This is a matter of some practical importance: many private companies have only a few shareholders and directors (they are often one and the same), and the relationship between them may become difficult or even break down.

The case had a long history, and in its finding the SCA overturned a 2017 judgment which had been cited as an authority on this vexing issue.

A majority shareholder in the company was dismissed as an employee. He complained that because he was no longer employed, he was “locked in” to the company against his will because he was unable to dispose of his shares, but he was also excluded from participation in its management. He claimed he had lost confidence in the management of the company and went to court to force the minority to buy his shares – the High Court said they had to, but this was overturned by the SCA.

In principle, the parties had agreed to separate, but could not agree on the terms of the separation, particularly the price for the shares of the exiting shareholder. The court had to determine whether the minority shareholders should buy out the majority in order to force the issue.

The general principle is that the supremacy of the majority is essential to the proper functioning of companies. Minorities have to accept that steps taken which they do not like, or which may be unfavourable to them, generally bind them.

Legislation both here and overseas has recognised, however, that in certain circumstances, even if majority shareholders strictly adhere to the contractual terms governing the relationship, they may still act oppressively and be unfairly prejudicial against minority shareholders. In such circumstances the minority may approach the court for relief.

Understanding prejudice

Over the years, the courts have wrestled with what is meant by the concept of “unfair prejudice” – prejudice is inherently unfair, so when does it become actionable in the hands of a minority. The courts have therefore dealt with it as a concept to be applied to the particular facts of each case. The starting point is that the court should not interfere in the management of a company as a general rule but rather when the oppression becomes so unfair that intervention is required.

As Wallis JA put it:

“Dissatisfaction and disagreement with, or disapproval of, the conduct of the business, does not of itself mean that the member has suffered unfair prejudice. The fact that there are irreconcilable differences between shareholders may in some circumstances justify an order for winding up the company, but it is not, without more, unfair prejudice. Something more is required. The question is, how much more?”

Lord Hoffmann said this in an English case to which reference was made: “Unfairness may consist in a breach of the rules [of a company] or in using the rules in a manner which equity would regard as contrary to good faith.”

Wallis JA noted that there are two, often overlapping, common factual situations where claims as to unfair prejudice usually arise:

“The first is where there was an agreement or understanding that all or some of the shareholders would participate in the conduct of the business, whether as directors or employees or both, where the unfair prejudice lies in their being prevented from doing so. These can conveniently be described as exclusion cases. The second is where, in the absence of such an agreement or understanding, the conduct of the majority shareholder, especially where it involves a lack of probity on their part, brings about a loss of trust and mutual confidence, but the disaffected shareholder is unable to address that by disposing of their interest in the company. The result is that they are effectively locked in and unable to realise the value of their investment.”

After analysing these situations with reference to case law, the court took the view that mere exclusion did not justify a right to exit where the business of the company could continue. A relationship breakdown – where the cause was not categorically a blameworthy fault on the part of one party – leading to a loss of trust was not enough to justify an exit. Wallis JA found that:

“It will almost always be prejudicial for the withdrawing minority shareholder to be unable to realise their investment. However, prejudice alone, and even a loss of trust in the majority, is not necessarily unfair. After all the minority shareholder agreed to become a shareholder on the basis that they could not freely dispose of their shares in the company. One of the risks of conducting a business with others in a small private company is that leaving the business and disposing of one’s interest in it may be difficult or practically impossible. Small private companies in South Africa have always been required to have provisions in their articles of association restricting the transferability of shares. This is still the case under section 8(2)(b)(ii)(bb) of the [Companies Act 71 of 2008].”

And further:

“If claiming that one had lost faith in the majority were the key to unlocking a right to demand that the company or the majority acquire the minority’s shareholding, it would effectively confer a right to exit the company at will at the expense of the remaining shareholders. A court should not allow a claim of unfair prejudice to be used to rewrite the terms on which the parties agreed to conduct the affairs of the company.

To permit a shareholder to withdraw and compel either the remaining shareholders, or the company, to purchase their shares might imperil the future of the company and prejudice its creditors. Its shareholders would be prejudiced by being forced to dispose of assets or borrow money in order to pay the price fixed for the shares of the departing shareholder. It might even lead to the winding up of the company or the sequestration of the other shareholders. Allowing that to happen to a functioning and otherwise solvent business is not in the public interest.”

Conclusion

What the SCA has done has put the brakes on a developing legal trend that was making it easier for aggrieved shareholders to exit companies when they were dissatisfied with how they were being run, or with the conduct of their co-shareholders. If the majority, or those in control even if they are a minority, are acting within their powers both in the law and in terms of the arrangements amongst the shareholders have with each other, they will have to accept the position even if they believe it is bad for them and the company. Unfair oppression would only arise if the controllers stepped outside of these legal boundaries e.g. by paying a dividend to themselves and not a minority shareholder where the constitution of the company required otherwise, or in acting in a way that was demonstrably dishonest or broke the law.

An exit is not available for grumpy shareholders who don’t like what the controllers are doing provided what the controllers are doing is lawful and within the company’s constitutional and management rules.