.

Directors’ functions and responsibilities

Section 195(4) requires every director to exercise independent judgment and act within the powers of the company in a way that he or she considers, in good faith, to promote the success of the company for the benefit of its shareholders as a whole. Further, section 195(5) requires every director to have regard to the need to act fairly as between shareholders.

Dissenting shareholder’s appraisal rights

According to section 233 of the Act if a company has given notice to shareholders of a meeting to consider a resolution to enter into a transaction contemplated on section 143 (Variation of rights attaching to shares) and 228 (Procedure for mergers) that notice must include a statement informing shareholders of their rights under this section.

At any time before the proposed resolution is voted on, a dissenting shareholder may give the company written notice objecting to the resolution. A shareholder may demand that the company pay him or her the fair value for all of the shares he or she holds in the company, subject to certain conditions in this section.

◆ This simplified article is for general information purposes only and does not constitute the writer’s professional advice. -herad.clz.w