Shar eholder G over nance , Re me die s, and Dispute Re solution

Backgr ound contex t:

A company is a separate legal person – they can own assets; they can sue and be a party to litigation.
Companies are fictional entities so they need human beings to act as their agents (board of directors).
The fact that humans must be involved means that there will be disagreements about many things,
there needs to be a system to organize the decision making (like the board of directors that make the
decisions). The process of decision making is called corporate governance.

Primarily this is spoken about in the context of directors and their powers and duties, but they are not
the only decision makers in the company. Shareholders play an important financial role and in
exchange for that, they have the right to have a say in how the company is managed.

A company used to be seen to be comprised of two organs – the board of directors and the other is the
shareholders in general meeting (shareholders can only make decisions by passing resolutions in
general meetings).

The decisions are influenced by majoritarian principle – the way to make a fair decision is to go with
what the majority says. It is hard to get a unanimous decision, this is why the majority is used.
Majoritarianism in corporate governance confirmed in Foss v Harbottle (1843) 67 ER 189
Both directors and shareholders are involved in decision making an they make use of majoritarianism.

There is one problem with the governance. In large companies where there are thousands of
shareholders and separate board of directors. There is a separation between the owners and managers
of the company.

This brings about shareholder apathy. Shareholders not involving themselves in the governance of the
company. They do not see value in being involved in the company. There can be a low turnout in
meetings and they don’t exercise their statutory rights or question the board of directors. A reason can
be that if you own shares and the company does something you don’t agree with, the number one
option is to just sell the shares, thus voicing displeasure by exiting. They don’t think it is worth the effort
to engage or influence the directors. Shareholders are generally also just looking to make profit.

The opposite is shareholder activism which has arisen in the last 20 years. They now voice their
dissatisfaction and organising a resolution to remove directors. Institutional shareholders (n institution
that buys shares) tend to take part in this. They object to or question the decision. They voice
displeasure about things like remuneration policies.

Remuner ation policy (s1 6 5 )

Any remuneration must be approved by a special resolution by the shareholders. The shareholders
need to give the go ahead. More often institutional shareholders are working together to reject th policy
or to remove the directors.

Significant shar eholder decision -making powe r s:

• To appoint and remove directors
• To amend the MOI
• To approve certain transactions (s 44 and 46) – fundamental transactions, distributions and
financial assistance.
T ypes of r esolutions:
1) Ordinary resolution: A decision taken at a general meeting with the support of more than 50% of the
voting rights exercised on the resolution in favour of the decision. BUT a company’s MOI may specify a
higher percentage of voting rights to approve a resolution (except decision to remove director) .
Provided there is a margin of at least 10 percentage points between the requirements for the adoption
of an ordinary and a special resolution

2) Special resolutions: A decision taken at a general meeting with the support of at least 75% of the
voting rights exercised on the resolution. The MOI may permit a lower percentage of voting rights to
approve the resolution, provided that there is a margin of at least 10 percentage points between the
requirements for the adoption of an ordinary and a special resolution.
Special Resolutions are required for the following decisions:
• Amendment of the Memorandum of Incorporation
• Approving the voluntary winding-up of the company
• Approval of fundamental transactions
• Approval of directors’ remuneration
• Ratification in terms of s 20(2)
• Any other matter required by the Memorandum of Incorporation

ESV and minor ity shar eholder pr otection:

There will likely be a group of shareholders that do not agree with certain decision and therefore they
need to be protected. They have remedies available to them, such as appraisal rights.
Where a shareholder is negatively affected by a decision, they can use remedies afforded to them such
as derivative action. They sue on the company’s behalf. It is a specific remedy and only applies in
specific scenarios. This is when a shareholder becomes powerless as a result of majoritarianism,

Shar eholder r emedies: the der ivative action:

This remedy was confirmed in the case of Foss v Harbottle – the proper plaintiff rule.
The proper plaintiff rule is linked to separate legal personality because according to this rule, if a
company suffers damages or if their rights are infringed, they have a legal right to enforce the claim or
to sue to recover damages. The rule says that only the company can litigate to enforce its rights.
This is not an absolute rule, the exception is derivative action.

