This case concerns the Court’s role in issuing directions/making an order with regards to the valuation of, and determination of the fair value of the shares in the Company where there is a deadlock between shareholders. Therefore, the applicability of s163(2)(e) of the Companies Act 71 of 2008 (“the Act”) is challenged insofar as determination of whether or not a deadlock between shareholders is considered oppressive or unfairly prejudicial.
The Applicant (Engelbrecht) and the First Respondent (Coleman) were equal shareholders and the only directors of the Second Respondent (Rynfield Veterinary Clinic (Pty) Ltd).
The Applicant and First Respondent were practising veterinary surgeons of the Second Respondent, however, the business was being conducted more like a partnership than a private company. It is common cause that the business relationship between the Applicant and the First Respondent had deteriorated over time and eventually broke down. The court was tasked with determining the fair value of 100% (One Hundred Percent) of the shares held in the Second Respondent.
The relief sought by the Applicant was for the equal division of the shareholding in the Second Respondent as the shareholders were not able to reach an agreement. As such, the Applicant approached the court for an order to determine the aforesaid fair valuation in terms of s163(2)(e) of the Act.
The First Respondent argued that the relief sought does not fall within the ambit of s163 of the Act, owing to the lack of evidence to prove that the conduct of the First Respondent was “oppressive or unfairly prejudicial to, or that unfairly disregards the interests of the Applicant” as is required in order for the court to make an order remedying the oppressive or unfairly prejudicial conduct of the company or any related person.
The First Respondent’s argument was rejected by the Court on the basis that s163 of the Act provides relief for shareholders or directors from oppressive or prejudicial conduct by the company or any related person or from abuse of a separate juristic personality of a company. The Court considered s163(2)(e) for the present matter, which provides for an order “directing the issue or exchange of shares”, being the relief sought by the Applicant in this matter.
The Court referred to the case of Grancy Property Ltd v Manala 2015 (3) SA 313 (SCA), in which it was held that s163 provides an extensive remedy which covers a broader scope of relief in the event of oppressive or unfairly prejudicial conduct and the aforesaid section must be interpreted in order to advance the remedy provided by the section, rather than limit it.
Another case referred to by the Court was Louw and Others v Nel 2011 (2) SA 172 (SCA), which outlines the requirements to be established by an applicant seeking relief in terms of section 252 of the old Companies Act, the equivalent of which is section 163 of the Act. The requirements are as follows:
a.) that the particular act or omission has been committed, or that the affairs of the company are being conducted in the manner alleged and that such act or omission or conduct of the company’s affairs is unfairly prejudicial, unjust or inequitable to him or some part of the members of the company;
b.) the nature of the relief that must be granted to bring to an end the matters complained of; and
c.) that it is just and equitable that such relief be granted.
The Court held that it will therefore only have jurisdiction to make an order of the nature requested by the Applicant once the statutory criteria outlined above have been met.
The issue to be decided by this court was whether or not the deadlock between the shareholders in, and directors of, the company can be read into and would qualify as oppressive or prejudicial conduct within the meaning of s163 of the Act.
The court held that the deadlock does fall within the ambit of s163 as it detrimentally affects both the Applicant and the First Respondent and in turn, the Second Respondent.
It was found that the relief sought by the Applicant was proper and that the Court should give effect to same. Furthermore, it was common cause that a division of the Applicant and First Respondent’s respective interests in the Second Respondent was to be objectively, fairly valued and determined by the Court. Therefore, it would be a “grave injustice” to uphold the First Respondent’s contention that the relief sought does not fall within the ambit of s163(2)(e) of the Act.
The Court accordingly held that the matter does fall within the ambit of s163 of the Act and ordered that the Applicant purchase the First Respondent’s 50% (fifty percent) shareholding at a fair value, calculated pro rata to the total issued share capital of the Second Respondent. The fair value of the shares was to be determined with regard to the financial condition of the Second Respondent as at the date that the instructions are given to the Valuator.
In addition, the parties were to agree upon an independent practising Chartered Accountant to valuate the shares, in respect of which any dissatisfied party would be entitled to obtain a judicial substituted valuation.
Section 163 provides an extensive remedy and the section must be interpreted to advance the remedy rather than limit it. Therefore, a deadlock between shareholders can be interpreted to be oppressive and prejudicial as it detrimentally affects the shareholders as well as the business.