When faced with a feud between shareholders, the court will seek to impose a pragmatic solution in terms of the "oppression" section of the Companies Act.
The "oppression" section of the Companies Act, and aggrieved shareholders.
Ideally, a trading company ought to be an organisation where the directors and shareholders have a harmonious relationship, and where all concerned work collegially to maximise the profits of the enterprise for their common benefit. That ideal is the exception rather than the rule. Many companies are riven with disputes between the directors, between the board of directors and the shareholders, and between the shareholders themselves.
The protection afforded to minority shareholders
The common law was never able to come up with a legal remedy for the abuse that a minority shareholder may suffer at the hands of the majority, save to recognise that majority shareholders cannot exercise their voting power in a way that perpetrates a "fraud on the minority" - a very ill-defined and rubbery concept. Consequently, the Companies Act itself had to provide a mechanism to protect minority shareholders from unfair treatment.
The premier statutory remedy available to a shareholder, aggrieved at his treatment by other shareholders or by the company itself, is laid down in section 252(1) of the Companies Act 61 of 1973, which reads as follows -
Any member of a company who complains that any particular act or omission of a company is unfairly prejudicial, unjust or inequitable, or that the affairs of the company are being conducted in a manner unfairly prejudicial, unjust or inequitable to him or to some part of the members of the company, may... make an application to the Court for an order under this section.
In South Africa, the recent decision of the Supreme Court of Appeal in Bayly v Knowles 2010 (4) SA 548 throws useful light on the way in which the courts interpret this provision in the modern era. In this case, the Norwegian holder of the rights to a vehicle tracking system had set up a South African company, South African Electronic Tracking Systems Ltd, to market the system in this country.
A certain Bayly was offered a 50% shareholding in this company for R2 million. Unable to afford the entire price, Bayly invited Knowles to join him as a co-investor, and the two of them purchased a 51% share in the company (with each holding 25.5%). It was undisputed that Bayly and Knowles had an understanding that they would participate equally in the management of the company.
The further understanding between them was that Bayly was to be the managing director and Knowles the sales and marketing director.The shareholders' agreement provided that a shareholder could not sell his shares without first offering them to the other shareholders in proportion to the latter's holdings.The company prospered, but the relationship between Bayly and Knowles soon soured, to the point where the mutual trust between Bayly and Knowles had been irredeemably destroyed.
Bayly made an offer to Knowles to acquire all of the latter's shares in the company at a price of R2 million on the basis that Knowles would resign as a director. Knowles made a counter-offer to acquire Bayly's shares at a value to be determined by an independent accountant. At this juncture, a minority shareholder had aligned himself with Bayly and, between the two of them, they held a majority of the shares in the company.
Knowles applied to the High Court for an order, in terms of section 252(1) of the Companies Act, quoted above, that his salary and benefits be reinstated, and that Bayly must sell him all his shares at an independent valuation; in the alternative, Knowles asked the court to make an order that the company be wound up.
The judgement of the Supreme Court of Appeal
The High Court made an order that Bayly must sell his shares to Knowles. On appeal, the Supreme Court of Appeal took a markedly different approach, and reached a very different conclusion, ruling that the High Court judgement must be set aside and replaced with an order that Knowles must sell his shares to Bayly.
Bayly, said the Supreme Court of Appeal, was at the helm of the company, enjoyed the confidence of the staff and had maintained goodwill with the company's major supplier. To force Bayly out, said the Supreme Court of Appeal, and to place Knowles in control would have effects on the company "which can only be guessed at".
It followed, said the Supreme Court of Appeal that - the only practicable [court] order that could have been made in the circumstances was one which directed Bayly to acquire Knowles's shares. The court pointed out that, to order the winding-up of the company (as Knowles had asked for in the alternative) would be to destroy a perfectly viable company, and would moreover provide Knowles with no redress for whatever oppression he had suffered. The Supreme Court of Appeal set aside the order made by the High Court that Bayly must sell his shares to Knowles.
The lessons to be learned from the Supreme Court of Appeal judgement
The following important principles emerge from the judgement by the Supreme Court of Appeal:
- where a company's prosperity is being damaged by a feud between warring shareholders, the courts will seek a pragmatic solution;
- the remedy provided in section 252 of the Companies Act was not intended to require a court to preside over a protracted and expensive contest of virtue between the shareholders and award the company to the winner";
- the court will be reluctant to order that a viable company be wound up just because its shareholders are in dispute;
- where a shareholder has suffered inequitable treatment, that inequity disappears and cannot be relied upon if he is offered a fair price at which he can sell all his shares to the other shareholders;
- in determining what order to make in terms of section 252(1), the court will take into account not only the interests of the warring factions of shareholders, but the interests of the other shareholders and the best interests of the company itself;
- where one of the warring shareholders, as director, has successfully steered the company to prosperity, enjoys the confidence of the staff and the confidence of the company's trading partners, it would not be sensible for a court to order, in terms of section 252, that his shares must be sold to another shareholder/director who does not have such a proven record of success.