How to use the new Companies Act

Are you faced with an ethical dilemma? Are you witnessing corruption but don’t know what to do about it? Ask the team of Corruption Watch experts what to do by writing to: letters@businesstimes.co.za and mark your letter ‘Dear Corruption Watch’.

Dear Corruption Watch,

Last month I read a news story about a test case for the Companies Act. Apparently, a director who wants to litigate against the company, whether the board agrees or not, can now do so.

I am worried about the way some expenses are reported in our financial statements and wonder if I might use this new tool to explore whether there have been corrupt expenditures made.

Yours, Duly Diligent

Dear Duly Diligent,

The new Companies Act (which came into force in May 2011) introduced a whole arsenal of legal remedies for stakeholders concerned about how their company is being run. These allow stakeholders (which may be shareholders, employees, directors and other officers of the company) to take action against individual directors or even the company itself by following specified procedures. The Act follows an international trend that encourages stakeholder activism and greater accountability from companies and their directors.

As you rightly observe, the new remedies are now being put to the test. Over the past few months, not one but in fact several High Court judgments have been delivered applying these remedies for the very first time.

The remedy you seem to have in mind is what is known as ‘the minority oppression action’ in section 163 of the Act. This remedy was successfully invoked by a minority shareholder in the Kudumane case to remove disputed directors from a company and to establish future corporate governance requirements.

Section 163 allows a shareholder or a director of the company to apply to the court for relief if -

1. the company or ‘a related person’ (e.g. a holding company or majority shareholder) has acted or conducted its business in a manner that has oppressed, unfairly prejudiced, or unfairly disregarded the interests of the applicant; or

2. if the powers of a director or prescribed officer of the company have been exercised in a similar manner.

Section 163 is considerably wider than the equivalent provision in the previous Companies Act. It protects the rights and ‘interests’ of both shareholders and directors. It also affords the Court extensive remedial powers, including: varying or setting aside a transaction to which the company is a party; appointing directors; requiring the payment of compensation to an aggrieved person; directing the company to amend it MOI; and (of relevance to your case in particular) requiring the company to produce financial statements or another appropriate form of accounting.

Two other recently-applied remedies are worth mentioning:

First, section 165 allows a broad range of stakeholders (shareholders, directors and employees) to serve a demand on the company to take legal action or related steps against anyone “to protect the legal interests of the company”. If the application is successful, the board must appoint an independent person or committee to investigate the demand and report to the board on whether action must be taken by the company.

If the board fails to investigate the demand properly, or decides not to pursue legal action, the person who made the demand can apply to the court for permission to sue on behalf of and in the name of the company. 

Second, section 162 of the Companies Act provides for a range of stakeholders within a company to apply to court to have a director declared a ‘delinquent’ and automatically removed on grounds of seriously breaching his duties or abusing his power.

We would encourage you and anyone aware of corrupt or potentially corrupt business practices to avail yourself of these tools to fight back against corruption. Remember, there is a supply and a demand side to corruption.

Take a stand and report an incident of corruption. This article originally appeared in the Sunday Times Business Times on 8 July 2012.