Democratic rights of a minority shareholder

Minority shareholders hold the minority vote and control of the company. The chances of the company altogether disregarding the wishes of the minority shareholders are very high as most of the time there vote counts for little. In one of Kenya’s largest shareholder disputes, the two majority shareholders took their fight to court and also simultaneously sought remedies under the Companies Act. The minority shareholders were not in a position to move any court action and were only invited by majority shareholders to support their action. This is just one of the real life examples that illustrate the position of minority shareholders.

 

However the Companies Act provides minorities with a remedy under Section 211. The courts appreciate that given the fact that the minority shareholders have very little control of the company, the chances of the company affairs being run in a manner detrimental to their interest is very high. This is why Section 211 of the Companies Act provides this protective remedy to minorities. The provision states that any member of a company who feels that the affairs of the company are being run in a manner oppressive to a part of the members of the company may petition the court and if the court is satisfied that indeed the company affairs are being run in an unfair manner and that the circumstances justify the winding up of the company but that winding up the company is not the best remedy for the company; then the court shall make any order against the company with a bid to rectify the situation.

 

Therefore as a minority shareholder one needs to know two things. Firstly, that the burden of proving that the company is indeed being run in an unfair manner lies with him and secondly that the circumstances warranting Section 211 meet the threshold of winding up of the company, but that winding up would not be the best remedy. If any of these two requirements fail, then the court will not grant the orders sought for.

 

An action by the minority shareholders of Ngénda Location Ranching Company Limited failed for failure to satisfy the first requirement. The shareholders failed to prove to the court that the company was indeed being run unfairly. The minorities sought a winding up order against the company claiming that the company was being run contrary to the memorandum and articles of association. They also claimed that some assets of the company were being disposed off without their consent. The minorities also sought a permanent injunction against the directors stopping them from doing a number of things within the company. The main issue of contention was a parcel of land which the minorities claimed that the other shareholders were allowed to access while they as minorities were locked out. In response, the directors denied the allegations by the minorities and stated that the persons who were accessing the land were infact not shareholders of the company but employees who were licensed by the company to access the land for the benefit of all the shareholders. The minorities ‘action failed and the court found that upon going through the memorandum and articles of association of the company, that the company’s objects did not provide for the sub-division of land but was formed for conducting agri-business for the benefit of shareholders.

 

This case brings out a number of unrelated issues to the Section 211 filing and of them is that whenever the company seeks to do anything outside its memorandum of association then an amendment of the memorandum must be done. The minorities failed to prove their case and one undoing was the memorandum of association as their claim went outside the authorized objects of the company. Going back to Section 211, minorities must ensure that they have all the facts right before moving the court. The burden of proving the company is being run in an unfair manner lies with them.

 

In most cases, the minorities may not be able to collect evidence from the company due to the asymmetry of information that exists between them and the majority shareholders. Many times the minority shareholders are left in the dark as to exactly what is going on in the company while the majority shareholders know exactly what is going on and have a control over the board. For example many of the small investors who bought shares during recent IPOs seldom know what is going on with the company, yet the institutional investors with a large shareholding, control the board in many ways.

 

In such a case, the minorities may also apply to the court for an inspection of the company under Section 165. However for this right to exist the minorities must show the court that they in aggregate hold at least 10% of the company.

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