If massive damage is caused to the company, they can sue, but the human beings must make the
decision to institute the proceedings. The bard of directors has the authority to decide to institute legal
proceedings.

The board can decide to not sue to recover damages. They can be related or the claim can be small
and they decide it is not worth it.

What happens when they decide not to exercise these rights? The decision not to institute action, it will
negatively impact the shareholders because the company will have to pay for the damages.

As a shareholder you have the option to use derivative action. This is the process of stepping into the
company’s shoes and suing on their behalf. It is called derivative because it is deriving from the
company’s right.

Who has locus standi to use this action? In terms of common law, this was only available to
shareholders. This has now been extended in the act in section 165(2). First category is shareholders,
then directors, prescribed officers, a registered trade union that represents the employees of the
companies (provided they act through the union), and any person who has been granted leave by a
court to use this action.
Ex ample:
Joe, the husband of one of Company B’s directors, negligently burns down the company’s head office.
The building was not insured. The company’s board of directors does not wish to sue Joe for damages.
Explain to the shareholders what their rights are in such a situation, as well as how to enforce them.
(8)

How to answer:
Explain derivative action
Speak about procedure to enforce – not an automatic right, there are steps that need to be followed.

Section 1 6 5 pr ocedur e:
F ir st step – the applicant needs to ser ve a de mand on the company.
165 says the demand the company to enforce their rights.
Marib Holdings (Pty) Ltd v Parring NO and Others [2020] ZAWCHC 74 – director remuneration, no
special resolution and they had the right to recover the money paid. The payment was not valid.

Ex ample of a demand (fr om Mar ib case ):

“We have instructions to demand, as we hereby do, that the (applicant) commence legal proceedings
against its directors, viz Blum Khan, Brian Figaji and Lionel Louw, to recover all directors remuneration
paid to them to date, which remuneration was paid contrary to the provisions of s66 (9) of the Act, in
order to protect the legal interests of the (applicant).”

Second step – company’s r esponse:

(i) Investigation, consideration, and board’s decision (Section 165(4), OR
(ii) If company feels applicant’s demand is frivolous, vexatious or without merit, board may apply to
court for setting aside of the demand (Section 165(3)) (this is what happened in the Marib case)

T hir d step – application for setting aside of de mand (s1 6 5 (3 ))

Marib Holdings (Pty) Ltd v Parring NO and Others [2020] ZAWCHC 74
(Remuneration paid to directors without required special resolution)
Court: Standard ito s 165(3) = demand must show a valid legal question/case to be answered, the
claim must have merit, could potentially succeed if it goes to trial.
Paragraph 38.

If court feels there is merit, the court must appoint someone to investigate the demand and they must
report whether there is a legal right that was infringed and is there a legal right that can be taken to
court. The board must receive the report and examine it to determine whether they will institute
proceedings or not. If they do, derivative action comes to an end and litigation starts.
If they succeed with setting aside the demand, there is no derivative action.
If they fail or decide not to institute, the procedure continues.

F our th step - Application for leave (Se ction 1 6 5 (5 ))

Applicant must apply to court for leave. They need to ask for permission to continue with the derivative
action. The court has the power to allow or reject this application if they are not satisfied with the
demand.

T hey decide this on a few gr ounds;

1 ) G ood faith
Lazarus Mbethe Para 20-22

“The enquiry is whether the evidence reveals reasonable (and therefore objective) grounds for the
appellant's statement that he acts in good faith… if the evidence establishes the presence of a collateral
or ulterior purpose on the part of the appellant, the pursuit of which does not involve the trial of a
serious question of material consequence to the company, or which is not in the best interests of the
company, this may also constitute cogent evidence of the absence of good faith on the part of the
appellant.”

