Amending the MOI to the prejudice of minority shareholders: the oppression remedy

The Memorandum of incorporation (”MOI“)

by Wesley Vos, Associate
co-authored by Jarryd Mardon, Director and reviewed by Pierre le Roux, Director

Introduction

The memorandum of incorporation (”MOI”) is the founding document of a company. It sets out the rights, duties and responsibilities of shareholders, directors and others in relation to the company, together with various other matters concerning the governance of the company.

The Companies Act 71 of 2008 (the “Companies Act“) recognises the important role that the MOI plays in the governance of a company and therefore the MOI may only be amended if the shareholders pass a special resolution authorising the amendment.[1] This means that in order to amend a Company’s MOI a shareholder resolution must be supported by at least 75% of the voting rights in order to approve the amendment.[2]

Therefore, where there is a majority shareholder who exercises 75% of the voting rights, or a group of shareholders who collectively exercise 75% of the voting rights, the majority shareholder(s) could easily resolve to amend the MOI to the detriment of the minority. In certain instances, such amendment could entitle the minority shareholders to relief under section 163 of the Companies Act (relief from oppressive or prejudicial conduct or from abuse of separate juristic personality of company).

Section 163: the Oppression Remedy

Section 163 of the Companies Act provides that a shareholder or a director of a company may apply to court for any form of relief if, amongst other things, any act of the company or a person related to the company has had a result that is oppressive or unfairly prejudicial to, or that unfairly disregards the interests of the applicant. Therefore, a minority shareholder would need to prove that the amendment to the MOI (i) was either oppressive or unfairly prejudicial; or (ii) unfairly disregards the interests of such shareholder.

Whether a minority shareholder will be entitled to relief under section 163 will be dependent on the circumstances, and a court will need to assess whether the impugned conduct of the majority to amend the MOI in the particular circumstances will satisfy the requirements for relief under section 163.

Examples of instances where an amendment to the MOI could lead to a result that is oppressive or unfairly prejudicial to the minority shareholder(s) may include:

• an amendment to the MOI which materially and adversely alters the preferences, rights, limitations or other terms of the class of shares (“Share Terms“) held by the minority (i.e. amendments to voting rights or rights to receive dividends)[3], where such Share Terms had been an integral term upon which they had agreed to become a shareholder of the company;
• an amendment which has the effect that minority shareholders no longer have a right to appoint a representative to the board, where such right had been an integral term upon which they had agreed to become a shareholder of the company; or
• an amendment which limits the rights of minority shareholders in terms of section 39(2) of the Companies Act to subscribe for shares before any other person who is not a shareholder (i.e. effectively diluting the shareholding of minority shareholders) where such anti-dilution provisions were an integral term upon which they had agreed to become a shareholder of the company.

Conclusion

Although minority shareholders may, in certain instances, rely on section 163 of the Companies Act for relief, shareholders are cautioned that the conduct of the majority shareholders should be evaluated in light of a fundamental principle of company law, namely that by becoming a shareholder, the latter undertakes to be bound by the decisions of the majority shareholders.  Therefore, not every amendment which is detrimental to the rights of minority shareholders will incline a court to grant relief under section 163 of the Companies Act.

[1] Section 16(1)(c) of the Companies Act.

[2] A company’s MOI may validly increase or decrease the threshold for requirement for a special resolution on any matter, provided that there is a margin of at least 10% between a special resolution and an ordinary resolution.

[3] Although an amendment of this nature may entitle a disgruntled shareholder to relief under section 164 of the Companies Act, the relief in section 164 of the Companies Act may not always be the most appropriate and relief under section 163 of the Companies Act may be more appropriate in certain instances.

Read more about the Relief from oppressive or prejudicial conduct in terms of the Companies Act 71 of 2008.