First published on CityWire South Africa

South Africa is grappling with a persistent budget shortfall, and National Treasury is under pressure to raise revenue wherever it can. A proposal made on 16 August to reclassify preference share dividends as income was withdrawn on 3 September, but not before it rattled investors and unsettled deal-making. The draft signalled a defensive mindset in government, seeking short-term revenue at the expense of long-term capital formation – precisely when the economy most needs private risk capital.
While the withdrawal was welcomed by private-equity professionals, the damage was done. The mere publication of the proposal – and its subsequent retreat – has eroded confidence and underlined a central weakness in South Africa’s investment case: a lack of certainty.

A fragile compact

Lenders and investors perform fundamentally different roles. Lenders provide capital in return for a fixed yield and the promise of repayment. They want their money back, with interest, and as little exposure to uncertainty as possible. Investors, particularly in venture capital and private equity, commit funds without that certainty. They take a residual claim on profits, absorbing both the upside and the downside. Economies require both types of capital to grow.
Tax systems typically mirror this divide. Interest payments on loans are treated as a cost of doing business and deducted before tax, while dividends represent a discretionary share of profits that can only be distributed after tax. The treatment of equity returns is often softened – or exempted – to encourage investment and avoid double taxation.

Preference shares sit uncomfortably between these two poles. They resemble equity in legal form but carry debt-like features such as redemption rights and priority over distributions. Tax authorities across the world have developed tests to determine whether such instruments are genuine risk-bearing capital or simply loans in disguise.

The US applies a ‘substance over form’ doctrine, asking whether risk has genuinely shifted. The UK uses ‘disguised interest’ rules to stop abuse while still recognising preference shares as equity if they retain a genuine equity component. Across the European Union, preference shares are generally treated as equity unless they overwhelmingly replicate debt.

What makes South Africa distinct is not the need to police the boundary, but the manner in which rules shift midstream. For professional investors, identifiable risks such as crime, politics or even load-shedding can be modelled and priced. What kills investment is uncertainty – sudden reversals in tax policy, discretionary approvals, or vague drafting that leaves too much to interpretation. These dynamics impose what dealmakers describe as a ‘policy-volatility premium’. They push up hurdle rates, complicate cashflow models, and ultimately reduce appetite for deployment.

The recent proposals highlight the choice confronting the National Treasury. A country with a growth agenda sets clear rules, interprets them consistently and keeps channels open for different forms of capital. A country with a defensive agenda writes vague rules that collapse everything into debt, closing loopholes but also closing wallets.

Private equity’s language

Preference shares are not a tax dodge. They are the central structuring tool of private equity worldwide. Apple, Google, Uber and Airbnb were all built on successive rounds of preferred stock. In South Africa too, preference shares are the language through which investors negotiate their position between lenders and founders.

By hard-wiring priorities into the capital stack – liquidation preferences, dividend rights, redemption triggers and consent matters – preference shares give early-stage investors confidence that their risk will be rewarded before common equity participates. This makes them indispensable in growth finance.

National Treasury’s 2025 Draft Taxation Laws Amendment bill sought to rewrite section 8E of the tax code, replacing the current three-year redemption test with an International Financial Reporting Standards (IFRS)-based approach. Because modern redeemable preference shares are generally classified as liabilities under IFRS, most instruments would have been swept into debt treatment. Dividends would have been taxed as income in the hands of investors, without any offsetting deduction for the issuing company.

For private equity funds, the implications were severe: higher required returns, re-engineered waterfall models, and contractual gross-up clauses that strip cash from growth. The withdrawal of this element of the bill has spared the industry from immediate disruption, but not from lingering unease.

Not all the proposals have been abandoned. Section 8EA, dealing with ‘switch-off’ guarantees, remains on the table. This would impose a permanent taint: once a guarantee or enforcement right has existed on an instrument, dividends could be reclassified as taxable income forever. National Treasury is also considering tweaks to exchange-control rules that could see certain

cross-border preference shares treated as foreign-currency items, dragging them into complex revaluation regimes.
The common thread is a move towards rigidity. Instead of recognising the nuanced role preference shares play in risk-sharing, the reforms risked collapsing the category into a binary test: IFRS equals debt. That oversimplification would have raised hurdle rates for South African private equity at precisely the wrong moment.

Where next?

The episode has left private equity sponsors and corporate CFOs with pressing questions. Existing preference share structures will need to be mapped against IFRS liability tests, past guarantees reviewed and covenant models stress-tested for dividend recharacterisation. Even without section 8E, the spectre of section 8EA means any historic support could contaminate instruments indefinitely.

Yet the bigger issue is not technical but philosophical. In growth finance, stability and clarity are not luxuries – they are prerequisites. The now-withdrawn proposal showed how quickly confidence can unravel when rules change abruptly. Emerging markets compete fiercely for global capital, and even small frictions tip the balance towards Kenya, Nigeria or India.

For South Africa, the cost of this policy volatility will be measured in smaller equity tickets, higher hurdles and tighter covenants. Managers seeking growth capital will find investors less patient and less willing to price long-term upside. That is the opposite of what the government should be encouraging if its priority is jobs and growth.

The withdrawal of the proposal is a step back from the brink, but the warning remains. If South Africa wants to foster private equity, it must craft clear, consistent rules for preference shares – and then stick to them.

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This article examines these key developments and asks: what lessons should SA businesses take going into 2025? We discuss the various regulatory developments and consider the Information Regulator’s 2024 enforcement notices, including our key take-aways for each.

Direct marketing: a spam-free 2025?

On the on hand, direct marketing is a vital business tool; on the other hand, unwanted electronic communications infringe on a person’s privacy and peace of mind. The Information Regulator (“IR“) has indicated that it has received an enormous amount of complaints relating to direct marketing.

This sets the scene for two developments in 2025:

POPIA: draft guidance note on direct marketing

The Protection of Personal Information Act No 4 of 2013 (“POPIA“) prohibits business from conducting direct marketing by ‘electronic communication’ unless the person who they are marketing to (i) is their customer; or (ii) has consented.

The generally accepted interpretation was that POPIA’s direct marketing provisions apply to electronic communications like email, text message, and telephone calls by automated machine, but that it does not apply to voice calls. The IR in 2024 firmly rejected this view, asserting that voice calls are also ‘electronic communication’.

The IR seeks to address direct marketing in a guidance note, and a draft was published for public comment on 3 December 2024. The document includes guidance on, amongst others, what constitutes electronic communication; and how to lawfully conduct direct marketing by (i) electronic communication; and (ii) other means, like post or in person.

CPA: draft regulations  

The Department of Trade Industry and Competition has proposed amendments to the regulations to the Consumer Protection Act No 68 of 2008 (“CPA“). The proposed amendments strengthen existing opt-out mechanisms, enhance consumers’ ability to block unwanted marketing communications, and tightens rules for direct marketers’ use of the opt-out registry. The mechanics of how some of the proposed amendments will work is not clear from the draft.

Public comment for the amendments closed on 15 January 2025.

It seems unlikely that we will see the amendments to the CPA regulations published this year. We’re hopeful that, although controversial, the IR’s guidance note is at least published in final form. This will give organisations and consumers a clearer understanding of their respective rights and obligations; as well as how the IR is going to enforce POPIA’s direct marketing provisions.

