22 June 2021 by Corporate & Commercial Alert

When the tribe has not spoken: How to handle dissenting minority shareholders

In the television show Survivor, the jury consists of a group of eliminated castaways that return to witness the remaining castaways at the Tribal Councils. The information they take in from these visits is supposed to help them decide who to vote for to win the ultimate cash prize and title of Sole Survivor at the end of the game at the Final Tribal Council. The Final Tribal Council can be likened to an annual general meeting (AGM) of a company because some of the most critical corporate actions are approved at such a meeting and much like some jury members, disgruntled shareholders tend to use their leverage to vote down certain resolutions. This article discusses the growing tendency of minority shareholders voting against, and in some instances having enough power to vote down, important special resolutions such as those for directors’ remuneration (in terms of section 66(9) of the Companies Act 71 of 2008 (Companies Act)) and intra-group financial assistance resolutions (in terms of section 45(3)(a)(ii) of the Companies Act) at AGMs, and how companies can address or mitigate this going forward.

Shareholders hold shares as their private property and, unlike board members, they do not participate in the day-to-day management of the company and do not owe a fiduciary duty to the company. Shareholders may exercise the voting rights attached to the shares as they please and in accordance with their personal interests. Resolutions approving directors’ remuneration and the provision of financial assistance to related companies are particularly important corporate actions that require shareholder approval prior to implementation. Naturally, shareholders are more scrupulous in their consideration of these resolutions because they are deciding on how the company’s resources should be applied. In addition, in terms of the Companies Act, resolutions approving directors’ remuneration and financial assistance remain valid for up to two years from the date on which they were passed. To be clear, the conventional thinking is that executive pay falls outside of section 66(8) and (9) of the Companies Act, as such remuneration is qua employee and not qua director, and thus one is more concerned in this context with fees paid to the non-executive directors. The executive pay policy is however submitted by JSE listed companies to their shareholders for a non-binding advisory vote.

The difficulty that the Companies Act introduced is that directors’ remuneration and the provision of financial assistance must be approved by way of a special resolution (supported by at least 75% of the voting rights exercised on the resolution). The threshold for a special resolution may be adjusted upwards or downwards in the memorandum of incorporation of the company, provided that there is always at least a 10% margin between the lowest threshold for passing a special resolution and the highest threshold for passing an ordinary resolution. But not for JSE listed companies: for these companies, the adjustment cannot go downwards from 75%. Given that the resolutions approving the directors’ remuneration and the provision of financial assistance are often passed at the AGM, companies face the risk of minority shareholders taking an activist approach by pooling their votes in order to vote against these resolutions, and their motives in doing so, whilst varied and at times controversial, are legally irrelevant. The risk of minority shareholders defeating these resolutions is particularly acute for listed companies because of the often poor attendance at AGMs, which increases the voting weight of the activist minorities who do happen to be present (in person or by proxy).

As a means to prepare for minority shareholder dissent on key special resolutions, the natural starting point is that companies need to embrace the stakeholder inclusive approach in the King Report on Corporate Governance. In practice, such a stakeholder inclusive approach can entail companies engaging with discontent shareholders on issues of director remuneration and financial assistance in advance of passing the resolutions so that they are able to anticipate the type of concerns or demands shareholders are likely to raise. Another mitigating strategy that companies should consider taking to address this issue is to ensure that special resolutions approving directors’ remuneration and financial assistance remain valid for the maximum period of two years (as prescribed by the Companies Act) and not a shorter self-imposed period, such as from one AGM to the next. This buys the company vital time to regroup and assess its position after such resolutions fail at the AGM, and enables the company to at least pay its directors and provide much-needed intra-group financial assistance for another year. Alternatively, and perhaps as a last resort, companies may consider invoking the provisions of section 6(2) of the Companies Act which states that:

A person may apply to the Companies Tribunal for an administrative order exempting an agreement, transaction, arrangement, resolution, or provision of the company’s Memorandum of Incorporation or rules from any prohibition or requirement established by or in terms of an unalterable provision of this Act, other than a provision that falls within the jurisdiction of the Panel.

The Companies Tribunal may issue an exemption order if it is satisfied that: (i) the arrangement serves a reasonable purpose and does not defeat a requirement established by an unalterable provision of the Companies Act, and (ii) it is reasonable and justifiable for the Companies Tribunal to grant the exemption in light of the purposes of the Companies Act and all relevant factors. To date, the use of this provision in the context of a company being hamstrung by its dissenting minority shareholders is unprecedent, and it is unclear what the likely outcome would be of an application in this regard. One may probably accept that only exceptional circumstances would justify an order under this section, and it would be required that the company has exhausted all other avenues.

Whilst the votes of shareholders can never be absolutely predicted, companies need to take steps to ensure that they are practising good corporate governance and are proactively participating in the appropriate level of shareholder engagement. Failure to do so may leave the company exposed to shareholder disapproval in respect of some the most critical matters that require a high level of shareholder assent.

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