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The wide powers of the court under the oppression section do not extend to overriding an agreement between the parties to resolve their differences

An aggrieved minority shareholder cannot claim relief under the oppression section of the Companies Act if he is party to an agreement on a way to end that oppression

It is not unusual for the minority shareholders in a company to believe that the way the business of the company is being run and its affairs conducted is unfair toward them. In these circumstances, their primary legal remedy is the so-called "oppression section" of the Companies Act.

In South Africa, the relevant section in this regard was section 252(1) of the now-repealed Companies Act of 1973 and is now section 163 of the Companies Act of 2008.

The wide discretionary power of the court

The strength of this statutory remedy is that, if "oppression" is shown to exist, the court is empowered to make whatever order it thinks fit to bring the oppression to an end, and it has a wide discretion in this regard.

This section of South Africa's Companies Act has close counterparts in the companies legislation of several other countries, for example, section 459 of the United Kingdom Companies Act of 1985. Consequently, our courts often look for guidance in this area of company law to the decisions of foreign courts.

Aggrieved minority shareholders usually want to be bought out at a fair value

Where one or some shareholders in a company believe that they are being unfairly treated, what they usually want is for their shares to be bought out by the majority shareholders or by the company itself, so that they can invest elsewhere.

It is often impossible for them simply to arrange a private sale to an outsider, either because the company's articles of association restrict their right to do so, or because few investors are interested in buying a minority shareholding in a company, particularly one with an unhappy history in its relationship with minorities.

Consequently, the relief that is usually sought by an aggrieved shareholder who applies to court under the oppression section is an order that the majority or the company must buy his shares at their fair value.

However, rather than incur the expense and delays of litigation, the majority shareholders and the disaffected minority may agree in principle that the minority's shares should be bought out. This then leaves only the issue of the valuation of their shares to be determined.

If the parties cannot agree on the valuation, it makes good business sense for them to avoid litigation on this seemingly straightforward issue and to seek a way of determining the valuation objectively.

Valuation of shares by an independent expert

An obvious solution is for the minority and majority shareholders to agree that the valuation is to be carried out by an independent expert, selected by agreement between them, and to bind themselves in advance to accept his findings.

This is, of course a second-best solution, for it involves a valuation being imposed on the disputing parties, and there is no guarantee that they will all agree with the independent valuation. In this regard, the process has its dangers, for one of the disputing parties may then embroil everyone in further litigation in which he seeks to set aside the valuation arrived at by the independent expert.

This was the scenario that recently played itself out in Burke v Bayne Services (Edinburgh) Ltd [2011] CSIH 14, which was a decision of the court of session, the supreme civil court in Scotland. The central allegation of the aggrieved minority shareholder was that there had been a series of irregular transactions, the result of which was that the assets of the company and therefore the value of shares, were grossly understated.

The aggrieved minority refused to accept the expert's valuation

In this case, the expert (appointed by agreement between the parties) concluded that each share of the company was worth 1 532 which meant that the shareholding of the aggrieved minority shareholder was worth 52 773. The latter refused to accept that valuation, contending that the true value of his shares was about twenty times higher, in other words, about 1 million.

However, as the judgment indicates, it is very difficult for a party who has agreed to the appointment of an independent valuer, and who has bound himself in advance to accept his valuation, to impugn that valuation if he does not agree with it.

The valuation could only be impugned on the grounds of fraud

The court in this case conceded that the valuation could be attacked if it were alleged that there had been fraud or misconduct on the part of the valuer. No such allegation had been made.

Consequently, the aggrieved shareholder was reduced to contending that the true agreement was that the valuation arrived at by the expert was to be a "provisional draft".

The court had no sympathy with this argument, and held that "On a straightforward interpretation of the agreement, it is final and binding on the parties." The court went on to say that, since the parties had themselves chosen to resolve the factual issue of the value of the shares by way of an expert valuation, the court did not have power under the "oppression" section of the Companies Act to disturb that valuation .

The decision shows that, wide though the court's power may be to make an order under the oppression section to bring the alleged oppression to an end, the court cannot do so where the parties have themselves agreed on the way of resolving their dispute.


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