Health information: critical care required

POPIA permits specific types of organisations to process health or sex life (“health information“), subject to its requirements. For example, medical professionals and healthcare institutions may process health information where required for a patient’s treatment. Insurance companies and medical schemes may process health data relating to their specific purposes.  

Nevertheless, the lawful processing of health information under POPIA is less than clear and requires more detailed guidance.

Enter the IR, who published draft regulations on processing health information under POPIA. The draft regulations apply to, amongst others, employers, insurance companies, medical aid schemes, medical scheme administrators, and pension funds. The draft regulations are onerous, for example, requiring certain organisations like insurers and medical aids to obtain consent from data subjects to process health information. The draft also contains additional rules regarding legitimate interests, cross border transfers, record retention, and destruction of health information.

Once published, these regulations will be legally binding. The current draft has been subject to criticism from industry stakeholders, and it seems unlikely that we will see these regulations published in their current form.

Cybersecurity Takes Centre Stage in the Financial Sector

The last few years have seen an increase in the frequency, severity, and sophistication of cyberattacks that target financial institutions. Financial institutions need to remain adaptive to the risks posed by cyber-attacks to withstand them, so-called ‘cyber resilience’. Accordingly, it is no surprise that financial sector regulators have published rules on how institutions operating in the national payment system and the financial sector must bolster their cybersecurity and cyber-resilience.

National Payment System

The South African Reserve published a directive mandating comprehensive cybersecurity frameworks for payment institutions and operators. These frameworks must align with international best practices, integrate with operational risk management, and establish clear protocols for risk mitigation and information sharing. The directive became effective on 17 August 2024.

Financial institutions

The Financial Sector Conduct Authority and the Prudential Authority published a joint standard on cyber security and cyber resilience which applies to various categories of financial institutions. The standard, amongst others, requires financial institutions to notify the responsible authority upon the occurrence of a material cyber incident or information security compromise.

The standard will commence on 1 June 2025. Thereafter, financial institutions will be afforded a 12-month grace period within which to comply.

The directive and standard are a necessary and welcome step in the protection of financial and payments institutions and their data.

AI Regulation: Mapping Tomorrow’s Rules

In August 2024, the Department of Communications and Digital Development published a draft National AI Policy Framework for public consultation. The framework is intended to serve as the basis for the National AI Policy that will guide AI regulation. As it relates to data protection, the framework envisions the safeguarding of personal information through various means, including bolstering of existing data protection regulations.

The document is likely to undergo further amendment based on the comments received from the public.

IR enforcement decoded

While new regulations shape tomorrow’s compliance landscape, today’s lessons come from yesterday’s enforcement. The IR issued seven enforcement notices in 2024 relating to POPIA non-compliance, each revealing critical compliance insights. We discuss the enforcement notices in the following table:  

Conclusion: the way forward

The message for 2025 is clear: organisations face an increasingly layered compliance landscape where general POPIA principles intersect with sector-specific requirements. Success requires a dual focus: maintaining robust general compliance while adapting to emerging industry obligations. As enforcement actions demonstrate, regulators are ready to act – making proactive compliance more critical than ever.

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The battle over environmental and social governance principles continues round after round with the latest battle having been won by the proponents of ESG. Last month, a federal appeals court dismissed a case that sought to block SEC regulations requiring investment funds to categorize and disclose their votes on ESG matters. Is ESG recovering from the blows it has taken over the past 12 months?

The primary fiduciary obligation of an investment fund manager is to act in the best interests of investors at all times. The manager must be committed to prioritising the financial well-being of the investors above all else and that translates into an obligation to take all decisions with a view to generating profits for investors. When a manager is managing other people’s money, the focus must be on the empirical metric of value generation, rather than principles and values the manager holds dear. The only exception to this rule is when the manager has a contract with the investor that allows the manager to take into account specific principles. This is the case, for example, in “impact funds”.

Within the realm of pension funds, in particular, the intersection of fiduciary duties and ESG rules presents a complex landscape as ESG seeks to look beyond the maximisation of profits at other factors such as environmental sustainability, social responsibility, social engineering and corporate governance.

The challenge for managers arises principally due to the perceived incompatibility between financial returns and ESG objectives. Proponents of ESG integration contend that incorporating these factors into investment decisions enhances long-term financial performance by mitigating risks associated with environmental and social issues. There is, however, no conclusive evidence of these claims and most of the studies supporting ESG talk to its potential to drive value rather than evidencing actual, universal value creation. This places investment managers in a difficult position. If they cannot prove that the implementation of ESG in their decision-making enhances profits paid to investors, they may be in breach of their fiduciary obligations.

In the United States, a 2020 regulation sought to address this issue by requiring certain retirement plan advisers to only consider “pecuniary factors” or those that have a material effect on risk and return. Effectively, this prohibited pension fund managers (managing around $12 trillion on behalf of 150 million Americans) from justifying investment decisions with reference to ESG factors. It did not mean that they could not take into account ESG factors, but decisions could not hinge on these factors. The 2020 regulations set off a ping-pong between proponents of ESG and those opposed to ESG.

When President Biden came to power, his administration amended the 2020 regulations to allow ESG considerations. Critics of Biden’s approach claim that Democrats want Wall Street to use worker’s hard-earned money not to grow savings, but to fund a far left political agenda and the Biden amendments were promptly challenged in court. Whilst the court expressed an aversion to the rise of ESG in investment decision-making, it upheld the regulations in large part based on a principle of US law known as the “Chevron Deference”. That outcome was appealed and the appeal has been buoyed by the US Supreme Court last month overturning the Chevron Deference. In the interim, however, Congress passed legislation prohibiting fund managers from basing investment decisions on ESG thereby effectively overruling the court. Biden was not done though and, for the first time in his presidency, exercise a veto blocking that legislation.

The battle then shifted to the US Fifth Circuit court where four States sought to invalidate a Securities and Exchange Commission ruling requiring funds to disclose their votes on ESG matters. In practice, this rule will require funds to take ESG factors into consideration in decision-making. The court upheld the SEC regulations, but it noted that this was not on principled grounds, but due to a lack of evidence of harm. The court found that it had insufficient evidence that the new regulatory burdens would result in an increase in costs to investors. If the States can assemble stronger evidence of injury, they may refile the case as they apparently intend to do. Proving an increase of costs does not seem to be particularly onerous.

The specifics of these cases aside, pension fund managers must always balance their fiduciary duties with the growing demands to consider other factors. A fund manager who takes an investment decision based on factors other than profit maximisation is potentially in breach of her fiduciary obligations and could be exposed to a claim from investors. The purpose of a pension fund is to provide for the retirement of its members. A retirement fund manager normally does not have an impact mandate. In the absence of a convincing connection between factors taken into account in decision-making and profit maximisation, managers are therefore exposed to claims.

ESG principles are far more entrenched in the European Union than they are in the US. The absence of ESG legislation in US has already resulted in complaints from European investment fund managers that the shackles of ESG regulatory compliance makes European fund managers uncompetitive. Developments in the US will therefore have a ripple effect into other jurisdictions and whilst ESG appears to have steadied itself from a series of blows in the US, the attacks will continue over the next few months.

At a recent conference of the world’s top fund lawyers, I asked what the impact of the battle over the ‘E’ in ESG would be on the ‘S’. In other words, if environmental considerations are already being downplayed, will social factors survive? Universally, the answer was that ESG is now nearly exclusively about environmental factors. Social considerations in investment decisions (other than in an environmental context) are now the exclusive domain of funds where managers have a specific mandate to promote human rights, job creation, affirmative action etc.

