1 November 2017 by Dispute Resolution Alert

Can minority shareholders’ rights to prevent corporate bullying prescribe? Say it isn’t so!

The current Companies Act as well as its predecessor provide minority shareholders with specific rights and remedies to ensure that the corporate governance of a company cannot be manipulated or influenced by the majority shareholders to their disadvantage. Unfortunately, as companies grow and become profitable, shareholders often fall prey to disputes regarding, among others, the direction of the company, the allocation of dividends or the sale of company assets. Minority shareholders are often caught in the middle of these skirmishes.

The Constitutional Court decision in Off-Beat Holiday Club and Another v Sanbonani Holiday Spa Shareblock Limited and Others [2017] ZACC 15 considered whether one of the cornerstone rights available to minority shareholders is vulnerable to prescription.

Sanbonani Holiday Spa Shareblock Limited (Shareblock) operates a share block scheme in Hazyview, the property having been developed by Sanbonani Development Limited (Development). The controlling mind of both companies, through his family trust is Mr Harri who owned 80% of Development and 46.7% of the shares in Shareblock. In 1991, the applicants and minority shareholders of Shareblock, being Off-Beat Holiday Club and Flexi Holiday Club (Clubs) purchased 29.14% of the shareholding. 

In 1988, Shareblock, following a special general meeting, amended its original articles of association. In terms of the amendment a continuous right was conferred upon Development to use the area on the property demarcated for common facilities. Further, Development was given an unlimited discretion to develop a resort as a timeshare holiday establishment, including the right to allocate different numbers of shares to different share blocks. Development accordingly commenced building the resort consisting of chalets and a hotel on the property at the cost of R40 million. The hotel was completed in 1990. 

In 1999, disputes arose about the manner in which Shareblock was run and whether Mr Harri, as the majority shareholder, exercised improper influence over Shareblock to its detriment. In light of the shareholders’ disputes, in 2000 a settlement agreement was entered into to the exclusion of the Clubs which agreement was never complied with and in 2004, the Clubs launched an urgent application, which the court dismissed. Only in 2008, nine years later, were the current proceedings launched. 

The Clubs claimed two broad categories of relief:

  • In terms of s252 of the old Companies Act, No 61 of 1973 (Old Companies Act), the Clubs wanted a declarator that the creation and allocation of shares were invalid and that the offending articles of association were liable to be cancelled. 
  • In terms of s266 of the Old Companies Act, namely, a derivative action. 

Section 252, where our focus lies, provides a remedy to minority members of companies in cases where the majority are guilty of oppressive conduct that has unfairly prejudiced them.

Shareblock, Development and others argued that the Clubs’ claim in terms of s252 constituted a “debt” for purposes of the Prescription Act, No 68 of 1969 (Prescription Act) and therefore their claim had prescribed. 

The Constitutional Court held that in cases of corporate bullying, equitable intervention is necessary and the courts must be given some latitude to intervene and bring to an end the matters complained of. The court held that the following three steps must be followed in order to determine whether the minority shareholders’ claim constituted a “debt” and therefore had prescribed:

  • the characterisation of the claim;
  • whether the s252 claim had prescribed; and 
  • whether the acts complained of constituted continuing wrongs.

The court confirmed that the correct characterisation of a claim for purposes of the Prescription Act is the characterisation arising from the relevant legal provision on which the claim is based. Thus, according to s252 of the Old Companies Act, the Clubs’ claim is for declaratory relief, not an alteration of the terms of a contract or a monetary award. Interestingly, the court held further that when considering the merits of the case, and granting just and equitable relief, the courts must, even if claims have prescribed, consider the tardiness of the applicant in bringing its claim and remember that this section provides a crucial mechanism to keep corporate bullying at bay. 

When determining whether the Clubs’ claim had prescribed, the Constitutional Court found that the interpretation of the term “debt” which is the least intrusive of the right of access to the courts must be preferred. In this regard, the Constitutional Court adopted a narrow interpretation, holding that the claim in terms of s252 is a far cry from the definition of a “debt” which is something owed or due, or an obligation to pay money, goods or services to another. It is rather a right to seek a judicial determination as to whether the Clubs are entitled to a statutory remedy. In light of the above, the court did not consider the third step of the enquiry. The High Court is now tasked with reviewing the merits of the Clubs’ claims, and to see whether a fair and just remedy may be found. 

The minority judgment, however, provided that the relief set out in the Clubs’ application did not ask the court to determine whether their claims in terms of s252 had prescribed. The Clubs had pleaded specific relief regarding the allocation of shares and amending of the articles, which relief the High Court and the Supreme Court of Appeal correctly confirmed had prescribed. The Constitutional Court, according to the minority, had therefore erred in looking at whether claims in terms of s252 had prescribed and not at what the Clubs were specifically seeking in terms of their papers. The minority accordingly held that to provide a blanket decision that confirmed that any claims in terms of this section could not prescribe was taking it a step too far. 

Therefore, in the event that minority shareholders see a dispute brewing, action should be taken immediately. Claims in terms of s252 currently may not prescribe, however, the relief sought may be altered significantly if the courts believe that the shareholders were tardy in seeking help from the courts. 

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