2 ) Ser ious question of mater ial conseque nce

Serious = neither frivolous nor vexatious;
‘Material consequence to the company' would serve to block superfluous derivative actions such as
proposed claims for the recovery of trifling, negligible or nominal amounts, or claims brought to bash
or embarrass directors, for personal reasons eg Lazarus Mbethe case

3 ) Best inter ests of the company

“If there are alternative means to obtain the same relief which do not involve the company being
compelled to litigate against its wishes, this would be an important consideration in determining
whether to grant leave to an applicant”
Best interests’ requirement is coupled with a rebuttable presumption in s 165(7)

T he r ebuttable pr esumption:
The best interests requirement is coupled with a rebuttable presumption. A rebuttable presumption
arises that it would not be in the best interests of the company to grant leave if it is established that
the proceedings are by the company against a third party, or by a third party against the company;
the company has decided not to bring the proceedings (or not to defend the proceedings, or to
discontinue, settle or compromise the proceedings, as the case may be); and
all of the directors who participated in that decision–
o acted in good faith for a proper purpose;
o did not have a personal financial interest in the decision, and were not ‘related’ to a person who
had a personal financial interest in the decision (for instance, a spouse or child of the director or
a company ‘controlled’ by the director);
o informed themselves about the subject matter of the decision to the extent they reasonably
believed to be appropriate; and
o reasonably believed that the decision was in the best interests of the company.

L az aru s Mbe the case:

ISSUE: Should the court grant leave to LM’s derivative action proceedings?

Court:
“Although the individual requirements of subsecs 165(5)(b)(i), (ii) and (iii) of the Act are conjunctive, this
does not mean that they are to be considered in isolation. For example, in considering whether the
proceedings involve “the trial of a serious question of material consequence to the company", a finding
that the applicant possesses a collateral or ulterior purpose, will also be of relevance in deciding
whether the applicant acts in good faith. Similarly, evidence which suggests that the proceedings are
not “in the best interests of the company", may establish an absence of good faith on the part of the
applicant.”
“Accordingly, the objective facts revealed by the evidence do not disclose any reasonable grounds to
support the statement by the appellant, that he acted in good faith in seeking to have the contract with
Zastrospace reinstated. The absence of reasonable grounds for belief in the truth of this statement,
provides cogent evidence that he did not hold such a belief… points inexorably to the presence of a
collateral ulterior purpose on the part of the appellant, in order to explain his conduct”
Court also pointed out that the application had alternative remedies available to him (s 20(4) and s
163), therefore derivative action not in best interests of company

LEAVE REFUSED
Appr aisal Right – Section 1 6 4
This is a right to compel a company to buy back shares. It’s a way for an unhappy shareholder to exit a
company while realising the “fair value” of his shares. This is however not always the best option for
minority shareholders who wish to still keep their shares and influence the company internally.
This is only available to shareholders.

This right is triggered in certain specified circumstances only. There are four circumstances where it can
be triggered.
In terms of s 164 of the Act, the appraisal right is triggered where a company proposes to pass a
special resolution to
• dispose of all or the greater part of its assets or undertaking;
• enter into an amalgamation or merger;
• implement a scheme of arrangement; or
• amend its Memorandum of Incorporation by altering the preferences, rights, limitations or other
terms of any class of its shares in any manner materially adverse to the rights or interests of the
holders of that class of shares (ie an alteration of class rights).

T r igger ing Actions

(1) If company considers a resolution/takes step to amend MOI in a way that prejudices rights of a
shareholder; EG remove voting right, convert shares into different classes, amend MOI to increase
authorised shares or provide greater authority to BOD/directors…anything that COULD affect rights or
interests of a shareholder. “Interests is so broad that most MOI amendments could potentially trigger
the appraisal right.