The South African context is, of course, slightly different. Compliance with specific legislation requiring social factors to be taken into account of course impacts the fiduciary analysis. Noting developments in the US, however, where the pendulum continues to swing from one side to the other, legislation may not be clear for some time and pension fund managers will not only need to ensure that they have actual obligations to implement ESG, but that these obligations are unambiguous and settled. Alternatively, they will need to ensure that they have a mandate to take into account factors other than profit maximisation.

The lack of standardised ESG metrics, varying stakeholder preferences and the evolving regulatory landscape make decision-making ever more complex for fund managers. Scepticism appears to be growing regarding the efficacy of ESG strategies in delivering superior returns and this complicates the integration of these principles into fiduciary duties. Pension fund managers, in particular, should be wary of being swept up by the latest trend and straying too far from profit maximisation motives.

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In this article we will discuss the extent to which employers may withhold a pension benefit if such employer has only laid a criminal complaint against an employee.

In terms of section 37D(1)(b)(ii) of the Pension Funds Act, 24 of 1965 (the “Act“), a fund may deduct any amount due by a member to his employer on the date on which he ceases to be a member of the fund, in respect of compensation (including legal costs recoverable from the member in the proceedings referred to below) in respect of any damage caused to the employer by reason of any theft, dishonesty, fraud or misconduct by the member, and in respect of which –

• the member has in writing admitted liability to the employer; or

• judgment has been obtained against the member in any court, including a magistrates court,

from any benefit payable in respect of the member or a beneficiary in terms of the rules of the fund, and pay such amount to the employer concerned.

Because it is uncommon for a member to admit liability in writing to the employer (at least, prior to any proceedings being instituted against them), it is the second scenario referred to above that is often the subject matter of disputes.

In Highveld Steel & Vanadium Corporation Limited v Oosthuizen[1] (“Highveld Steel“) the Supreme Court of Appeal (“SCA“), for purposes of interpreting section 37D(1)(b) of the Act and the rules of the relevant fund, found that the purpose of the section is to protect the employer’s right to pursue the recovery of money misappropriated by its employees.

Accordingly, the SCA interpreted the provision purposively to include the power to withhold payment of an employee’s pension benefits, pending determination or acknowledgment of such employee’s liability.

The SCA found that the relevant fund had a discretion to withhold a benefit and, in exercising such discretion, the fund should consider potential prejudice.

The fund was moreover bound to exercise such discretion with care and, in the process, balance the competing interests with due regard to the strength of the employer’s claim. The fund may also impose conditions on employers to do justice to the case.

The SCA did not deal with whether the pending proceedings include both civil and criminal proceedings, but in that particular matter the dispute related to civil proceedings.

For a number of years following the SCA’s finding, funds exercised their discretion in withholding pension benefits pursuant to section 37D(1)(b)(ii) of the Act pending civil or criminal proceedings, taking note that in terms of section 300 of the Criminal Procedure Act, 51 of 1977 (“CPA“), where a person is convicted of an offence which has caused damage to or loss of property (including money) belonging to some other person, the court in question may, upon application of the injured person or the prosecutor acting on the instructions of the injured person, forthwith award the injured person compensation for such damage or loss, with such award having the effect of a civil judgment.

The recent position adopted by the Financial Services Tribunal (“FST“) in the findings referred to below, is that an employer cannot withhold a pension benefit in terms of section 37D(1)(b)(ii) of the Act if the employer failed to institute civil proceedings and had only laid a criminal complaint against an employee.

Judge Harms[2], sitting as the Deputy Chairperson of the FST, in the case of FundsAtwork Umbrella Provident Fund v Elvis Eliah Ngobeni and Another Case No.: PFA64/2020 (“Ngobeni“), in considering the rules of the relevant fund and the provisions of the Act, found that the case of Highveld Steel merely dealt with the withholding of payment pending the finalisation of civil proceedings and it did not hold that a fund is entitled to withhold payment because a criminal case has been opened or even upon conviction.

Judge Harms stated that “a conviction is not a judgment against a member that quantifies compensation in respect of damage caused, and costs are not awarded against persons convicted“.

He stated further that since the employer in the case did not inform the fund of a civil action or even an intention to claim, a jurisdictional fact for the exercise of a discretion by the fund to withhold was absent.

In the case of Tape Aids for the Blind v Ashwin Anadh Palhad and Others Case No.: PFA3/2022 (“Tape Aids“), Judge Harms repeated what he stated in Ngobeni and considered the applicability of section 300 of the CPA, in particular.

The FST found that it is doubtful that section 300 of the CPA covers fraud[3], but for the purpose of its finding assumed that fraud was covered by section 300 of the CPA.

This resulted in the issue before the FST being whether laying a criminal complaint amounted to the institution of legal proceedings as required by the rules of the relevant fund.

The FST held that criminal proceedings are instituted by the State through the prosecuting authorities and laying a criminal complaint has no legal consequences.

Thus, laying a criminal complaint, the FST found, does not commence legal proceedings. Legal proceedings may or may not follow, depending on the decision of the prosecutor.

The Pension Funds Adjudicator now adopts the same approach to withholding matters, as has been articulated in the FST’s above findings.

In the result, the industry has largely adopted the position that a fund should only be permitted to withhold an individual’s benefits if the employer has instituted civil proceedings against the individual or has obtained an interdict against the fund, preventing payment.

The position of the FST brings into focus the difference in the requirements for a delictual claim and the requirements for a criminal conviction (i.e. in the context of section 300 of the CPA). Although they are similar, the major difference is that a delictual claim needs to be proved on a balance of probabilities, while the burden of proof for a criminal conviction is that of being beyond reasonable doubt.

Accordingly, criminal conviction requires a higher burden of proof than a delictual claim.

In principle, section 300 of the CPA is a convenient, cost effective and efficient way for a victim to receive compensation for damages without the need to institute parallel or after the fact civil proceedings against an offender. 

Some commentators have also suggested that section 300 of the CPA fits perfectly within the framework of restorative justice spearheaded by the Constitution of South Africa.

As stated above, in terms of section 300 of the CPA a court may instruct an offender to repay the victim for damages suffered as a result of the offender’s conduct. Section 300(3)(a) states that such a finding by a court has the same effect as a civil judgment of the magistrate’s court. In light of this the position of the FST, as reflected in Ngobeni and Tape Aids, should be carefully scrutinised –

• in Ngobeni, it is unclear whether application was made for an order in terms of section 300 of the CPA. It appears that the fund only relied on the fact that a criminal case was opened, with no indication that the employer would have pursued damages whether by way of application in terms of section 300 of the CPA or separate civil proceedings; and
• in Tape Aids, Judge Harms focused on the wording of the rules of the relevant fund, which provided that a benefit may only be withheld if legal proceedings are instituted. It appears that the fund in that case only relied on the fact that a criminal complaint was laid, leading to Judge Harms’ finding that a criminal complaint is not the institution of legal proceedings.

In conclusion, withholding a pension benefit would always be subject to the rules of the relevant fund. Further, criminal proceedings could be sufficient to withhold pension benefits on the grounds that the criminal complaint is actually prosecuted and judgment is obtained in terms of section 300 of the CPA (bearing in mind any prosecutorial backlogs).

