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The new Companies Act gives the court novel powers to impose or amend a shareholders agreement

The High Court flexes its muscles under the oppression provision of the Companies Act of 2008

The premier remedy for an aggrieved shareholder who believes that he has been unfairly treated by the company is the "oppression" section of the Companies Act. This was section 252 of the old Companies Act of 1973 and is now (in an amplified form) section 163 of the new Companies Act of 2008.

There is a wealth of judicial decisions, both in South Africa and overseas, notably the United Kingdom, on the kind of conduct that falls within the scope of this section and the kinds of orders that a court can make to give relief from oppression.

The team that drafted the new Companies Act took the opportunity of broadening the already broad scope of this statutory remedy, and one of the first cases to come before the courts and be decided under the new Act illustrates the additional breadth of the new provision.

The court has power to impose or amend a shareholders agreement

Section 163 of the new Companies Act of 2008 provides that one of the powers of the court under this provision is to make an order "directing the company to ... create or amend a unanimous shareholder agreement".

This is a new power that was not available to the court under the old Companies Act of 1973.

It is, in principle, startling that a court should be permitted to create or rewrite an agreement between the shareholders.

The law of contract is based on the principle that parties should be free to regulate their affairs by agreement and that the law will give effect to and enforce what they have agreed - not what a court thinks they should have agreed. As a general principle, the court has no power to write or rewrite a contract between litigants and the fact that the Act now gives the court this power is not only novel in company law, but it is an intrusion on a fundamental concept in contract law.

The Kudumane judgment

The recent judgment of the Gauteng High Court in Kudumane Investment Holding Ltd v Northern Cape Manganese Co (Pty) Ltd [2012] ZAGPJHC 116 concerned a mining company in which the level of in-fighting between two factions of its shareholders, one holding a 49% interest and the other a 51% interest, had reached a level that was prejudicing the company's ability to conduct its business and indeed threatening its commercial viability.

When a black empowerment shareholder was introduced, a shareholders agreement had been concluded in terms of which each of the two shareholders was entitled to nominate and appoint three directors to the board of the company; provision was also made for the chairman to have a casting vote in the event of a deadlock.

The dispute centred on who the directors of the company were, as envisaged in this shareholders agreement, and litigation on this issue was pending in another jurisdiction.

The minority shareholder had asked the court to make an order, in terms of the oppression section of the new Companies Act, that is to say section 163, removing all but one of the disputed directors who had been appointed by the majority shareholder. In the result, the court handed down an order, substantially in these terms. The court also included in its order certain provisions relating to the governance of the company under the new board.

The applicant shareholder had asked the court to frame its order as an amendment to the shareholders agreement. Although the order in due course handed down by the court was not expressed in these terms in other words, it did not explicitly say that it was amending the shareholders agreement in effect the terms of the court order amounted to a judicially-imposed shareholders agreement that would on an interim basis override the actual shareholders agreement until litigation pending in the other court finally resolved the dispute.

The judgment in perspective

The apparently draconian nature of the court order has to be seen in perspective. It was in essence a stop-gap measure to put in place a functioning board of directors so as to enable the company to continue carrying on its business whilst litigation in another court would determine who the company's directors were in terms of the shareholders agreement.

Thus, the order of court was explicit that its terms were to be operative only on an interim basis, 'pending the final outcome of the .... litigation' then pending in the other court.

Overview

Although section 163(2) of the new Companies Act of 2008 gives the court the power to 'create or amend a unanimous shareholder agreement', the Kudumane judgment is not an example of the exercise of that draconian power.

The judgment went no further than laying down a pragmatic interim modus operandi for the management of the company by a court-appointed board of directors pending the outcome of litigation in the other court which would determine the parties' legal rights in terms of the shareholders agreement and which would result in the board being constituted as provided for in that agreement.

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