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Godknows Hofisi

It is common to come across differences or disputes by shareholders in a company, partners in a partnership, parties to a joint ventures and so on. This article focuses on resolving disputes by shareholders in companies.

Nature of disputes

Disputes by shareholders take many different forms. They may include the following:

◆ Rights and obligations of shareholders,

◆ Differences in interpreting key documents such as shareholder documents, articles of association, share transfer documents, especially if they were badly structured or not updated,

◆ Number of shares held,

◆ Appointment or removal of directors,

◆ Management of finances especially for private companies where the shareholders are directors or part of management,

◆ Dividend distribution, loans to or by the directors,

◆ Alleged unfair treatment of some (minority) shareholders by others shareholders (major or majority),

◆ Undeclared conflict of interest such as side marketing, opaque procurement and contracts, opaque employment practices,

◆ Unfulfilled contributions e.g. capital, loans, securing clients,

◆ Perceived differences in contributions to the company, for example productive hours,

◆ Restricted access to company information,

◆ Transfer of shares to a third party,

◆ Raising additional funding for example through debt that increases gearing or issue of new shares in a manner that dilutes one or more shareholders.

◆ A shareholder abandoning a company in debt.

◆ Placing the company under an insolvency practitioner.

Approaches to resolve the disputes

There are many approaches shareholders can use to try and resolve their differences. It should be easier in private companies due to the few number of shareholders and the fact that the shareholders may have some connection. The options include the following:

◆ Open and sincere mutual engagement especially before the situation deteriorates,

◆ Dissenting shareholders can exercise certain appraisal rights in terms of section 233 of the Companies and Other Business Entities Act, “COBE Act”, or “the Act”.

◆ Mediation by a person who is acceptable to all parties. The mediator should command respect and be impartial.

◆ The dispute can also be resolved in terms of the key company documents such as shareholders agreement, if any, and the Articles of Association.

◆ Parties may also go for arbitration. The arbitrator, who is expected to be neutral can be a trained arbitrator usually a legal practitioner or retired judge. Parties may also agree to have the arbitrator appointed by a professional body such as the Commercial Arbitration Centre.

◆ Investigation of ownership or control in terms of section 41 of the Act.

◆ If shareholder differences are manifesting through the board of directors there could be merit in removing and replacing the directors viewed as meddling, subject to the company’s internal policies and procedures and requirements of applicable laws such as the Act. Section 195(5)(f) of the Act requires a director to have regard to the need to act fairly as between shareholders.

◆ Through litigation in a Court with competent jurisdiction over the matter. This process is confrontational by its nature as parties will be involved in a legal contest. It may even be difficult to normalise relations thereafter.

Possible decisions to resolve differences.

Certain decisions have to be made and implemented in order to resolve corporate differences or conflicts. Such decisions may include the following:

◆ Depending on the solution parties may agree to continue as business partners,

◆ An aggrieved shareholder may be bought out, subject to a valuation of the company and his/ her shareholding.

Buy outs are common. For example in a group of companies the party being bought out can be given some subsidiaries so that he/ she gives up his shares in the company subject of the conflict (share swap).

◆ Subject to certain conditions a company may buy back its shares from an aggrieved shareholder,

◆ Subject to internal regulations and applicable laws a party may choose to sell his/ her shares to a third party.

◆ A shareholder may simply walk away to form a new business. He / she may move away with key personnel or customers.

◆ The Court, subject to its discretion, can order what it considers appropriate in the circumstances.

◆ Improve the corporate governance practices e.g. financial management, procurement, bank signatories, contract signing, access to information, holding of key meetings.

◆ Remove and replace meddling directors.

Key documents referred is resolving corporate disputes

The following documents are usually referred to in resolving shareholder disputes:

◆ Shareholder agreements, if any.

◆ The company’s Articles of Association.

◆ Minutes of annual general or extraordinary general meetings.

◆ Board minutes, for example issue of shares, management of finances, contracts.

◆ Return of allotment of shares (CR11 formerly CR2).

◆ Share purchase and transfer agreements if shares were purchased from previous shareholders.

◆ Capital contributions into the company.

◆ Company policies and procedures,

◆ Contracts with third parties.

◆ The COBE Act and other applicable laws.

Shareholding dilution methods to watch out for

Some shrewd shareholders use the “python approach” to increase their shareholding over time. They ambush weaker or unsuspecting shareholders, tighten their grip and squeeze them over time. Some of the strategies used by such daring shareholders include:

◆ Lending a fellow shareholder funds and use the latter’s shares as security and acquire them in the event of default.

◆ Allowing a shareholder to borrow from the company beyond repayment means,

◆ Issuing of debt which is convertible to equity. A shareholder may volunteer to loan the company with the option to convert the loan to equity. If he/she exercises this option his/ her shareholding will increase thereby diluting the other shareholders.

◆ Rights issue so that a shareholder who cannot take up the new shares is diluted,

Resolve differences early

Address differences early to avoid weakening the company, suffering a devastating defeat or posting a pyrrhic victory.

◆ Godknows Hofisi, LLB(UNISA), B Acc(UZ), CA(Z), MBA(EBS,UK) is a legal practitioner / conveyancer, chartered accountant, corporate rescue practitioner, and consultant in deal structuring and tax. He has handled resolution of corporate disputes. He writes in his personal capacity. He can be contacted on +263 772 246 900 or [email protected]