Whilst the findings of the FST are reviewable in terms of the Promotion of Administrative Justice Act, 3 of 2000, the position of the FST is currently unchallenged in a court.

Footnotes

[1] 2009 (4) SA 1 (SCA)

[2] Also a concurring Judge in the Highveld Steel matter.

[3] In doing so it referred to S v Liberty Shipping and Forwarding (Pty) Ltd and Others [1982] 4 All SA 141 (D) 1982 (4) SA 281 (D), where it was held that the wording of section 300 of the CPA was vague in that it is unclear as to whether the section only covers damage to property or whether it covers damage to a person as well. Since the approach of the courts was very conservative at the time, the court opted for a strict interpretation of the section and held that fraud, in that instance, was excluded from the cover of section 300 of the CPA.

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In Discovery Insure Limited v Masindi the SCA considered whether the entirety of an insurance claim should be forfeited in circumstances where only part of the claim was fraudulent and the other part was valid in relation to the same facts. The insurance policy in question included a forfeiture clause which provided for retrospective cancellation in the event of a fraudulent claim. The case dealt with an insurer who was claiming repayment of all amounts paid to the insured in terms of an insurance claim – both in relation to the fraudulent and valid portions of the claim. This article discusses this recent case and its importance for policyholders and insurers alike.

Mr Tshamunwe Masindi (“Mr Masindi” or the “insured“) had an insurance policy in place with Discovery Insure Limited (“Discovery” or the “insurer“), entitled “Discovery Insure Plan” (the “policy“). The policy insured against losses arising in relation to property and household contents. It also covered reimbursement for “emergency accommodation” in the event that Mr Masindi’s house was unoccupiable due to an insurable event. Mr Masindi’s house was struck by a storm and flooding on 10 November 2016, and on the following day, 11 November 2016, he lodged a claim in two parts in response to the catastrophe: a claim for losses relating to property and household contents (the “property claim“) and a claim for the recoupment of emergency accommodation (the “accommodation claim“).

Discovery paid Mr Masindi out for both the property claim and the accommodation claim (together, the “total claim“), but following investigation Discovery uncovered that the accommodation claim was based on fraudulent invoices. The insurer proceeded to cancel the policy (with retrospective effect) and instituted a claim against the insured for the total claim, even though only the accommodation claim was tainted by fraud. Discovery’s conduct was based on a forfeiture clause in the policy which provided that –

• all benefits in terms of the policy in respect of any claim will be lost if any claim “or part thereof” was in any way fraudulent; and
• in that case, the insurer would be entitled to cancel the policy with retrospective effect, from the date the incident occurred or was reported, whichever was earlier.

The insurer’s case was that the forfeiture clause permitted it to cancel the policy with retrospective effect from 10 November 2016, being the date of the incident, and to reclaim all amounts paid subsequent to the retrospective date of cancellation. Mr Masindi disputed Discovery’s claim on the basis that there is no express provision in the policy – and that the forfeiture clause in question was not wide enough – to require the insured to repay all amounts paid in terms of the policy, even those that were genuine and not fraudulent.

The High Court decided in favour of Mr Masindi by only ordering him to repay the sum received for the property claim, being the genuine claim. The High Court’s decision was based on, firstly the doctrine of “accrued rights”; and secondly the fact that the forfeiture clause in question was a penalty clause which was unenforceable for causing disproportionate prejudice to the insured. Discovery, unsatisfied with the decision of the High Court, took the matter on appeal to the Supreme Court of Appeal (“SCA“).

Discussion

The SCA in its judgment makes it clear that despite the High Court’s focus on other issues, what was in question in this case was an issue of interpretation, namely did the forfeiture clause result in the forfeiture of the total claim and not just the accommodation claim, and ancillary to this, if answered in the affirmative, was Discovery entitled to repayment of the total claim by the insured?

The SCA’s consideration of the issues was premised on the basis that forfeiture clauses are a common feature in insurance contracts and are generally viewed as valid and enforceable. The underlying purpose of such clauses was to prevent fraudulent claims and their lodgement.

The SCA referred to our courts’ approach to interpretation and held that an insurance policy, like any other document, had to be interpreted by having regard to its language, context and purpose.[1] Furthermore, a sensible meaning is to be preferred to one that leads to insensible or unbusinesslike results or undermines the apparent purpose of the document.

The court held that the clause in question was “clear and unambiguous” and accordingly had to be given effect to. Because the forfeiture clause permitted the insurer to cancel the policy with retrospective effect from the date of the incident in the event of a fraudulent claim, Discovery was permitted to do so and acted within the bounds and in accordance with the policy in cancelling it retrospectively from 10 November 2016. The court also emphasised the importance of the context of such forfeiture clauses, namely, to prevent fraud.

The SCA accordingly held that the High Court had erred in considering the doctrine of accrued rights to be applicable. When Masindi purported to submit his claim on 11 November 2016, there was no longer an extant insurance policy because it had already been terminated with retrospective effect from 10 November 2016. Accordingly, no rights accrued to him and the doctrine was not applicable in the present instance.

In relation to the High Court’s reliance on the forfeiture clause being a penalty clause, the court held that this was not an issue which could be considered by the court because it had not been raised by the parties in their pleadings and the court was not permitted to raise it for them. Given the court’s pronouncements regarding the permissibility of forfeiture clauses, it seems even an alternative argument that the clause was unenforceable based on public policy would have failed.

In the premises, the SCA ordered Mr Masindi to repay all the monies he had received in relation to the total claim, with costs and interest. The SCA held that giving the forfeiture clause the meaning contended by Mr Masindi would undermine the well-established tenets of interpretation of documents and render the clause entirely nugatory.

Conclusion

Neither insurance fraud nor the legal imperative to control it is new. The use of forfeiture clauses by insurers is common. The Masindi case confirms that such clauses have a clear purpose and are not on the face of it unenforceable. The court will give effect to the meaning of such clauses and policyholders are well minded to ensure that they understand what the enforcement of such clauses will mean for any claims. The result of the Masindi case will surely be welcomed by insurers; policyholders should be wary that the submission of a partly genuine and partly fraudulent claim may result in the forfeiture of their entire insurance claim.

Footnotes

[1] Natal Joint Municipal Pension Fund v Endumeni Municipality [2012] JOL 28621 (SCA) at paragraph 17.

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The recent decision of Ndwandwe v Trustees of Transnet Retirement Fund and others[1] (the Ndwandwe decision) concerned the review of a pension fund’s decision to award and apportion a member’s death benefits contrary to his nomination form. The decision is relevant to pension fund members in general because this fund’s rules and section 37C(1)(bA) of the Pension Funds Act[2] (the PFA) are almost identical with regards to death benefits. Section 37C applies to most pension funds. This article explores the Ndwandwe decision as a caution to pension fund members.

The Facts

Mr Mkhwauleni Paulus Ndwandwe died on 19 September 2018. At the time of his death he was a Transnet employee and a member of the Transnet Retirement Fund (the Fund). Mr Ndwandwe had completed a beneficiary nomination form where he nominated the following persons to receive a death benefit in the following proportions:

• his customary law wife, Mrs Xoshwaphi Ndwandwe (60 percent);
• two of his children with Mrs Ndwandwe (10 percent each); and
• two of his adult children with his common law wife, Ms Thowi Alvinhah Ngcobo (the adult children) (10 percent each).[3]

Ms Ngcobo was not named in the nomination form. Mr Ndwandwe also had one further minor child with another of the respondents (the minor child), who was similarly left off of the nomination form. Notwithstanding the nomination form, the Fund resolved to apportion Mr Ndwandwe’s death benefit as follows:

• Mrs Ndwandwe and Ms Ngcobo (40 percent each);
• the adult children (3.66 percent each); and
• the minor child (12.69 percent).

