PROTECTING MINORITY SHAREHOLDERS

Article by Cape Town Attorney: NICOLENE SCHOEMAN-LOUW

In any company, shareholders invest their money and trust in the hope of a fair return and proper governance. While majority shareholders often control the direction of the company, minority shareholders sometimes find themselves sidelined, with their voices drowned out or their interests overlooked. To prevent abuse of power and ensure fairness, South African law provides specific remedies to protect minority shareholders. The most significant of these is Section 163 of the Companies Act 71 of 2008, often referred to as the “oppression remedy.” But how does it work, and when can it be relied upon?

What is a Minority Shareholder?

A minority shareholder is any shareholder who does not hold enough shares to control company decisions. In practical terms, this means they cannot outvote majority shareholders when important resolutions are put to a vote. An oversimplification would be to say that, if one shareholder holds 70% of the company’s shares and another holds 30%, the latter is a minority shareholder.

Although minority shareholders still enjoy rights under the law and the company’s Memorandum of Incorporation (MOI), they are often vulnerable to decisions taken by the majority. Without legal protection, this imbalance could leave minority investors exposed to unfair or prejudicial conduct.

The Gist of Section 163

Section 163 provides minority shareholders with the right to apply to court for relief if the conduct of the company, its directors, or other shareholders is oppressive, unfairly prejudicial, or disregards their interests.

In essence, it is a safeguard against majority abuse. The section is deliberately broad to cover a wide range of possible unfair conduct. Importantly, an application under Section 163 can be brought not only by minority shareholders, but by any shareholder or director of the company who feels aggrieved.

The court, if satisfied that such conduct exists, has very wide powers to grant a remedy tailored to the circumstances.

When Can Section 163 Be Used?

Not every disagreement or disappointment in a company qualifies for relief. Section 163 is designed for situations where there is serious misconduct or unfairness that undermines the rights or interests of shareholders. The section can be invoked in three key situations:

1. Oppressive Conduct – where actions by the company or its directors are burdensome, harsh, or wrongful. For example, if directors deliberately exclude certain shareholders from participating in management decisions or impose decisions in bad faith.
2. Unfairly Prejudicial Conduct – where the effect of decisions or actions unfairly harms the financial or personal interests of a shareholder. An example would be the majority paying themselves excessive director remuneration while withholding dividends.
3. Disregard of Interests – where legitimate shareholder interests are ignored. For instance, if directors act in a way that benefits themselves at the expense of the company or certain shareholders, without considering their fiduciary duties.

In practice, conduct that justifies a Section 163 application often overlaps with breaches of fiduciary duty or abuse of power by those in control.

Examples of Conduct That May Trigger Section 163

Courts have dealt with various scenarios under Section 163, including:

• Excluding minority shareholders from access to company information.
• Diluting minority shareholding unfairly through the issue of new shares.
• Paying directors or majority shareholders excessive salaries or benefits while withholding returns for others.
• Running the company in a way that benefits a few at the expense of the broader shareholder body.
• Preventing minority shareholders from participating in decision-making processes.

These examples show that Section 163 is not limited to extreme misconduct but applies to any unfair exercise of majority control that harms shareholders.

Remedies Available to Shareholders

One of the most powerful features of Section 163 is the wide discretion it gives the court to craft an appropriate remedy. Depending on the circumstances, the court may:

• Set aside a decision of the directors or shareholders.
• Amend or review the company’s MOI or agreements.
• Require the company or majority shareholders to purchase the shares of the oppressed shareholder at a fair value.
• Appoint directors to safeguard minority interests.
• Regulate the future conduct of the company’s affairs.
• Grant any other relief that the court considers just and equitable.

This flexibility ensures that remedies are not limited to a “one-size-fits-all” approach but can be tailored to the specific unfairness faced by the shareholder.

Why Section 163 Matters for Minority Shareholders

For minority shareholders, Section 163 provides a critical safety net. It balances the natural power inequality between majority and minority shareholders by ensuring that the majority cannot simply run the company as they please, without regard to others.

Without such a remedy, minority shareholders would face significant risks, including being excluded from participation, denied returns, or forced into disadvantageous situations. Section 163 empowers them to hold directors and majority shareholders accountable, ensuring that corporate governance remains fair and transparent.

It also strengthens investor confidence. Knowing that the law protects their interests, minority shareholders are more likely to invest in companies where they are not in control, thereby contributing to economic growth.

Conclusion

Being a minority shareholder comes with challenges, but South African law, and specifically the Companies Act provides important protections to ensure fairness. Section 163 empowers shareholders to approach the courts when faced with oppressive or prejudicial conduct, offering a wide range of remedies to restore balance. For shareholders—particularly minority shareholders—understanding Section 163 is vital. It is not only a legal remedy but a warning to the majority, to acknowledge their rights, and ensure that companies are managed in a way that is fair, accountable, and transparent.

For more information, please visit our website schoemanlaw.co.za or give us a call on 021 425 5604