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CGF ARTICLES, OPINIONS & EDITORIALS

Boardroom domination: Treating minority shareholders fairly (2013-06-25)

There are quite a number of corporate governance codes that document the manner in which organisations should govern their business; notably the King Report on Governance for South Africa 2009 (‘King III’) is one of the more recognised codes throughout the world.  
King III -- being an amended version of its former King I and King II versions -- goes to great lengths and provides recommendations to ensure the independence, structure and balance of a Board, amongst other important governance matters.  King III, and the new Companies Act 2008 (“the Act”), provides further detail to ensure that the Board, including its committee members, remain free from any form of conflict, be this at an individual or at a corporate level.  When any situation places a Board or the organisation’s executives in a conflictive situation, they need to know how to deal with it, effectively, efficiently, and transparently.

Whilst King III does not provide specific guidelines on how to deal with, for example, a shareholder who is dominating or attempting to dominate strategic decisions being taken by the Board, companies may find relief in the Act that should protect not only the remaining shareholders, but indeed the Board itself as well as the other stakeholders of the company.  The Act has significantly improved many of its provisions as contained in its predecessor Companies Act of 1973; and one of the purposes of the Act is the promotion of its compliance with the Bill of Rights.  To this extent, the Bill of Rights and the Act, both seek to protect minority groups and this is enshrined in our Constitution and democracy.  Section 163 is known as the ‘oppression’ clause, and although the clause is quite broad and not yet fully interpreted by our courts, it does however provide relief for any aggrieved company shareholder wanting to take action against any individual acting oppressively toward any other shareholder, particularly where this behaviour may cause damage to the company. Regrettably -- but also ironically -- considering the massive personal liability directors in South Africa are exposed to, many directors may find themselves acting as ‘shadow directors’ and submit to either dominating directors, or directors who serve the interests of a particular controlling (dominating) shareholder and not those of the company.  Obviously such behaviour is completely wrong and is not aligned with the recommendations of King III vis-à-vis the Board’s collective purpose, including issues which include its balance, and its member’s requirements to act in the best interests of the company amongst their other fiduciary duties.

There are many well documented cases where directors have not fulfilled their fiduciary, neither statutory duties to protect their companies, and they have been exposed when these duties were selfishly bestowed to themselves or a dominating shareholder.  Such examples include those directors linked to the corporate collapses of the Enron Corporation (US), Maxwell (UK) and even a number of South African cases such as Leisurenet, Macmed and Regal Treasury Private Bank.
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