Mrs Ndwandwe instituted a review application against the Fund’s decision with the KwaZulu-Natal High Court (the Court).[4]

The applicable rules and provisions of the PFA

Although the Transnet Pension Fund Act[5] applied to the Fund (and not the PFA), the provisions in the Fund’s rules (the Rules) and section 37C(1)(bA) of the PFA  regarding the awarding of death benefits, are almost identical.[6] Section 37C applies to most pension funds and governs how a pension fund has to deal with death benefits.

Rule 10.4(iii) of the Rules provided as follows in relation to death benefits:

“If a Member has a Dependant and the Member has also designated in writing to the Fund a Nominee to receive the benefit or such portion of the benefit as is specified by the Member in writing to the Fund, the Fund shall within 12 (twelve) months of the death of such Member pay the benefit or such portion thereof to such Dependant or Nominee in such proportions as the Trustees may deem equitable: Provided that this paragraph shall not prohibit the Fund from paying the benefit, either to a Dependant or Nominee contemplated in this paragraph or, if there is more than 1 (one) such Dependant or Nominee, in proportions to any or all of those Dependants and Nominees“.

The definition of “dependent” in the Rules differs slightly to that contained in the PFA but nothing turns on that for present purposes.

Suffice to say that the PFA casts the net widely and includes as a dependent:

• a person who the member is legally liable to for maintenance;
• a person who is not legally liable for maintenance, but is determined to be liable in the opinion of the trustees;
• a spouse of the member or the member’s child (including posthumous and adopted children and those born out of wedlock); and
• a person who the member would have become legally liable to for maintenance had they not died.[7]

The non-binding nature of a nomination form

Mrs Ndwandwe argued that the Fund’s decision fell to be set aside, amongst others, because the trustees ignored the nominees and their benefits as stipulated in the nomination form, and the trustees were not legally permitted to do so as they were bound by the form.[8] The Fund argued that the nomination form was nothing more than a “non-binding guide” and “that the deceased’s wishes are but one factor to be considered in the exercise of the discretion expressly conferred on it“.[9]

The Court held that not only may the Fund look further than the nomination form but it must do so to properly exercise the wide discretionary power granted to it (the same as it would be were section 37C applicable to it).[10] Indeed, the Pension Funds Adjudicator (the Adjudicator) has on a number of occasions held that the first thing a fund is required to do in terms of section 37C of the PFA is to identity potential beneficiaries, comprised of both nominees and dependants.[11] As held by the Supreme Court of Appeal (SCA), once a fund has identified the potential beneficiaries, “the board of the fund is vested with a large discretion to determine how the death benefit is to be apportioned between them“.[12] On  a separate occasion the SCA held that a fund’s duties in terms of section 37C are irrespective of anything said in its rules.[13]

The Court held that Mrs Ndwandwe’s argument on this ground failed: section 37C of the PFA was intended to serve a social function and protect dependants from being left without the support: “A fund is expressly not bound by a will, nor is it bound by the nomination form, whose contents are merely a guide to the trustees“.[14]

When will a reviewing body step in?

To consider Mrs Ndwandwe’s argument that the Fund acted irrationally and that this led to an unfair result, the Court had to opine on when it could – as reviewing body – step in and set aside or otherwise interfere with the Fund’s decision. The court, citing precedent, held that it could not do so simply because it may not agree with the Fund’s decision. The test has often been applied by the Adjudicator as follows:

“The duty of this Tribunal [the Adjudicator] is not to decide what is the fairest or most generous distribution, but rather to determine whether the board has acted rationally and arrived at a proper and lawful decision” (our emphasis).[15]

A fund is therefore required to take into account relevant considerations and ignore irrelevant considerations – only if it does not do so will the reviewing body have grounds to intervene.[16]

Although a fund can be guided on what to consider and what to not,  it should not slavishly apply a policy that will fetter its discretion.[17] The Adjudicator has held that the following factors are relevant to considering a death benefit award and apportionment –

• the age of the dependants;
• the relationship with the deceased;
• the extent of dependency;
• the wishes of the deceased placed either in the nomination and/or his last will; and
• financial affairs of the dependants including their future earning capacity potential.[18]

In the Ndwandwe decision, the Court held that the Fund took into account relevant factors, which included not only the financial circumstances of Mrs Ndwandwe and her children, but also the financial circumstances of Ms Ngcobo, the adult children and the prospects of the minor child. The court could not point to the consideration of any irrelevant factors by the Fund. The court accordingly held that the Fund’s decision was rational and reasonable and that it had acted equitably in making it.[19]

Conclusion and guidance

The Ndwandwe decision reaffirms our court’s approach to the awarding of death benefits and their apportionment. Front of mind for pension fund members must be that although their nomination form should indicate their intended death benefit beneficiaries, the form is not binding on a fund and instead a fund is required by virtue of section 37C of the PFA to look wider and apportion the death benefit equitably amongst the deceased member’s dependents in terms of its wide discretionary powers.

Furthermore, the Adjudicator or a court faced with a review of the Fund’s decision can only interfere in such decision on the very limited grounds of it not meeting the test of being a rational or lawful decision.

Pension fund members should therefore be mindful of who qualifies as their dependants and to the extent that a member wishes to protect certain dependants (or other persons) by ensuring they accrue benefits if the member dies, rather than relying solely on their nomination form, the member should ensure that such persons are adequately provided for by another estate planning mechanism, such as by making provision for a beneficiary in a life insurance policy, in a will or by way of an inter-vivos or testamentary trust.

Two pots of gold: What you should know about the “two-pot” retirement system

Footnotes

[1]  [2023] ZAKZDHC (22 February 2023).

[2] No 24 of 1956.

[3] [2023] ZAKZDHC (22 February 2023).

[4] No 24 of 1956.

[5] Ndwandwe decision, paragraphs 1 to 5.

No 62 of 1990. Because the Fund was not registered in terms of section 4 of the Pension Funds Act No 24 of 1956, not all of the sections of the Act were applicable to it.

[6] Ndwandwe decision, paragraphs 6 to 7.

[7] No 62 of 1990. Because the Fund was not registered in terms of section 4 of the Pension Funds Act No 24 of 1956, not all of the sections of the Act were applicable to it.

[8] Section 37C(1)(bA) only applies to nominations made on or after 30 June 1989.

[9] PFA, section 1 s.v. “dependent”.

[10] Ndwandwe decision, paragraphs 31(i) and 32.

[11] Ndwandwe decision, paragraphs 36 and 37.

[12] Ndwandwe decision, paragraphs 51.

[13] See Van Schalkwyk v Mine Employees’ Pension Fund and Another [2003] 8 BPLR (PFA) and Mukhungo v Trentyre Provident Fund and others [2018] JOL 39898 (PFA) (the “Mukhungo decision“).

[14] Fundstwork Umbrella Pension Fund v Guarnieri 2019 (5) SA 68 (SCA) at paragraph 8.

