Oppressive Conduct – Companies Act

In a recent decision of the Supreme Court of Appeal, the court ruled on the application of section 163 of the Companies Act dealing with the relief available to directors or shareholders from oppressive or prejudicial corporate conduct or from the abuse of a company’s separate legal personality.

If a director or shareholder can show that a company (through its board) or its controlling shareholder(s) have acted in a manner that is oppressive or unfairly prejudicial, or that unfairly disregards his/her interests, s/he may apply to court for relief which may take the form of any order which the court considers fit including an order (1) restraining the conduct (2) appointing a liquidator (3) placing the company under supervision (4) that the company amend its MOI (5) directing and issue or exchange of shares (6) appointing directors (7) that the company or any other person repay a shareholder his/her share subscription/purchase price (8) setting aside a company transaction (9) to produce company financials (10) to pay compensation, or (11) to rectify a company register.

The court was presented with the following factual matrix:

A minority shareholder applied to court for relief under section 163 on the grounds that (1) he had been excluded from the company’s management (having been removed as a director) (2) he had been excluded from decision making vis-à-vis the company’s affairs (3) he had been declined access to the company’s management accounts.

The court found that none of these grounds constituted grounds for the granting of an order because (1) a minority shareholder does not have a right to appoint a director to the board (in the absence of an article to such effect in the company’s MOI), (2) a majority shareholder may remove a minority shareholder as a director without reason, (3) a shareholder is only entitled (absent an article in the MOI to such effect) to receive annual financial statements, management accounts are not required to be supplied.

Minority shareholders should accordingly secure board seats and access to information in the MOI. Nothing can be done however to prevent the removal of a director by a majority shareholder if the minority can appoint an alternate. If the alternate appointment is blocked ad infinitum, a case for relief under section 163 may be made.