Shareholder disputes can arise in any company and in South Africa, the Companies Act 71 of 2008 provides legal remedies for shareholders who experience unfair treatment. Section 163 of the Act offers protection against prejudicial, oppressive or unfairly disregarding conduct. But what exactly constitutes such conduct? This article explores the legal framework and practical implications of Section 163 in shareholder disputes.

What is Prejudicial and Oppressive Conduct?

Section 163 of the Companies Act allows a shareholder or a director to apply to court for relief if they believe that the conduct of a company’s affairs, an act or omission or a resolution of the company:

• Is oppressive or unfairly prejudicial to them; or

• Unfairly disregards their interests.

This provision aims to prevent actions that unfairly disadvantage minority shareholders or certain directors, ensuring that corporate governance remains fair and equitable.

Examples of Prejudicial and Oppressive Conduct

South African courts have considered various forms of conduct that may be classified as prejudicial, oppressive, or unfairly disregarding a shareholder’s interests. Common examples include:

1. Exclusion from Management and Decision-Making

   • Minority shareholders being systematically excluded from board meetings or key decision-making processes.

   • Directors making significant business decisions without consulting affected shareholders.

2. Unfair Share Dilution

   • Issuing new shares in a manner that disproportionately reduces the shareholding percentage of minority shareholders.

   • Selectively offering new shares to certain shareholders while excluding others.

3. Misuse of Company Funds and Assets

   • Company funds being used for the personal benefit of certain shareholders or directors.

   • Unjustified related-party transactions that do not serve the best interests of all shareholders.

4. Unfair Dividend Policies

   • Refusing to declare dividends while directors and majority shareholders benefit from excessive salaries or perks.

   • Dividends being paid selectively to certain shareholders and not others.

5. Oppressive Conduct Towards Minority Shareholders

   • Forcing a minority shareholder to sell their shares at an unfairly low price.

   • Creating a hostile environment that forces a shareholder out of the company.

Legal Remedies Under Section 163

If a shareholder believes they are being subjected to prejudicial or oppressive conduct, they can apply to the High Court for relief. The court has broad discretion to grant appropriate remedies, including:

• Ordering the purchase of shares: The court may compel the company or majority shareholders to buy out the affected shareholder at a fair value.

• Amending or setting aside company resolutions: If a resolution is deemed unfair, the court can alter or nullify it.

• Regulating the conduct of the company’s affairs: The court may impose new governance measures to ensure fairness.

• Ordering compensation or damages: If financial harm has occurred, the court can award monetary relief.

Key Considerations for Shareholders

• Burden of Proof: The shareholder seeking relief must prove that the conduct is oppressive, prejudicial, or unfairly disregards their interests.

• Minority Protection vs. Majority Rule: Courts balance the rights of minority shareholders against the principle of majority rule in corporate decision-making.

• Alternative Dispute Resolution: Mediation or arbitration may be considered before resorting to court action.

Conclusion

Prejudicial and oppressive conduct in a company can significantly impact shareholder rights and business operations. Section 163 of the Companies Act serves as a crucial tool for shareholders seeking relief from unfair treatment. If you are experiencing unfair corporate practices, seeking legal advice from experts like Barter McKellar can help protect your interests and ensure fair corporate governance.

For expert legal guidance on shareholder disputes and corporate governance in South Africa, contact Barter McKellar today.