Published by Kemilembe Barongo
Imagine a situation where two parties decide to open a company. A has 90% of the shares of the company while B holds only 10% of the company’s shares. From an ordinary man’s perspective, this may just be the way the company has structured its operations, but from a legal standpoint the shareholding structure of a company is the major determinant of the company’s affairs. The majority shareholder usually has a wider power in controlling, managing and directing the course of affairs of the company than the minority shareholder. In this sense A has greater power in driving the company’s affairs than B. So how does the law protect the interests of these minority shareholders?
Although the minority shareholder’s has limited control over the company’s decision-making the law sets out a procedure through which the interests of the minority shareholder may be protected.
This is one of the proceedings by which a minority shareholder, can seek relief on behalf of the company, to remedy a wrong done to the company’s shareholders. A derivative action may be brought under section 234 of the Companies Act R.E. 2019 against a director or member of a company with the purpose of prosecuting, defending or discontinuing an action on behalf of a company. To file the same, one must obtain leave of the court (court permission) for the continuation of claims. And if the same is approved, the court may direct how the action should be dealt with.
A statutory derivative claim may be brought in respect of a cause of action arising from an actual or proposed act or omission involving negligence, default, breach of duty or breach of trust by a director of the company or other person involved. The cause of action may be against the director or another person. To establish its claims the minority shareholder must prove that they are acting in good faith and in the interests of the company.
The law also lists filing for unfair prejudice as one of the methods through which the rights of the members of a company may be protected
The Companies Act R.E. 2019 provides the grounds under which a claim of unfair prejudice may arise. Unfair prejudice may arise when;
· When company affairs are being or have been conducted in a manner which is unfairly prejudicial to the interests of its members or;
· When any actual or proposed action may be prejudicial to the interests of its members
In such an instance the members of the company may make an application to the court by petition for an order on the ground that the company’s affairs are being or have been conducted in a manner which is unfairly prejudicial to the interests of its members and if the court is satisfied with the evidence, it shall make an interim order as it sees fit giving relief of the matters complained of.
This is another way in which minority shareholders may be protected. Several shareholders put money into the project and want to make sure they can get a proper reward for their commitment of time and/or money in it setting up, managing and developing the business. The agreement will often include controls on the appointment of Directors, profit distribution, major expenditure, borrowing and exit mechanisms. This gives minority shareholders a say in the business and some security, where they would otherwise have no influence in decisions affecting their interests.
Protection of shareholders is a crucial aspect in the oversight of companies as shareholders form the foundation of a company through their investment in terms of capital and other forms of investment. The rights of the minority shareholders should therefore be harmonized with those of the majority to ensure their rights are protected and guarded no matter how minor their investments may seem in the eyes of the company.