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When shareholder disputes arise, minority shareholders sometimes face the risk of dilution of shareholding or removal from board representation by hostile majority shareholders. In such cases, absent a shareholder agreement prescribing the manner in which disputes are resolved, minority shareholders are at the mercy of the provisions of the company’s articles of association and the protections provided in the law.
Sections 780 and 782 of the Companies Act, 2015 set out legal reliefs that may be sought by shareholders who are suffering from unfair or prejudicial conduct of a company’s affairs. However, there is very little case law on the role of the court in an application filed under these minority shareholder protection provisions.
In a recent High Court judgment focused on protection of minority shareholder rights under the Companies Act, Hon. Lady Justice Wilfrida Okwany delivered a ruling where she expounded the role of the court in issuing relief to minority shareholders under section 780 and 782 of the Companies Act. The Ruling will go a long way in building the jurisprudence on this relatively new concept as well as providing minority shareholders with reliefs from our courts, where need be.
The majority shareholders of the Company arranged for an extra-ordinary general meeting to remove the minority shareholder as a director of the Company. They also sought to increase the share capital of the Company and dilute the minority shareholder by approving the conversion of shareholder loans and debts owed by the Company to a certain shareholder and related third party to equity.
All these actions were aimed at diluting the shareholding of the minority shareholder and reducing the economic value of the minority shareholders’ stake in the context of a proposed sale of the minority shareholder’s stake. The actions were also contrary to the Articles of Association of the Company regarding transferring and allocating the Company’s shares.
The facts of the situation raised emerging issues of law on the application of the Companies Act minority protection provisions and on the applicability of arbitration clauses in a Company’s articles of association to a shareholder dispute.
ALN Kenya| Anjarwalla & Khanna represented the minority shareholder against a company and its majority shareholders. ALN Kenya filed an application before the High Court seeking interim orders to stop the removal of the minority shareholder as a director of the Company and the dilution of the value of the minority shareholder’s stake pending arbitration under the Company’s articles of association.
ALN Kenya successfully obtained the interim orders pending the intended arbitration. The Judge ruled that that section 780 of the Companies Act allows a member of a company to file an application before the High Court under section 782 of the Companies Act for remedies (including injunctive orders), where a company’s affairs are being or have been conducted in an harsh manner or in a manner prejudicial to the interests of the company, the members generally or some part of the members.
The Judge also agreed with the minority shareholder’s position that applications for protection against alleged oppressive conduct under the Companies Act could be made against a company, its directors, and its shareholders.
Lastly, the Judge noted that while the rule in Foss vs Harbottle (1843) 2 Hare 461 discourages courts from interfering with the running of the affairs of the company except where the acts complained of are ultra vires, sections 780 and 782 of the Companies Act allow the court to intervene where the affairs of the company have been conducted in a manner that is repressive or unfairly prejudicial.
Ordinarily, shareholders would have to institute a secondary suit to enforce the rights of a company on its behalf, particularly where the majority shareholders or a third party has undertaken actions that are prejudicial to the affairs of the company. However, the relief sought could not be for the personal benefit of the applicant or any other shareholder of the company.
Minority shareholders now have more clarity on the procedure for seeking relief from the High Court where a company’s affairs are being conducted in a manner that is unfairly prejudicial to the interests of all or some of the members or where an actual or proposed act or omission of the company would be oppressive or prejudicial. Shareholders can challenge harsh conduct that is not only directly affecting the affairs of the company but also affecting individual minority shareholders economic and governance rights.
Should you have any questions regarding the information in this legal alert, please do not hesitate to contact Akash Devani, Faith Macharia or Wangui Kaniaru.