This article provides a practical overview of shareholder disputes in South African companies, with particular focus on the remedy for oppressive or prejudicial conduct in section 163 of the Companies Act 71 of 2008 (“the Act”) and on the problem of deadlock between equal shareholders. It explains the options available when a business relationship breaks down, and how a well-drafted shareholders agreement can prevent the dispute arising in the first place.
Background: How Shareholder Disputes Arise
Most owner-managed companies are founded in a spirit of optimism, often between people who know each other well. The governing documents receive little attention, because at the outset the parties agree about everything.
Disputes tend to emerge later, and usually from a small number of recurring causes: one shareholder works materially harder than another; the parties disagree about whether to distribute profits or reinvest them; one shareholder is excluded from management or information; remuneration and director’s loans become contentious; or a shareholder wishes to exit and cannot agree a price.
In a 50/50 company, any of these disagreements can escalate into complete deadlock: neither shareholder can pass a resolution, the board cannot function, and the business stagnates while the dispute runs its course.
The Governing Documents
Three documents ordinarily govern the relationship between shareholders, and it is important to understand how they interact.
- The Memorandum of Incorporation (MOI) is the company’s founding document and is binding between the company, its shareholders and its directors. It is a public document filed with the Companies and Intellectual Property Commission.
- A shareholders agreement is a private contract between the shareholders. Section 15(7) of the Act provides that it must be consistent with the Act and the MOI, and that any provision inconsistent with either is void. A shareholders agreement therefore cannot be used to contract out of the MOI.
- Employment or service agreements regulate the position of shareholders who also work in the business, and are often the missing document in owner-managed companies.
Where the MOI is the standard form adopted at incorporation and no shareholders agreement exists, the parties are left with the default provisions of the Act. Those provisions were not designed with the particular dynamics of a two-person business in mind.
Section 163: Relief from Oppressive or Prejudicial Conduct
Section 163 of the Act is the principal statutory remedy available to an aggrieved shareholder. A shareholder or director may apply to court for relief where:
- any act or omission of the company, or a related person, has had a result that is oppressive or unfairly prejudicial to, or that unfairly disregards the interests of, the applicant;
- the business of the company, or a related person, is being or has been carried on or conducted in such a manner; or
- the powers of a director or prescribed officer are being or have been exercised in such a manner.
The remedy is notably flexible. Section 163(2) empowers the court to make “any interim or final order it considers fit”, including an order restraining the conduct complained of, an order appointing directors, an order requiring the company or any other person to purchase the shares of the applicant, an order for the payment of compensation, and an order directing rectification of the company’s records.
The court is therefore able to craft a commercial outcome, most commonly a buy-out at a fair value, rather than being confined to a declaration of rights.
Deadlock Between 50/50 Shareholders
Section 163 is often described as a minority protection provision, which raises the question whether a 50% shareholder, who is not a minority, can rely on it.
The courts have answered that question affirmatively. In Van der Watt v Schoeman and Others (3393/2022) [2023] ZAECQBHC 61; 2024 (1) SA 531 (ECGq), two medical practitioners each held 50% of the shares in the company through which they conducted their practice, and were its only directors. After one of them withdrew from active practice, the other excluded her from the management and affairs of the company, ignored her requests for board meetings, and made an unsatisfactory offer for her shares.
The court held that section 163 was available notwithstanding the equal shareholding, and ordered the respondent to purchase the applicant’s shares and loan account at a value to be determined by an independent expert. The decision confirms that deadlock between equal shareholders can found relief under section 163, and provides an alternative to the blunt instrument of winding up.
Other Avenues
Section 164 confers appraisal rights on a dissenting shareholder in specified circumstances, principally where the company proposes to amend its MOI in a way that materially and adversely alters the rights attaching to that shareholder’s shares, or enters into certain fundamental transactions. A shareholder who follows the prescribed procedure may require the company to pay the fair value of their shares.
Section 81(1)(d) permits a court to wind up a solvent company where, among other things, the directors are deadlocked in the management of the company and irreparable injury to the company is resulting or may result, or the company’s business cannot be conducted to the advantage of shareholders generally. Winding up is a remedy of last resort: it usually destroys value that a buy-out would preserve.
Section 166 provides for voluntary alternative dispute resolution, and many shareholders agreements make mediation or arbitration a contractual pre-condition to litigation. Arbitration is frequently preferable in shareholder disputes because it is private, which matters where the dispute could unsettle customers, funders or staff.
Preventing the Dispute: What a Shareholders Agreement Should Address
Most shareholder disputes are, in substance, the consequence of questions that were never answered at the outset. A properly drafted shareholders agreement should deal with at least the following:
- Deadlock resolution, whether by an escalation procedure, a casting vote, an independent director or chair, mediation, or a shoot-out mechanism;
- Exit and transfer provisions, including pre-emptive rights, tag-along and drag-along rights, and restrictions on transfers to third parties;
- Compulsory transfer events, such as death, disability, insolvency, resignation or removal for cause, and whether a departing shareholder is treated as a good or bad leaver;
- Valuation, specifying the methodology and the identity or appointment mechanism of the valuer, since disputes about price are far more common than disputes about principle;
- Dividend and reinvestment policy, and the treatment of shareholder loans;
- Roles, remuneration and time commitment of shareholders who work in the business;
- Reserved matters requiring unanimous or special approval; and
- Restraints of trade and confidentiality applicable to shareholders and departing shareholders.
Funding these provisions with appropriate buy and sell assurance is a further step that many owner-managed businesses neglect, with the result that on the death of a shareholder the survivors have an obligation to purchase shares but no means of doing so.
Conclusion
A shareholder dispute in an owner-managed business is rarely only a legal problem. It affects staff, customers and funders, and it consumes the attention of the very people the business depends on. The law provides effective remedies, and section 163 in particular allows a court to order a buy-out at fair value rather than leaving the parties locked together.
Those remedies are nonetheless slower and more expensive than the agreement that would have avoided them. For any company with more than one shareholder, a shareholders agreement that addresses exit, valuation and deadlock is among the highest-value legal documents the business will ever put in place.
How O’Reilly Law Can Assist
Shareholder disputes require both corporate and litigation expertise. The strength of a party’s position is usually determined by the governing documents and the conduct recorded in the company’s records, long before proceedings are contemplated.
O’Reilly Law drafts and reviews memoranda of incorporation, shareholders agreements and buy-sell arrangements for owner-managed companies, and advises shareholders and directors when relationships break down. We act in negotiated exits, in mediation and arbitration, and in applications for relief under section 163 and related proceedings in the High Court.
Speak to a Corporate and Commercial Law Specialist
If you are in dispute with a co-shareholder, or you would like to put proper shareholder arrangements in place before one arises, it is essential to obtain advice early.
📩 Email: info@oreillylaw.co.za
📞 Tel: +27 (0)82 929 7015
🌐 Web: www.oreillylaw.co.za
Our team advises shareholders and companies on governance, exits, deadlock and shareholder litigation.