[15] Kaplan NNO v Professional and Executive Retirement Fund 1999(3) SA 798 (SCA) at paragraph 803B-C/D.

[16] Ndwandwe decision, paragraph 57.

[17] Cillie v Lifestyle Retirement Annuity Fund and another [2019] JOL 42006 (PFA) at paragraph 5.9.

[18] Mukhungo decision at paragraph 5.2.

[19]  Nel v Netcare 1999 Pension Fund and another [2018] JOL 40371 (PFA) at paragraph 4.2.

[20] See Sithole v ICS Provident Fund [2000] 4 BPLR 430 (PFA) at paragraph 27.

[21] Ndwandwe decision, paragraphs 60 to 78.

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What is the “two-pot” system? 

In July 2022, the Minister of Finance published the draft revenue laws amendment bill (the Bill), which proposes significant changes to the present retirement system by replacing the current one-pot system with a “two-pot” system. The two-pot retirement system will apply to pension funds, pension preservation funds, provident funds, provident preservation funds and retirement annuity funds (the Funds). Two “pots” will be established, the “savings pot” and “retirement pot“. Under the new system, members of the Funds (Fund Members, each Fund Member) will be able to withdraw the funds in the savings pot, whereas the funds in the retirement pot will remain preserved until retirement. There will also be one additional pot: the “vested pot“.

What happens to the retirement funds I have saved up before the two-pot system is implemented?

A Fund Member’s retirement funds which existed immediately prior to 1 March 2024 will be placed in what is known as a “vested pot”; funds in the vested pot will remain subject to the present rules.[1] No contribution may be made to the vesting pot after the two-pot system has been implemented, except in the case of provident fund members who were 55 years old or older on 1 March 2021, whose pension benefit regime will remain unchanged despite implementation of the new system.

How will my retirement contributions be allocated to the two-pots?

The savings pot will be allocated no more than one-third of a Fund Member’s retirement contributions. On the other hand, at least two-thirds of the retirement contributions must be allocated to the retirement pot. Any contributions not allocated to the savings pot must be allocated to the retirement pot.

How will withdrawals work and what happens when I retire?

Fund Members will be entitled to withdraw from the savings pot only once in a 12 month period, at a value of no less than R2000. On the other hand, withdrawals will not be permitted from the retirement pot. If, at the time of retirement, there is money in the savings pot, this will be paid out as a lump sum. At retirement, the accumulated funds in the retirement pot must be used to purchase a retirement annuity, subject to the minimum threshold amount required to purchase an annuity.

Labour Appeal Court Settles Questions On Retirement Age

Why are two-pots better than one?

Currently, Fund Members can fully access their pension funds and provident funds when they resign or retire from their employment. In the media statement issued by the National Treasury on 31 July 2022, titled “Retirement Reform: Draft Legislation for the Two-Pot System” (the Media Statement), the main issues and reasons for the two-pot system were discussed.

The first issue was that a Fund Member may need to access the funds for a specific issue. However, on resignation they would have full access to the funds and this may place long-term retirement savings at risk.[2] The second issue is that there are Fund Members who are financially distressed and have assets in investment funds that they cannot access.[3] A Fund Member may require the additional funds for an immediate need but would only be able to access these funds to address the immediate issue if they were to resign. The failings of the current system became readily apparent during the COVID-19 and concomitant lockdown, when many Fund Members were under financial distress, but unable to access their retirement funds without resigning from their work or other shams, like divorcing their spouses.[4]

The two-pot system provides a “life-line” to Fund Members in times of financial distress or when immediate short-term obligations arise by allowing access to the savings. This “life-line” is provided while ensuring that Fund Members retain retirement savings by placing restrictions on the withdrawals from the savings pot and prohibiting withdrawals from the retirement pot.

What’s the catch?

Overall, this proposed retirement system should have a positive effect on Fund Members. However there will be an administrative burden placed on Funds. Funds will be required to amend their rules to regulate the two-pot retirement system, new sophisticated systems will need to be put in place, employees will need to be trained and Fund Members educated.[5] Funds will have a greater burden of direct engagement in the current system as Fund Members will be able to initiate their claims themselves instead of through their employer. There will also be a cost to be borne by all Fund Members.

The current concern for Funds and their administrators is the timeline required for them to prepare for the implementation of the two-pot retirement system.[6]

At the time the Bill was published, the plan was initially for the amendments in the Bill to take effect on 1 March 2023. National Treasury confirmed that the first phase of the legislation amendments, which would create the two-pot retirement system, should take effect on 1 March 2024;[7] but it did not however publish any further draft legislation for comment, as some in the industry expected.[8]

Although the National Treasury in the Budget Review 2023 recognises that there are areas in this proposed retirement system which require additional work, namely “a proposal for seed capital, legislative mechanisms to include defined benefit funds in an equitable manner, legacy retirement annuity funds and withdrawals from the retirement portion if one is retrenched and has no alternative source of income“,[9] its answer to this is that the first three issues will be addressed in the draft legislation to be published and the last issue will be reviewed in the second phase of the implementation of the two-pot retirement system.[10] This indicates that the proposed retirement system will be implemented in at least two phases and results in the unfortunate position of piecemeal legislation. It is unclear when the new draft legislation will be published, but there are concerns on whether or not the Funds will have sufficient time to prepare for this proposed retirement system.

Conclusion: gold at the end of the rainbow?

Despite the administrative burdens to be placed on the Funds and their administrators, the proposed retirement system appears to be generally welcomed. The proposed retirement system will provide Fund Members with the flexibility required to access a portion of their retirement funds, while still upholding the purpose of retirement funds by placing restrictions on access of the largest part for retirement purposes.

However, the delay in further required legislation on the two-pot system is placing industry players under pressure to be ready for the 1 March 2024 implementation date.

Footnotes

[1] The Bill refers to “1 March 2023”. However the proposed date of implementation was changed to 1 March 2024.

[2] The Media Statement, pages 3 and 4.

[3] Ibid.

[4] For further comment on how the COVID-19 pandemic and lockdown made apparent the failings of the current system, see the comments of Richard Carter, Head of Assurance at Allan Gray, at Allan Gray | Making sense of the proposed two-pot retirement system.

[5] See the comments of Old Mutual Retirement Reform Executive, Michelle Acton, at Kick-off date for implementation of two-pot pension system urgent 

[6] Ibid.

[7] Budget Review 2023, page 51.

[8] See the discussion by N Moodley in the Daily Maverick’s article Retirees on hold after Budget 2023 delays the ‘two-pot’ retirement system.

[9] Budget Review 2023, page 51.

[10] Ibid.

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Introduction

In terms of Section 163 of the Companies Act 71 of 2008 (“the Act“), shareholders or directors of a company (“applicant”) are afforded several instances to apply to the court for relief in terms of section 163 of the Act. One such instance is where an act or omission of a related person[1] of the company, has had a result that is oppressive or unfairly prejudicial to, or that unfairly disregards the interests of, the applicant.

It is not uncommon for a business opportunity to present itself which requires that the resources and expertise of more than one entity are pooled together in order to procure and successfully execute the business opportunity. An example of this is where national, provincial or local government publish a request for tender submissions requesting that interested and eligible businesses submit a tender application that complies with the requirements described in the request for tender submissions.

