By Johann Botha – Senior Associate
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Section 163 of the Companies Act 71 of 2008 (the “Act”) provides a crucial mechanism for minority shareholders and directors to seek relief from acts or omissions by a company or related persons that are oppressive, unfairly prejudicial, or unfairly disregard their interests. This section aims to safeguard minority shareholders who may be adversely affected by decisions made by the majority shareholders.
In the matter of Armitage NO v Valencia Holdings 13 (Pty) Ltd and Others (638/2022) [2023] ZASCA, the Supreme Court of Appeal considered an appeal in relation to section 163(1) of the Act and whether oppressive or unfairly prejudicial conduct had been established. The dispute centred around interest-free loans granted by Valencia Holdings 13 (Pty) Ltd (“Valencia”) to its shareholders, including the deceased, as an advance on future dividends.
Background:
- Michelle Armitage’s late husband (the “Minority Shareholder”) was a minority shareholder of Valencia. Michelle was also the executrix of the late estate of the Minority Shareholder.
- During the period from February 2012 to February 2016, the shareholders (including the Minority Shareholder) devised a scheme in terms of which a shareholder could take out interest-free shareholder loans that were described as advance payments on future dividends.
- Valencia would first amortise the loans against the dividend due to the relevant shareholder and pay any remaining credit balance to the shareholders.
- Valencia’s shareholder agreement provided that the shareholders would take out and maintain a “buy and sell” indemnity insurance on each other’s lives in the event of the death or disability of one of them. Upon the death of the Minority Shareholder, a life insurance policy paid out R6,768,900 to the surviving shareholders.
- Upon the payment of the life insurance policy, the remaining shareholders, being the majority, of Valencia attempted to purchase the shares held by the late estate of the Minority Shareholder without any success due to the executrix objection against such transaction.
- The executrix’s objection was based on an allegation that the remaining shareholders enjoyed a substantial benefit by way of ‘huge interest-free loans made by Valencia’ to her exclusion. The executrix, among other claims, alleged that the majority of the shareholders acted in concert and engaged in ‘oppressive and/or unfairly prejudicial’ conduct under section 163(1) and (2) of the Act in disregard of her interests [the executrix].
- The executrix submitted that the shareholder loan arrangement and its characterisation as advance dividends amount to oppressive and unfairly prejudicial conduct.
Finding of the Supreme Court of Appeal
- The Supreme Court of Appeal (“SCA”) considered the application of section 163 and emphasized the necessity for minority shareholders to demonstrate that the conduct complained of is truly oppressive or unfairly prejudicial.
- The test for oppressive and unfairly prejudicial conduct contained in section 163 is an objective one.
- The SCA noted that prior to the passing of the Minority Shareholder, the Minority Shareholder enjoyed the benefit of the shareholder loan arrangement. In addition, the loan account ledger showed that Valencia maintained the Minority Shareholder’s loan account beyond its death. The Minority Shareholder’s late estate continued to reap benefits of the shareholder loan arrangement after the Minority Shareholder’s death.
- The SCA found that in these circumstances, relief cannot be provided by section 163(2) of the Act as there was no act or omission that was oppressive or unfairly prejudicial, bearing in mind the following:
- The Minority Shareholder benefitted from the arrangement or decision of the majority shareholders and consented to this arrangement prior to its passing for more than 4 years.
- On the same token, the executrix is not entitled to claim a bigger piece of the pie at a later stage by utilising section 163 of the Act on the basis that the benefit derived from the arrangement by the Minority Shareholder is now all of the sudden oppressive or unfairly prejudiced.
- It is difficult to establish oppressive or unfairly prejudicial conduct under section 163 of the Act, where both the Minority Shareholder and the majority shareholders derived the same benefit on the same terms.
Key Takeaway
The SCA's decision underscores the importance of shareholders understanding the provisions of a company’s memorandum of incorporation and shareholders agreement.
It serves as a reminder that minority shareholders must act in accordance with the agreements they have consented to, and they cannot seek relief under section 163 for their own strategic purposes.