(2) If company proposes transaction governed by section 112,113, or 114 (Fundamental transactions)
Common denominator is potentially negative impact on SHS. (Fundamental alteration of assets,
securities or shareholder rights)
Options i – iii above.
minority shareholder may not be able to sell shares to external buyer, therefore provided with
legislative protection.

F AIR V ALUE?
1) Agreement or
2) Court order
Courts may appoint independent appraiser to assist in determining fair value
BNS Nominees (RF) (Proprietary) Limited v Arrowhead Properties Limited 2023 (1) SA 478: “fair value”
is not necessarily fair market value, because the market can be distorted
“Fair value is the value a share would realise in an undistorted market, in the medium term, with free
interaction between buyers and sellers with proper information, and without any exceptions being made
for minority holdings or the effect of the corporate action which has led to the dissent.”

P r ocedur e to enfor ce appr aisal r ights

“Lengthy series of hurdles that must be jumped” (BNS Nominees case)
Section 164(4)-
– (i) advance notice of intention to oppose resolution;
– (ii) attended meeting;
– (iii) voted against the resolution
Unfair pr ejudice r emedy
This is provided for in section 163 of the act and is available to shareholders and directors.

T he r equir ements for r elief ar e;

• first, there must be relevant ‘conduct’; and
• second, such ‘conduct’ must be oppressive or unfairly prejudicial or unfairly disregard his or her
interests.

Section 163 (‘the oppression remedy’) states that a shareholder or a director of a company may apply
to a court for relief if he or she has been oppressed or unfairly prejudiced or if his or her interests have
been unfairly disregarded by (the relevant conduct)
• the result of any act or omission of the company, or a related person;
• the manner in which the business of the company, or a related person, is being or has been
carried on or conducted; or
• the manner in which the powers of a director or prescribed officer of the company, or a person
related to the company, are being or have been exercised.

To prove the conduct was oppressive or unfairly prejudicial to the applicant, the ambit is wide and
undefined, but one can use section 66 of the previous act. The principles are as follows;
i. Relief would be granted under the oppression remedy if the applicant is able to establish ‘a lack
of probity or fair dealing, or a visible departure from the standards of fair dealing, or a violation
of the conditions of fair play on which every shareholder is entitled to rely ... The emphasis is on
the unfairness of the conduct complained of. It must be conduct which departs from the accepted
standards of fair play, or which amounts to an unfair discrimination against the minority.’

ii. The test of the oppression remedy is unfairness, as opposed to unlawfulness. The relevant
‘conduct’ does not necessarily have to be unlawful, in the sense that it infringes any legal rights
of the applicant, for instance, rights under the Act or the company’s Memorandum of
Incorporation. Instead, the court may also take account of the applicant’s interests, which are
broader than ‘rights’ and may include wide equitable considerations. The inclusion in the Act of
the unfair disregard of the applicant’s ‘interests’ now emphasises this principle.

iii. In certain circumstances equitable principles would render it unfair for the majority (or those
conducting the business of the company) to exercise their strict legal powers, where this would be
to the prejudice of another shareholder.

iv. The court would grant relief under the oppression remedy when, for instance, the majority
shareholders use their ‘greater voting power unfairly in order to prejudice’ a minority
shareholder, or when they act in a manner which does not enable such a shareholder to enjoy a
fair participation in the affairs of the company. When one is able to readily rid oneself of the
alleged prejudice or to put an end to it (for instance, as a majority shareholder or controlling
shareholder), then one may not complain of unfair prejudice or unfair disregard of one’s
interests - the court will not intervene, on the basis that there is no ‘unfair’ prejudice or ‘unfair’
disregard of interests.

