Shareholder and Director oppression remedies: A wider ambit

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Clem Daniel, Director, Corporate and Commercial, Cliffe Dekker Hofmeyr

cdh
Grancy Property Ltd vs Manala and Others 2015 (3) SA 313 (SCA)

clemUnlisted companies by their very nature seem to lend themselves to internecine conflict, particularly when the interests are closely held. At such times the majority shareholders may use various tactics to further their own interests or to apply pressure to the minority shareholders (or the directors appointed to the board at the instance of the minority shareholders). Most corporate law systems rooted in English law, while recognising that corporate organisations operate under the fundamental premise of “majority rule”, have a mechanism for redress when the boundaries of fair play are overstepped.

In South Africa, that mechanism is contained in section 163 (1) (a) of the Companies Act 71 of 2008, which entitles a shareholder or a director of a company to make application for relief, amongst other things, in respect of “any act or omission [fusion_builder_container hundred_percent=”yes” overflow=”visible”][fusion_builder_row][fusion_builder_column type=”1_1″ background_position=”left top” background_color=”” border_size=”” border_color=”” border_style=”solid” spacing=”yes” background_image=”” background_repeat=”no-repeat” padding=”” margin_top=”0px” margin_bottom=”0px” class=”” id=”” animation_type=”” animation_speed=”0.3″ animation_direction=”left” hide_on_mobile=”no” center_content=”no” min_height=”none”][that]… unfairly disregards the interests of, the applicant“. Section 163 (2) goes on to provide that “Upon considering an application… the court may make any interim or final order it considers fit…

Traditionally the view has been that a fairly high hurdle needs to be crossed in order to succeed in a claim for oppression (used here in the wide sense of the word) and in which context it has in some of the older authorities been said that it is necessary for the minority shareholder to show that the conduct complained of is “unjust or harsh or tyrannical… or burdensome, harsh and wrongful“. There are clear indications that this is unlikely to be the case going forward.

In Grancy’s case, which concerned an interlocutory application pending the main action, the Supreme Court of Appeal examined the common law principles against the provisions of section 163. A number of interesting points emerge from that decision.

The decision takes the view that “there is much to be said for the proposition that section 163 must be construed in a manner that will advance the remedy that it provides rather than limit it” and appeared to agree with the proposition that section 163 “constitute[s] a flexible mechanism for the protection of a minority shareholder“. It was also noted that the term “interests” as used in section 163 (1) is much wider than the concept of “rights”.

At the same time the court took the opportunity to reiterate the position that “it is not the motive for the conduct complained of that the court must look at but the conduct itself and the effect which it has on other members of the company” – in other words, while bad faith may be indicative, it is not a requirement to establish grounds for relief.

The key message appears to be clear: in the future matters that would not previously have found legal traction in the context of oppression remedies will be the subject of court interventions.

Of further interest is that two independent directors were appointed by the court to the board of the company in question and given the power, to the exclusion of the other directors, to “determine whether an investigation into the affairs of [the company], in light of the complaints made on behalf of Grancy Property Ltd, is necessary and if so to conduct such an investigation” pending the main action and a final determination on the issues by the trial court.

While noting that it did not form part of the rationale for the decision of the court, it is worth considering that section 163 (2) does not, on the plain language of the subsection, seem to require a finding of “unfair disregard” in terms of section 163 (1) in order for a court to act; it seems that the mere fact that an application is before the court will entitle the court to intervene if it so considers fit (see the language of section 163 (2) set out above).

In light of Grancy’s case we should probably expect to see a great deal more litigation as minorities attempt to extend the boundaries of relief under the provisions of section 163.[/fusion_builder_column][/fusion_builder_row][/fusion_builder_container]