The rights of minority shareholders
The principle of majority rule established in the landmark precedent Foss v Harbottle (1843) 2 Hare 461, 67 ER 189 dictated for decades that a decision made by the majority shareholders was binding on the minority. However, this principle has been invalidated by the new Companies and Other Business Entities Act [Chapter 24:31] (the COBE). This article briefly highlights minority shareholder rights introduced by the COBE mainly; minority shareholder protection in terms of Section 40, Sections 223-225, Section 233, appraisal rights and the tag-along right.
Minority shareholders protection in terms of Section 40
When a minority shareholder is concerned about how the company is conducting its affairs, they may request the Registrar to inspect and investigate the affairs of that company.[1] The procedure to be followed is that the request must be dated and signed by all of the requesting shareholders.[2] It must state the number of shares or the extent of the interests they each hold and the purpose for which the investigation is requested. A copy of the request must also be delivered by the requesting shareholders to the company’s board of directors. The Registrar may, before assigning an inspector, require the requesting shareholders or members to give satisfactory security in an amount which may be prescribed towards the costs of the investigation.[3]
Section 40 of the COBE seeks to promote good corporate governance and inspires confidence in investors that they have the opportunity to take corrective action to ensure that their investments/interests are not unduly prejudiced at the whims of majority shareholders. However, this procedure is available only to minority shareholders who hold at least five per centum of the ordinary shares of the company.
Minority shareholders protection in terms of Sections 223-225
In terms of section 223 of the COBE, if the company’s affairs are being or have been conducted in a manner which is oppressive or unfairly prejudicial to the interests of some shareholders, the shareholder who considers they have been or may be prejudiced may apply to the High Court for an order in terms of section 225. The application may also be made if actual or proposed acts of commission or omission by the company would be oppressive or prejudicial to minority shareholder interests. Section 224 provides that the same application may be made by the Registrar following a section 40 investigation. The High Court if satisfied that the application is well-founded, may make such order as may be necessary to grant the relief sought. Section 225 (2) provides that the Court order may:
- regulate the conduct of the company’s affairs in the future;
- require the company to refrain from doing or continuing an act complained of by the applicant or to do any act which the applicant has complained it has omitted to do;
- authorise civil proceedings to be brought in the name and on behalf of the company by such person or persons as the court may direct;
- provide for the purchase of the shares of any members of the company by other members or by the company itself and, in the case of a purchase by the company itself, the reduction of the company’s capital accordingly
Minority shareholder protection in terms of Section 233
The greatest protection to minority shareholders may be in section 233 of the COBE. If the business interests of minority shareholders are no longer aligned with those of the majority shareholders, the former may exercise appraisal rights and opt-out of the business. Section 233 of the COBE provides that if a company has given notice to shareholders of a meeting to consider a resolution to enter into a transaction provided for in section 143 (Variation of rights attaching to shares) or 228 (Procedure for mergers) the notice must also include a statement outlining their rights as provided for under section 233.
How are appraisal rights exercised?
During the period before shareholders vote on a proposed resolution, a dissenting shareholder may give the company written notice objecting to the resolution.[4] The term “appraisal rights” denotes the valuation of the shares. Therefore, a dissenting shareholder may request that a fair value of their shareholding in the company be paid to them. The company is obliged to send an offer letter disclosing the amount that has been considered as a fair value by the board of directors.[5] Thus the remedy provides relief to minority dissenting shareholders to at least gain a fair value for their shares and saves them the trouble of finding a willing buyer for their shares. If the dissenting shareholder is not satisfied with the offer made by the company section 244(14) allows them to approach the courts for a determination. There is no fixed method for valuation, hence the courts may enlist the assistance of appraisers who are usually experts in the field to arrive at what would be considered a fair price for the shares.
Tag-along: the right of the minority to sell out to offeror having 90%
The COBE also provides for what is known as a tag-along provision. The tag-along provision is found in section 239 and requires a buyer who acquires at least ninety per centum of shares in a company to inform the minority shareholders in writing no later than thirty days after acquiring the shares. Within ninety days of receipt of such information minority shareholders may demand by notice in writing that the offeror acquire all their shares.[6]
After receiving such notice the buyer is bound to acquire all minority shareholder shares on the same terms that applied to shares of holders who accepted the original offer.[7] Basically, if a majority shareholder decides to exit the company and finds a buyer for their shares, the buyer must also purchase the shares held by minority shareholders. This provision allows minority shareholders to “tag-along” with major shareholders if they find a buyer for their shares.
Conclusion
In summation, minority shareholders are an important asset to any company and their outlined rights must be protected. If the business interests of a minority shareholder are no longer aligned with those of the majority shareholders the COBE affords protection to minority shareholder to remedy any challenges.
Are you a minority shareholder? Do you fear your rights are being violated? At JPLP we have a team of legal professionals ready to assist you. Contact us today at info@jplp.co.zw
- Section 40 of the Companies and Other Business Entities Act [Chapter 24:31].
- Section 40 (2) of the Companies and Other Business Entities Act [Chapter 24:31].
- Section 40 (3) of the Companies and Other Business Entities Act [Chapter 24:31].
- Section 233 (1) of the Companies and Other Business Entities Act [Chapter 24:31].
- Section 233 (11) of the Companies and Other Business Entities Act [Chapter 24:31].
- Section 239 (2) of the Companies and Other Business Entities Act [Chapter 24:31].
- Section 239 (3) of the Companies and Other Business Entities Act [Chapter 24:31].