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How to resolve disputes among shareholders

office

More often than not, SMEs are formed out of a bond of personal relations, with a very small or closed shareholding structure. FILE PHOTO | NMG

Summary

  • Conflicts between shareholders are what some would commonly refer to as the Achilles heel of private limited companies, especially SMEs.
  • More often than not, SMEs are formed out of a bond of personal relations, with a very small or closed shareholding structure.
  • Their ownership and management structures, which are fundamentally different from listed companies, are usually akin to a partnership arrangement, known for having few owners with the same level of influence when it comes to decision-making.

Conflicts between shareholders are what some would commonly refer to as the Achilles heel of private limited companies, especially SMEs.

More often than not, SMEs are formed out of a bond of personal relations, with a very small or closed shareholding structure.

Their ownership and management structures, which are fundamentally different from listed companies, are usually akin to a partnership arrangement, known for having few owners with the same level of influence when it comes to decision-making.

Management and ownership wrangles form part of this commonplace bicker since certain structural arrangements provide certain advantages or perceived advantages to some persons over others.

An example would be, denying one of the company members the right to access certain information, board participation, control of the company's financial resources, and decision-making.

Such management and ownership conflicts can usually be resolved through a varying degree of civility or destructiveness, with the latter leading to unintended consequences such as winding-up or dissolution of the company.

This may not be the case for publicly listed companies, as fortunately for them they have a clear structural distinction of roles, where there is a separation between ownership and control, so much that any slight misunderstanding between the company members can easily be resolved through a voting system during a general meeting.

How then can private companies resolve shareholder disputes? Keeping in mind that due to the overlap between ownership and management, personal differences can dominate a boardroom meeting, thus putting the entire business in jeopardy, as decisions will be made purely based on emotions devoid of logic.

Although there are numerous causes and kinds of conflicts, not all of them lead to a possible dissolution of a company. Nevertheless, a greater challenge even arises where the ownership structure is 50:50, which can potentially create a deadlock at the management level.

And where the structure has a majority shareholder or where there is a veto right for crucial decisions, the minority shareholder would still feel left out in the management of the company, thus deprived of influence. Consequently, they remain locked into a company that is not run efficiently or a company that has incompetent management.

The Companies Act No. 12 of 2015 possibly anticipated such company wrangles, more so at the management level, with the legislation being expansive in terms of the remedies available for shareholder disputes.

It is also equally strict in the application of such remedies, albeit striking a balance between the internal operations of a company and the protection of company members against oppressive or unfairly prejudicial conduct by the majority shareholders.

The court may also find that the company affairs are being conducted in a manner that is oppressive or unfairly prejudicial to the interests of the members and issue injunctive reliefs, or to the very extreme dissolve the company.