It is often that the scope of works as described in the request for tender submissions span across several specialized areas of expertise. A further factor that is taken into consideration in the awarding of such tenders is the tenderors’ compliance status under the Broad-Based Black Economic Empowerment (“B-BBEE“) legislation.

For purposes of complying with the tender requirements, the relevant companies who are interested in the tender may elect to incorporate a joint venture company to operate as a special purpose vehicle (“JV Company“) in which they pool their resources and which they agree will act as the tenderor.

It is likely that one of the companies that will be a shareholder of the JV Company will serve as the black economic empowerment partner (“B-BBEE partner“) by virtue of its favourable B-BBEE status, in addition to the other assets, services or capital which the B-BBEE partner contributes to the JV Company.

For the purposes of this article, the following scenario is assumed to exist. The B-BBEE partner holds 51% of the issued shares in the JV Company. The B-BBEE partner happens to be a wholly-owned subsidiary of a 100% black-owned company (“the Holding Company“) ie the Holding Company holds 100% of the issued shares in the B-BBEE partner.

It is also understood that the Holding Company co-operated with the other shareholders in the JV Company and put forward the B-BBEE partner as its chosen entity which will hold its shareholding in the JV Company.

In these circumstances, the Holding Company would be deemed to be a related person to the JV Company by virtue of the fact that it indirectly controls the majority of the voting rights of the shares in the JV Company through its wholly-owned subsidiary (ie the B-BBEE partner).

For purposes of this scenario, it is pointed out that following the successful award of the tender to the JV Company, the other shareholders of the JV Company become aware of the fact that the Holding Company has subsequently sold a significant portion of its shares in the B-BBEE partner to a third party (which has a considerably lower B-BBEE status than the Holding Company) without consultation with the other shareholders of the JV Company (“the Sale“).

Cause of complaint

A complaint may arise regarding the Sale if, for instance, it was understood amongst all the shareholders of the JV Company that the B-BBEE partner would maintain its B-BBEE status for purposes of complying with the tender requirements (as derived by it from its 100% holding company (ie the Holding Company), and where this was an integral term and arrangement upon which all the shareholders had agreed to become shareholders in the JV Company.

Accordingly, where the identity of the third party to whom the Holding Company has sold a significant portion of its shares in the B-BBEE partner has a consequential detrimental effect on the B-BBEE status of the B-BBEE partner and consequently also the B-BBEE status of the JV Company, which leads to a breach by the JV Company of the tender conditions, the remaining shareholders of the JV Company (“Aggrieved Shareholders“) may be exposed to serious business risks in connection with their investment in the JV Company.

In such instance, it may be arguable that the conduct of the Holding Company as a related person to the JV Company (because of its status as an indirect holding company of the JV Company), has or had a result that is oppressive or unfairly prejudicial to, or that unfairly disregards the interests of the Aggrieved Shareholders.

Potential Remedy

In the circumstances, the Aggrieved Shareholders may potentially be able to apply to a court for relief in terms of section 163 of the Act, as follows –

1. directing that the Holding Company, as a related person to the JV Company, restore the Aggrieved Shareholders any part of the consideration that the Aggrieved Shareholders contributed in exchange for shares in the JV Company, with or without conditions as as envisaged in section 163(2)(g) of the Act; and/or
2. directing that the Holding Company, as a related person to the JV Company, pay compensation to the Aggrieved Shareholders, as envisaged in section 163(2)(j) of the Act, for any losses suffered by the arising from the breach of the tender conditions.

Conclusion

In the instance where an applicant seeks to rely on section 163 of the Act to seek relief from the prejudicial conduct of a related person to a company, the above example illustrates that there is likely to be complex circumstances which will need to be considered with the assistance of professional legal advice.

[1] The term “related person” is defined in the Act to include, amongst others, where one company (ie a holding company) directly or indirectly controls 100% of the voting rights in another company (ie a subsidiary).

The post The pride or prejudice of being a related person to a company? appeared first on Werksmans Attorneys.

Brief overview of Section 163

Introduction

There are instances where the Companies Act 71 of 2008 (“the Act“) and/or the Memorandum of Incorporation (“MOI“) will require the board of the company to propose resolutions to the shareholders of the company to approve certain commercial transactions.

An example is where a company proposes the repurchase of its shares (the “Proposed Transaction“). The Proposed Transaction may be made subject to certain conditions precedent premised on statutory and/or commercial considerations. The conditions precedent may stipulate that:

1. the Proposed Transaction must be approved by special resolution of the company’s shareholders (the “Repurchase Resolution“), and
2. not more than 5% of the company’s shareholders exercise shall have exercised their appraisal rights by making valid demands in terms of Section 164 of the Companies Act 71 of 2008 (the “Act“) (“Appraisal Rights Condition“).

Dissenting minority shareholders who are not in favour of the Transaction may seek to vote against the Proposed Transaction, which could result that the Repurchase Resolution is not passed.

If the dissenting minority shareholders who are opposed to the Proposed Transaction constitute less than 5% of the company’s shareholders and exercise their appraisal rights, the board of the company will be obliged to comply with the appraisal rights of the dissenting minority shareholders, prior to the conclusion of the Transaction.

Cause of complaint by dissenting minority shareholders

It may be that the financial cost of the company having to comply with the dissenting minority shareholders having exercised their appraisal rights is larger than initially anticipated. Whilst the board of the company is still intent on proceeding with the Proposed Transaction, the cost implications may represent a significant hurdle for the company to do so. In such circumstances, the board of the company may elect to adopt an alternative strategy to give effect to the substance of the Proposed Transaction, whilst impeding dissenting minority shareholders from exercising their appraisal rights.

The alternative strategy to give effect to the substance of the Proposed Transaction may entail issuing a notice to the remaining shareholders, proposing that the remaining shareholders of the company revoke the Repurchase Resolution and approve new resolutions for a revised transaction, absent of a similar Appraisal Rights Condition contained in the Proposed Transaction.

In the circumstances, the dissenting minority shareholders who voted against the Proposed Transaction and invoked their appraisal rights will be placed in the precarious position of not being able to vote on the proposed revised transaction.

The restriction on the rights of the dissenting minority shareholder to vote on the proposed revised transaction is due to operation of Section 164(9) of the Act, which provides that shareholders who invoke their appraisal rights relinquish their rights to vote on further decisions connected to their shares, save for the right to obtain fair value for their shares from the company[1].

The intended effect of the above set of circumstances (assuming the remaining shareholders of the company is intent on proceeding with the revised proposed transaction), is that whilst the dissenting minority shareholders will be unable to receive fair value for their shares in the company, the dissenting minority shareholders will also be restricted from participating at the shareholders meeting where the revised proposed transaction will be considered and voted on.

Section 163 of the Act – Potential remedy

The dissenting minority shareholders are afforded relief in terms of Section 163 of the Act to challenge the substantive fairness of the conduct of board of the company and request that the court restrain the board of the company from implementing the revised proposed transaction, alternatively that the court order the board of the company to comply with the appraisal rights invoked by the dissenting minority shareholders, prior to concluding the revised proposed transaction.

In order to obtain the above relief, it is incumbent for the dissenting minority shareholders to satisfy the court that that the effect of the conduct of the board of the company that is being challenged is oppressive, unfairly prejudicial or unfairly disregards the interests of the dissenting minority shareholders.

The above set of facts demonstrate conduct by the board of a company falling within the ambit of Section 163 of the Act as the board of the company did not make an offer to the dissenting minority shareholders for the fair value of their shares, despite the dissenting minority shareholders having exercised their rights to obtain a fair value.

