Are minority shareholders always bound by the conduct of majority shareholders?

A memorandum of incorporation (MOI) is the cornerstone of the governance of a company and sets out the rights, duties and responsibilities of shareholders, directors and others in relation to a company.

An MOI may be amended at any time but, given its importance to the governance of a company, it can only be amended if the shareholders of a company pass a special resolution authorising the amendment and, in terms of the Companies Act, 2008 (Companies Act), this requires a default of at least 75% of the voting rights.

As such, a shareholder or a group of shareholders who collectively exercise 75% of the voting rights can resolve to amend an MOI, and the minority shareholder/s will be bound by the amendment to the MOI because of the fundamental principle of company law: that by becoming a shareholder, one agrees to be bound by the decisions of the majority shareholders.

However, in certain instances, an amendment, or the effect of an amendment, to an MOI may be oppressive or prejudicial to a minority shareholder and entitle them to relief in terms of section 163 of the Companies Act, with the effect being that such amendment, although valid and binding, does not apply to a specific minority shareholder as was confirmed by the Supreme Court of Appeal in Strategic Partners Group and Others v The Liquidators of Ilima Group (Pty) Ltd and Others (2023) ZASCA 27 (24 March 2023).

The oppression remedy

S163 enables a shareholder to apply to a court for relief where an act or omission of the company, a related person, its directors or prescribed officers, is oppressive, unfairly prejudicial or unfairly disregards its interests.

As s163 protects interests rather than just rights, its ambit is far-reaching, and its broad application allows a court to make any order it deems fit.¹

The Strategic case

In this case, Ilima Group (Pty) Ltd (“Ilima”), was placed in final liquidation in April 2010, and liquidators were duly appointed. Ilima held a minority shareholding in Strategic Partners Group (Pty) Ltd (Strategic), which constituted 11.784% of the entire issued share capital of Strategic (Ilima Shares). In line with their statutory duties, the liquidators were required to realise the Ilima Shares and distribute the proceeds to the creditors of Ilima.

In November 2013, the liquidators requested that a valuation of the Ilima Shares be conducted to determine their market value. In response to the liquidators’ request, Strategic appointed advisors who conducted the valuation in terms of a shareholders agreement which was later found to be invalid. A copy of the valuation was furnished to the liquidators almost a year later, in August 2014, which they rejected.

It is important to note that there was a written shareholders agreement intended to be concluded by the shareholders of Strategic which, in a separate application, was declared invalid by the High Court in November 2015, on the basis that there was no proof that all the shareholders consented to the agreement. The invalid shareholders agreement contained a standard forced sale clause in terms of which a shareholder being placed in liquidation would trigger a sale of that shareholder’s shares in Strategic, the day immediately before the date on which such shareholder is placed in liquidation. The forced sale clause also purported to set out how the value of a liquidated shareholder’s shareholding would be calculated.

Having rejected Strategic’s valuation and with the shareholders’ agreement being found to be invalid, the liquidators requested certain information to conduct an independent valuation. A dispute ensued between the liquidators and Strategic on what information the liquidators of an insolvent shareholder in a company are entitled to obtain from that company. This dispute culminated in a High Court application by Strategic against the liquidators in September 2018, seeking an order declaring that the liquidators were only limited to the information that Ilima, as a shareholder of Strategic, was entitled to in terms of the Companies Act. During the hearing of the case, Strategic conceded that this argument was untenable.

On 30 June 2020, the majority shareholders of Strategic approved an amendment to the Strategic MOI which introduced forced sale provisions as clause 27, which were akin to those set out in the invalid shareholders agreement. In light of this, the liquidators brought a counter-claim seeking relief to declare that in terms of s163(2)(h), the provisions of clause 27 of the Strategic MOI did not apply to the sale of the Ilima shares. The liquidators viewed this amendment as an attempt by Strategic to have the valuation performed without being furnished with the requested information. Once a valuation was arrived at in terms of clause 27, the liquidators would be bound by it.

The High Court had to consider whether the act of amending the Strategic MOI by introducing clause 27 operated oppressively or was unfairly prejudicial against the liquidators, or unfairly disregarded their interests. The High Court found this to be the case, based on the following key facts:

• the liquidators requested information on numerous occasions and their requests were met with outright refusals mixed with empty promises made by Strategic to provide the information;

• whilst the dispute around which information the liquidators were entitled to was ongoing, the Strategic MOI was amended to include forced sale provisions which purported to bind all the shareholders of Strategic. The effect of the amendment was that Strategic would avoid having to provide the liquidators with the requested information;

• the invalid shareholders agreement contained a forced sale mechanism which was not binding. Without the amendment to the Strategic MOI, Strategic would have had no right to impose a forced sale of the Ilima shares;

• the amendment to the Strategic MOI would result in an outcome that would only force upon the liquidators a consequence that did not exist before the amendment, while depriving them of their ability to access the necessary information to complete their statutory duties and to realise the Ilima shares on the open market at their current value, which value had already vested; and

• in its retrospective application, the amendment would not affect the shareholders equally, as the forced sale would only apply to the Ilima shares, which value would be limited to a historic date.

On this basis, the court held that the liquidators had satisfied the criteria in s163 and a declaratory order was granted, stipulating that clause 27 of the amended MOI would not apply to the Ilima shares in terms of s163(2)(h) of the Companies Act.

Where does this leave forced sale provisions?

Forced sale provisions are commonplace in agreements that regulate the relationship of shareholders of a company.

It is a norm for a forced sale clause to be negotiated in a manner that is unfavourable to shareholders (including minority shareholders), and this alone will not amount to unfairly prejudicial or oppressive conduct. The Strategic judgment does not alter this, as the court emphasised the context in which the forced sale clause was introduced into the MOI rather than the substance of the clause.

A key criterion of a s163 relief is not that a provision is unfair but instead that the conduct is unfairly prejudicial or oppressive to the interests of the complainant. The crux of the issue was that Strategic had attempted to implement the clause, amid tumultuous disagreements, as a mechanism to oppressively circumvent the liquidators’ rights.

The forced sale clause would have overreached commercial commonplace and infringed on the liquidators’ rights to discharge their statutory duty to act in Ilima’s general body of creditors’ best interests, while also imposing a valuation and sale of the Ilima shares in a manner that would have benefited Strategic while prejudicing the liquidators.

Thus, while a court may grant any relief it deems fit, it will not lightly grant the relief when the act is merely prejudicial or oppressive, but not unfairly so.² The court will consider each case’s merits.

Key takeaway

While our courts are still bound by the confines of the fundamental company law principle that majority rules, this case highlights that the court will be minded to grant appropriate relief in terms of s163 (including a punitive costs order) where it is clear that the conduct complained of is unfairly prejudicial or oppressive.

1 Grancy Properties Limited v Manala [2013] 3 All SA 111 (SCA); section 163(2) of the Companies Act 71 of 2008.
2 Grancy (n1 above) at paragraph 27.

Gabi Mailula is an Executive and Asanda Lembede a Candidate Legal Practitioner in Corporate and Commercial | ENSafrica.

This article first appeared in DealMakers, SA’s quarterly M&A publication

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