All shareholders are equal, but some shareholders are more equal than others
(With apologies to George Orwell)
by Gertruida Grové
In the Supreme Court of Appeal Bayly v Knowles 2010 (4) SA 548 case two equal minority shareholders in a company (each with 25.5% shareholding) had an understanding that they would participate equally in the management of the company. Bayly was the managing director and Knowles the sales and marketing director. However the relationship between Bayly and Knowles soured, and all trust and confidence between them were eroded. Bayly started side-lining Knowles from running the affairs of the company and eventually stopped his salary, and other company perks and benefits such as a petrol allowance, medical aid benefits and credit card facility and furthermore had him locked out of his office. It was clear that Bayly wanted Knowles out of the company. The shareholder agreement provided that a shareholder could not sell his shares without first offering them to the other shareholders in proportion to the latter’s holdings.
Bayly then made an offer to purchase Knowles’s shares for R2 million on the condition that Knowles would resign as director and would cease to be employed by the company. Knowles rejected the offer as unacceptable but did neither claim that the price of R2 million offered to him was unfair, nor did he provide reasons for his refusal to accept the offer. Knowles wanted to remain in the company. Knowles then made a counteroffer to Bayly to purchase the latter’s shares at a value to be independently determined. Furthermore he made it clear that if this offer was refused, he would apply to court for the company to be liquidated. Bayly refused the offer and made it clear that he had no intention of selling his shares to Knowles. At this stage Bayly had aligned himself with another minority shareholder and together they held a majority of the shares in the company.
Knowles then applied to the High Court for relief in terms of section 252 of the old Companies Act, Act 61 of 1973 to have his salary and benefits reinstated and to compel Bayly to sell his shares to Knowles at an independent valuation. In the alternative Knowles asked the court to make an order that the company be liquidated.
Section 252 reads:
(1) Any member of a company who complains that any particular act or omission of a company is unfairly prejudicial, unjust or inequitable to him or some part of the members of the company, may ... make an application to the court for an order under this section.
(3) If on any such application it appears to the Court that the particular act or omission is unfairly prejudicial, unjust or inequitable, or that the company's affairs are being conducted as aforesaid and if the Court considers it just and equitable, the Court may, with a view to bringing to an end the matters complained of, make such order as it thinks fit, whether for regulating the future conduct, of the company's affairs or for the purchase of the shares of any members of the company by other members thereof or by the company and, in the case of a purchase by the company, for the reduction accordingly of the company's capital, or otherwise.
The High Court ordered that Bayly must sell his shares to Knowles.
On appeal, the Supreme Court of Appeal ruled that where a minority shareholder has been prima facie unfairly treated (as Knowles had been in this case) and furthermore refuses a fair offer for his shares it is strong evidence at a willingness to endure such prima facie inequitable treatment despite the choice of a viable alternative. The court said by refusing the fair price for his shares, Knowles had abrogated the right to rely on his prior unfair treatment at the hands of the company.
The court further said that having refused a fair offer for his shares, it was an abuse of process for Knowles to take his grievances to the court. Knowles had been given the opportunity before he approached the court to protect and redeem his investment, but he insisted on retaining his shares.
The court said that the relief offered by section 252 of the old Companies Act was not intended to enable the court to preside over a protracted and expensive contest of virtue between the shareholders and award the company to the winner. The Supreme Court of Appeal said that in determining what order to make in terms of section 252(1), the court must take into account not only the interests of the warring factions of shareholders, but the interests of the other shareholders and the best interests of the company itself;
The company was viable and successful and had become so under the direction of Bayly over a period of years. Bayly was the driving force behind the company: he was at the helm of the company, hired and fired, enjoyed the confidence of the staff and had maintained goodwill with the company's major supplier. Knowles mostly worked away from the company’s premises selling the product. By the time the Supreme Court of Appeal judgment was handed down more than two years had passed since Knowles’ last involvement in the management of the company. To force Bayly out, said the Supreme Court of Appeal, and to place Knowles in control would have negative effects on the company "which can only be guessed at".
The court pointed out that, to order the liquidation of the company (as Knowles had asked for in the alternative) would be avoided except for the most extraordinary circumstances, as it would result in destroying a perfectly viable company. Liquidation would moreover provide Knowles with no redress for whatever oppression he had suffered and would favour revenge above reason.
The court found that the only practical order to make in the circumstances was that Knowles must sell his shares to Bayly, and not the other way round. However such an order was not sought and could not be granted by the court.
Section 252 has been incorporated into Section 163 of the new Companies Act, Act 71 of 2008. Section 163 gives the court a wide discretion to protect the interests of an aggrieved shareholder.
It is clear from the Bayly v Knowles decision and the wide scope of section 163 of the new Companies Act that where a company's prosperity is being damaged by a feud between warring shareholders, the courts will seek a practical solution. The Bayly v Knowles interpretation of section 252 tells us that a court will be reluctant to order that a viable company be liquidated just because its shareholders are in dispute. Furthermore the remedy provided in section 252 of the old Companies Act was not intended to require a court to preside over a protracted and expensive contest of virtue between the shareholders and award the company to the winner. Where a shareholder has suffered inequitable treatment, but is offered a fair price at which he can sell all his shares to the other shareholders, that inequity disappears and cannot be relied upon. Also in determining what order to make in terms of section 252(1), the court will take into account not only the interests of the warring factions of shareholders, but also the interests of the shareholders who have stood apart and the best interests of the company itself. Where one of the warring shareholders as director successfully steered the company to prosperity, held the helm, hired and fired, enjoys the confidence of the staff and the confidence of the company's trading partners, it would be impractical for a court to order, in terms of section 252, that his shares must be sold to another shareholder who does not have such a proven record of success. Although it may be very unusual for the Court to order a majority shareholder actively concerned in the management of the company to sell his shares to a minority shareholder when he is willing and able to buy out the minority shareholder at a fair price, as it was indeed pointed out in Bayly v Knowles, the wide discretion afforded to the court by section 252(3) does not exclude such a possibility in appropriate circumstances.