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Last updated on September 11th, 2023 at 09:57 am
he main incentive for the incorporation of a company is the legal shield against personal liability created by the principle of separate corporate personality that the law affords to companies.
However, the company as an artificial entity is run by directors who act as its agents. These directors are appointed by the shareholders who oftentimes vote based on the value of their shares.
Accordingly, although directors are agents of the company, oftentimes they represent the voice of their appointers i.e. the majority shareholders.
For SMEs, the situation is often worse because usually the majority shareholders also double as directors. It is therefore not uncommon to find situations where the directors act in a manner that is prejudicial to the interests of the company and is also oppressive to the minority shareholders whose voice is often unheard due to their insignificant voting rights.
In that case, the question that arises is what remedies are available to the oppressed shareholder. By way of example, reference is made to the case of Irene Kulabako vs. Moringa Limited & David Case (High Court Company Cause No. 21 of 2009). The brief facts of the case are that Moringa Ltd was incorporated by David Case, Charles Case, and Irene Kulabako holding 50%, 40%, and 10% of the company’s shares respectively.
In this case, Irene complained that the other shareholders had; Transferred company property (land in Bugolobi) to a company owned by the majority shareholders (Muwafu Holdings Ltd), Paid out colossal sums of money as rent for the company’s premises yet the said premises actually belonged to the company. The other shareholders had also forced her to sell her shares at a low price.
The court found that indeed she had been oppressed as the minority shareholder and the defendants were ordered to buy her out at the market value of the company. From this example, it’s clear that the majority shareholders took advantage of their dominant position.
What is shareholder oppression?
In simple terms, shareholder oppression is conduct prejudicial to the interests of a shareholder. There are no hard and fast rules on what constitutes prejudicial conduct but the courts have provided guidance. The Honorable Justice Musa Sekaana in the case of Alfred Byaruhanga Muhumuza & Another vs. Uni Oil (U) Ltd ( High Court Company Cause No.14 of 2016) held that;
“To constitute unfair prejudice, the value of the quality of the shareholder’s interest that is his/her shares in the company limited by shares must be adversely affected.”
Further in the case of Kigongo V Mosa Courts-Apartments Ltd (Company Cause No. 01 of 2015), Justice Stephen Musota [as he then was] noted that;
“The conduct must be prejudicial in the sense of causing prejudice to the relevant interests of members of the company i.e. shareholders and It must be unfair.” The learned Judge added that the test for fairness is if a hypothetical reasonable standard would regard it to be unfair, and examples include:
- Exclusion from management in circumstances where there is a (legitimate) expectation of participation
- The diversion of the business to another company in which the majority shareholders hold interest.
- The awarding of the majority shareholder to himself excessive financial benefits.
- Abuse of powers and breaches of the Articles of Association.
- Repeated failures to hold Annual General meetings.
- Delaying accounts and depriving members of their right to know the state of company affairs.
Legal protection from shareholder oppression
The protection from shareholder oppression is founded in Sections 247 and 248 of the Companies Act. In the recent decision of the Court of Appeal, Kigongo Olive, Uganda National Chamber of Commerce and Others vs. Uganda National Registration Bureau ( CACA No. 236 of 2017), Justice Christopher Madrama explained the distinction between the two provisions. In this case, the High court had allowed the addition of the Registrar of companies as a party to a suit brought under Section 248 of the Companies Act.
The honorable Judge disagreed and set aside the decision of the High Court on the grounds that Section 247 of the Companies Act gives the oppressed member the option to petition the registrar of companies for redress including investigation of the affairs of the company. The registrar is also empowered to petition the court for redress on behalf of the aggrieved parties where he deems fit. The Judge noted that by virtue of this role, the registrar of companies holds a quasi-judicial position and is therefore an option for an oppressed member.
On the other hand, Section 248 of the Companies Act gives a member the option to directly seek redress from the court in the event of any prejudicial conduct. Section 248 of the Companies Act is to the effect that; A member of a company may apply to the court by petition for an order under this part on the ground that the company’s affairs are being conducted in a manner which is unfairly prejudicial to the interests of its members generally or some part of its members including at least himself or herself or that any actual or proposed act or omission on its behalf is or would be so prejudicial.
A distinction must however be made between minority oppression claims which directly relate to the rights of the members from derivative actions which relate to prejudicial and detrimental acts and/or omissions against the company. It must be noted though that oftentimes a derivative action can be combined with a minority oppression action.
In the case of Alfred Byaruhanga Muhumuza & Another vs. Uni Oil (U) Ltd ( cited above), Justice Musa Sekaana found that;
“The directors of the company owed fiduciary duties to the company and the company would be the best petitioner but this is not possible so the petitioner (a minority shareholder) was at liberty to bring this action against the company for his benefit as minority shareholder and also the company in case of any alleged wrong doing against the company”
Practical Options available to an oppressed shareholder
- Mitigate your loss by acting early enough and being proactive in relation to the affairs of the company in so far as possible. Don’t just sit and watch.
- Register your complaint with the directors of the company.
- Request for a meeting to air out your grievances and forge a way forward.
- Rally and solicit for support from other affected members.
- Involve the majority shareholders and make your grievances known. You may also ask the majority shareholder/company to buy you out.
- Negotiate for a shareholder’s agreement which strengthens your interests on a contractual basis and also clearly sets out the expectations of each member.
- Sell your shares to another third party taking into account preemption rights.
If you fail to internally get redress, petition the registrar of companies who may conduct further investigation. If you are a shareholder in a listed company you could engage the Capital Markets Authority. Alternatively, as a last option petition court for redress.
As noted above, an oppressed shareholder has protections under the law. However, before escalating the matter to external parties and authorities, exhaust the internally available options.