v. The courts have granted relief in the ‘standard case’ of a quasi-partnership. The quasi-
partnership type of case serves as a useful illustration of the oppression remedy. A quasi-
partnership (or owner-managed company) usually involves a small private company that is
formed on the basis of an agreement, an understanding or an intention that the shareholders
will generally all be directors and participate in the management of the company, for instance,
because the return on investment is to take the form of directors’ remuneration rather than
dividends on shares. Where the majority shareholders subsequently use their voting power to
 unjustifiably remove a shareholder from his or her office as a director, without giving him or her
the opportunity to withdraw his or her capital upon reasonable terms, the courts have granted
relief to the shareholder on the basis of the oppression remedy.
vi. Despite the wide ambit of s 163, it must be borne in mind that the conduct of the majority
shareholders must be evaluated in light of the fundamental corporate law principle that, by
becoming a shareholder, the shareholder undertakes to be bound by the decisions of the
majority shareholders. A minority shareholder accordingly cannot obtain relief merely because
he or she (or it) is outvoted on a certain issue, or is constantly outvoted; nor may relief be
granted merely on the basis of a loss of confidence in or dissatisfaction with the conduct of the
company’s affairs. Thus, not all acts which prejudicially affect shareholders or directors, or which
disregard their interests, will entitle them to relief – it must be shown not only that the ‘conduct’ is
prejudicial or disregardful but also that it is unfairly so.

T he available r elief:
Section 163 sets out an extensive, but non-exhaustive, list of possible remedies. The open-ended list
includes the following remedies, some of which are far-reaching:
i. an order restraining the conduct of which the applicant complains;

ii. an order appointing a liquidator, which may be made only if the company appears to be
insolvent;

iii. an order placing the company under supervision and commencing business rescue
proceedings, if the grounds for business rescue are satisfied;

iv. an order to regulate the company’s affairs by directing the company to:
a. amend its Memorandum of Incorporation; or
b. create or amend a unanimous shareholder agreement.

When an order directs the company to amend its Memorandum of Incorporation, the company must
not make any further amendment to the Memorandum of Incorporation that will alter, limit or negate
the effect of the court order unless and until a court orders otherwise. (The amendment of the
Memorandum of Incorporation in this case is affected by a resolution of the board of directors of the
company as opposed to a special resolution of the shareholders.)
v. an order directing an issue of shares or an exchange of shares;

vi. an order appointing director in place of or in addition to (all or any of) the directors then in
office;

vii. an order declaring a director to be delinquent or to place a director under probation;

viii. an order directing the company or any other person to restore to a shareholder any part of the
consideration that the shareholder paid for shares, or to pay the equivalent value;

ix. an order varying or setting aside a transaction or agreement to which the company is a party
and compensating the company or any other party;

x. an order requiring the company, within a time specified by the court, to produce to the court or
an interested person financial statement in a form required by the Act, or an accounting in any
other form the court may determine;

xi. an order to pay compensation to an aggrieved person, subject to any other law entitling that
person to compensation;

xii. an order directing rectification of the registers or other records of a company;

xiii. an order for the trial of any issue as determined by the court.

The section does not explicitly refer to an order to purchase the shares of a shareholder (whether by
other shareholders or by the company), even though this has been the most common remedy granted
by the courts in practice. But the court would in all probability be able to make such an order, since the
list of orders under the section is non-exhaustive and open-ended.

Common law on unfair pr ejudice r eme dy

“Reasonable person would regard the prejudice as unfair”
“Remedy is available where company not dealing equitably at shareholder”
“Principles of fair play have been disregarded or clear company is particularly targeting one
shareholder or a class”
Wherever there is “unfair discrimination against shareholders”

So?
Some broad guidance = fair dealing. Ito fair dealing approach: Every voice must be heard, even in
majoritarianism system. Oppressive conduct (denied the right to cast vote) would be unfair dealing.
‘That’s not right”
EG Shareholder’s name not entered into share register, shareholder not allowed to vote at general
meeting…malicious intent, wanting to exclude shareholder from influencing company actions by
making it as difficult as possible for shareholder to participate in company. Singling out for arbitrary
treatment, etc.

Enfor ceme nt and dispute r e solution

Intr oduction
There are several provisions in the Act that can impose liability for violations of the Act. In addition, the
Act creates several avenues, institutions and fora to resolve disputes, enforce compliance with the Act,
and penalise violations of the Act.