In the circumstances, the court is likely to exercise its wide powers afforded in Section 163 of the Act, to restrict the board of the company from implementing the revised transaction[2], alternatively, order the revised prior transaction is conditional on the board of the company having to comply with the appraisal rights invoked by the dissenting minority shareholders

Conclusion

The prospects of success in relying on Section 163 of the Act will ultimately be premised on the specific facts surrounding the conduct being challenged. Aggrieved persons are therefore required to identify the nature of the impugned conduct and to establish that the conduct is oppressive or unfairly prejudicial or unfairly disregards the interests of the aggrieved person.

A further important consideration for aggrieved persons is setting out the relief which the aggrieved persons request the court to grant. In this regard, a useful recommendation is to plead for alternative forms of relief in order of preference and concluding with a catch-all request that the court grant further and/or alternative relief that the court may deem appropriate.

by Marvin Petersen, Senior Associate
co-authored by Jarryd Mardon, Director and reviewed by Pierre le Roux, Director

[1] Section 164 (9) of the Act.

[2] Section 163 (2)(a) of the Act.

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In any corporate environment, the authority of the board of directors, combined with the rule of the majority of shareholder votes, may lead to the interests of minority shareholders being at prejudiced. Section 163 of the Companies Act 71 of 2008 (Section 163), also known as the ‘oppression remedy’, therefore plays a critical role in safeguarding the interests of minority shareholders.

This article provides a brief overview of Section 163 and forms part of a series of 10 articles that will discuss practical examples where Section 163 may be invoked by minority shareholders or directors.

Section 163: the oppression remedy

Section 163 (Relief from oppressive or prejudicial conduct or from abuse of separate juristic personality of company) provides that a shareholder or a director of a company may apply to court for any form of relief if:

• any act or omission by the company, or a person related to the company, has had a result that is oppressive or unfairly prejudicial to, or that unfairly disregards the interests of the applicant; or
• the business of the company, or a person related to the company, is being conducted in a manner that is unfairly prejudicial to, or that unfairly disregards the interests of the applicant; or
• the powers of a director or prescribed officer of the company, or a person related to the company, are being or have been exercised in a manner that is oppressive or unfairly prejudicial to, or that unfairly disregards the interests of, the applicant.

The ambit of Section 163 is far-reaching, and an applicant’s grievance may consequently lie against:

• the result of any act or omission of the company or a related person; or
• the conduct or carrying on of the business of the company or related person; or
• the exercise of the powers of a director or prescribed officer of the company or a person related to the company.

Relief under Section 163 is usually sought in the context of smaller private companies, or companies operated in a manner that is akin to a partnership, where there are a limited number of shareholders who commonly play an active role in managing the business and affairs of the company. Such circumstances can often result in a dispute of a personal nature among shareholders, who are often the directors of the company in question.

When disputes of this nature arise in such companies, it can result in the rights of minority shareholders becoming oppressed or prejudiced. Such minority shareholders therefore need legislative protection, especially when one considers the fact that it is often very difficult to exit a private company in these circumstances.

Who can rely on Section 163

Both shareholders and directors can apply for relief under Section 163, although, it is noted that this remedy is not available to creditors. The Companies Act defines a ‘director’ as a member of the board or an alternate director and includes any person occupying the position of a director or alternate director, by whatever name designated.

It is noted that relief under Section 163 is not only available for shareholders and directors of the company in question, but also to shareholders and directors of related persons, unlike the position under the Companies Act 61 of 1973. Therefore, an applicant shareholder or director may also seek relief under Section 163 if the conduct complained of is by a person or entity related to the company in question.

A related person, as defined in section 2 of the Companies Act, includes a holding or subsidiary company.

To succeed with an application for relief in terms of Section 163

In obtaining relief from a court in terms of Section 163, an applicant must prove to the court that the relevant conduct complained of was oppressive, or unfairly prejudicial or unfairly disregards the applicant’s interests. It is not required of the applicant to show that the conduct complained of is unlawful.

When considering an application in terms of Section 163, a court must be satisfied that the following two elements are present:

• first, the existence of the relevant conduct, by way of a positive act or omission; and
• second, that the relevant conduct (i) was either oppressive or unfairly prejudicial; or (ii) unfairly disregards the interests of the applicant.

However, it is cautioned that when considering the prospects of being granted relief by a court under Section 163, the conduct of majority shareholders must be evaluated in the light of a fundamental principle of company law, namely that by becoming a shareholder, a person undertakes to be bound by the decisions of the majority of the shareholders (i.e. the majority rule principle).[1] Therefore, not all acts which prejudicially affect a minority shareholder or which may disregard his or her interests will necessarily entitle such minority shareholder to relief in terms of Section 163 – what is necessary is that it must be oppressive, unfair or unreasonable in the circumstances.

An example of conduct which may be suited for an application in terms of Section 163 could be where a company, by passing a special resolution of the shareholders, resolves to amend the company’s memorandum of incorporation in a manner that materially and adversely affects the rights of a minority shareholder and which is contrary to a pre-existing agreement amongst the shareholders as to the manner in which the company would be managed and operated.

In these circumstances, although the minority shareholder would be entitled to exercise its appraisal rights in terms of section 164 of the Companies Act, and demand that the company purchases its shares at the fair value thereof, this may in certain instances lead to an inequitable outcome and relief in terms of Section 163 may be more appropriate.

Possible forms of relief

If an applicant is successful, the court has a wide discretion to make any interim or final order it deems appropriate. In exercising its discretion, the court will consider the following forms of relief contemplated in Section 163:

• an order restraining the conduct of which the applicant complains;
• an order appointing a liquidator, if the company appears to be insolvent;
• an order placing the company under supervision and commencing business rescue proceedings;
• an order to regulate the company’s affairs by directing the company to (i) amend its Memorandum of Incorporation; or (ii) create or amend a unanimous shareholder agreement;
• an order directing an issue or exchange of shares;
• an order (i) appointing directors in place of or in addition to all or any of the directors then in office; or (ii) declaring a director to be delinquent or to place a director under probation;
• an order directing the company or any other person to restore to a shareholder any part of the consideration that the shareholder paid for shares, or pay the equivalent value, with or without conditions;
• an order varying or setting aside a transaction or an agreement to which the company is a party and compensating the company or any other party to the transaction or agreement;
• an order requiring the company, within a time specified by the court, to produce to the court or an interested person financial statements in a form required by the Act, or an accounting in any other form the court may determine;
• an order to pay compensation to an aggrieved person, subject to any other law entitling that person to compensation;
• an order directing rectification of the registers or other records of a company; or
• an order for the trial of any issue as determined by the court.

It is important to note that this is not a closed list of the relief which a court may grant, and as mentioned above a court has a wide discretion to make any other order it deems appropriate.

Although this article provides a brief introduction to the provisions of Section 163, there are complex legal aspects that would need to be considered when assessing the merits and prospects of success for any litigation intended to be brought in terms of Section 163.

Who appoints the substitute BRP? A look into the meaning of Section 139(3) of the Companies Act.

^[1] Grancy Property Ltd v Manala and Others 2013 ZASCA 57.

by Wesley Vos, Associate
co-authored by Jarryd Mardon, Director and reviewed by Pierre le Roux, Director

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