Locus Standi
1) Standing (right to redress)
The Act has broad standing provisions capable of protecting several persons that may be affected
by a company’s publication of materially false or misleading financial statements. Persons will have
standing to utilise the Act’s dispute resolution avenues if they:
• are directly permitted to take such steps in terms of a particular provision in the Act;
• are acting on behalf of a person contemplated in (a), who cannot act in his own name;
• are acting as a member of or in the interest of a group or class of affected persons, or an
association acting in the interests of its members; or
• are acting in the public interest. (Section 157(1) of the Act).

Alter native dispute r esolution

Conciliation, Mediation and Arbitration instead of formal court procedure
ADR saves time and money
**Generally speaking, any person with standing may attempt to address an alleged contravention of
the Act with the company itself through alternative dispute resolution mechanisms. (Section 156(a) of
the Act.)
PLUS, any person with standing may apply for alternative dispute resolution to resolve a dispute,
through the CIPC, Tribunal, court or any other relevant accredited independent body. These bodies
may be empowered to mediate, conciliate, or arbitrate the issue(s) brought before them.
See sections 156(a), 157(1) and s 166(1)
Statutor y dispute r esolution mechanisms
(In addition to ADR)
A person with standing may also make application to the High Court for appropriate relief, file a
complaint with the Companies and Intellectual Property Commission (CIPC) or Takeover Regulation
Panel (if applicable), or apply to the Companies Tribunal (the Tribunal) for adjudication ‘in respect of
any matter of which such an application is permitted in terms of this Act’. Therefore, there are several
avenues fora to address violations of the Act.
(See Section 156(a) of the Act, Section 156(d) of the Act.)

Enfor cement agencies

1) CIPC
One of the functions of the CIPC is to effectively enforce the Act and other applicable legislation.
The CIPC serves a monitoring, investigative, and complaints-receiving role regarding compliance with
the Act. The CIPC may investigate a complaint received from a per son with standing. The Act confers
several investigative powers on the CIPC, including the right to summon any person to appear before
and provide evidence regarding a matter under investigation.
After investigation and a finding that a person is acting in violation of the Act, the CIPC may issue a
compliance notice. After an investigation, the CIPC may refer a matter to the National Prosecuting
Authority (NPA) if the CIPC is of the opinion that a person has committed an offence in terms of the Act
or other legislation.
If a person fails to satisfy a compliance notice issued by the CIPC, then the CIPC may ‘apply to a court
for imposition of an administrative fine or refer the matter to the National Prosecuting Authority for
Prosecution for prosecution as an offence in terms of section 214(3)’. Companies Act s 170(7)(a)-(b)

2 ) Companies T r ibunal
The Tribunal serves as a forum for alternative dispute resolution and can play an adjudicative role. The
Tribunal, which is made up primarily of lawyers, mediators and corporate law academics, is
empowered to assist in the resolution of disputes voluntarily referred to it, and to adjudicate disputes
and make orders on application to it in terms of applicable provisions in the Act. There are only certain
matters that may be referred to the Tribunal for adjudication (aka judgment).
To assist in resolving disputes, the Tribunal has the power to summon any person to appear before and
provide evidence to it. Section 182 of the Act.

Remedies
1 ) Civil Remedies:
EG INTERDICTS, Damages, Declaratory Orders
RESTRAINT: A company’s shareholders, directors or prescribed officers, or a trade union representing
the company’s employees may apply to the High Court for an appropriate order to restrain the
company from violating the Act. Section 20(4) of the Act.
Also, restraint in terms of Section 20(5)

DAMAGES: For example, s 20(6), s 218(2), s 77(2) and 77(3) of the Act.

2 ) Cr iminal P enalties
See s 214(1)
EG creating and publishing false/misleading financial statements is a criminal offence (Sections 29(6)
and 214(2)).