Issue 9 February - May 2002

In the past, shareholders—particularly small or minority shareholders —were either reluctant to enforce their rights, or were unable to. The cost of bringing actions was often too high and lack of information meant the chances of a claim being successful weren’t good. The Companies Act 2001 (the 2001 Act) seeks to change all that. Thierry Koenig, an attorney at De Comarmond & Koenig1, and Mauritius Chair on the International Litigation Committee of the International Bar Association, examines the changes.

Shareholders’ Rights and Powers
Company Resolution
Under the 2001 Act, a company cannot do certain things without approval by either a special resolution or an ordinary resolution of the shareholders. This is one of the most important protections available to shareholders. A special resolution is mandatory for:

(i) Adopting, altering or revoking the company’s constitution
(ii) Approving transactions of more than 75% of the value of the company’s assets
(iii) Approving any amalgamation
(iv) Putting the company into liquidation.

A special resolution is one approved by a majority of 75%. If a higher majority is required by the company’s constitution, the special resolution must be approved by the higher majority. This is a departure from the existing provisions of the 1984 Act. By allowing a higher majority, up to unanimous decisions, minorities can be given greater blocking power. This new flexibility may create interesting opportunities in corporate structures.

Major Transactions
A feature of the 2001 Act is the requirement that shareholders must consent, by special resolution, to any major transaction when such major transaction affects assets representing 75% or more of the company’s assets, or by an ordinary resolution when such major transaction affects between 50% and 75% of the company’s assets. A major transaction embraces many asset sales, acquisitions or financial arrangements entered into by a company. It is clear that a major transaction cannot be entered into unless approved by the appropriate company resolution, or made contingent on approval by the appropriate company resolution. While this may be a procedural hurdle, the consequences of the resolution being passed are of financial significance to a company because dissenting shareholders have the right to be “bought out” of the company. This procedural hurdle is less burdensome for closely held companies wherein the members may assent to written resolutions.

Shareholders’ Rights to Information
General
Shareholders now have extensive rights to disclosure and rights of inspection of a company’s records. This increased access to information is complementary to the remedies now available under the 2001 Act.

Information for Shareholders
In addition to records available for public inspection, a shareholder may give the company written notice of his or her intention to inspect and copy:
(i) Minutes of all meetings and resolutions of shareholders
(ii) Copies of written communications to shareholders over the past 7 years
(iii) Directors’ certificates
(iv) The interests register of the company.

Within 7 days of receiving a request for information, the company must provide requested copies or extracts of documents. In so far as shareholders are concerned, grounds for refusal have been provided for in the 2001 Act (such as the right to withhold such information when its release may prejudice the company’s commercial position, or any other person’s or is frivolous or vexatious). As regards directors, their rights to inspect the records may, under the 2001 Act, be curtailed by a court order upon application by the company.

Investigation
A shareholder or creditor may apply to the court for a suitable person to be appointed to inspect and copy records. The person appointed acts under the court’s direction.

Shareholders’ Remedies
Derivative Actions
Actions on Behalf of the Company
A shareholder or director may apply to the court for leave to bring proceedings in the name of, or on behalf of, the company, or to intervene in proceedings involving the company. Court supervision is intended to prevent the abuse of the process.

Court Discretion
Leave to bring, or intervene in, proceedings may only be granted if the court is satisfied that either:
(i) The company or its related company does not intend to bring, diligently continue or defend or discontinue the proceedings, or
(ii) It is in the interests of the company or of its subsidiary that the conduct of the proceedings should not be left to the directors or to the determination of the shareholders as a whole.

In deciding whether to grant leave to a shareholder, the court must consider:
(i) The likelihood of the proceedings succeeding
(ii) The costs involved compared with likely benefits
(iii) Any action the company has already taken
(v) The company’s interests or that of its subsidiary in the proceedings.

Costs
Disparity in resources is a disincentive for shareholder enforcement. However “the whole or part of the reasonable costs” of the proceedings must (if applied to the court for) be met by the company, unless the court considers it would be “unjust or inequitable” for the company to meet them.

Powers of the Court
When granting leave the court may:
(i) Authorise the shareholder or other persons to control the proceedings
(ii) Give directions for the conduct of the proceedings
(iii) Order the company/directors to provide information and assistance
(iv) Order that any payment to be paid by a defendant shall be made, in whole or in part, to former and present shareholders of the company or its subsidiary, instead of, to the company or related company.
Note should be taken that derivative actions may give rise to a substantial increase in court action and litigation.

Minority Buy-out Rights
Corporate Change
The 2001 Act recognises that it is not always fair to force a minority to bow to the will of the majority, when the enterprises of the company are to be fundamentally changed. Situations where the enterprises of the company are considered to be fundamentally changed are: an alteration to the company’s constitution that imposes or removes a restriction on a company’s business or activities; major transactions; and amalgamations.

Shareholders who vote against such a resolution dealing with fundamental matters (which is then passed), may require the company to purchase their shares. The right may be exercised as soon as the resolution has been passed.

Procedure
A shareholder that is entitled to require the company to purchase his or her shares must give written notice to the company within 14 days of the resolution. Within 28 days of receiving notice from the shareholder, the board must either agree to purchase the shares, or arrange for a third party to agree to purchase the shares, or apply to the court for an exemption, or arrange for the resolution to be rescinded by a special resolution.

Where the board agrees to purchase the shares, it must nominate a “fair and reasonable” price. It must also give notice to shareholders of the price it intends to pay. The same procedure applies to a third party who has agreed with the company to purchase the shares. A third party who agrees to purchase the shares does not necessarily have certainty of price when entering into the arrangement with the company.

If within 14 working days of the company giving notice to a shareholder, no objection to the price has been received, the company must purchase and the shareholder must sell all the shares at the nominated price, on a date to be agreed upon between the shareholder and the company, or as soon as practicable.

If the shareholder (or any other shareholder) does not consider the price nominated by the board to be fair and reasonable, he or she must forthwith give notice of his or her objection. The company must then refer the question to arbitration within five working days, and pay a provisional price equal to the price originally nominated by the board.

Once the price is determined by arbitration, either the company must pay the balance owing to the shareholder or it is entitled to recover the excess from the shareholder. The arbitrator also has the power to award interest.

It will be interesting to see how the court will react to this legislative imposed arbitration. The 2001 Act provides that the reference of such difference to arbitration is a deemed submission to arbitration under the Code of Civil Procedure. Practical difficulties will also be created by the time limits imposed by the 2001 Act, if the parties cannot agree on various issues such as the “compromis d’arbitrage”.

“Fair and Reasonable Price”
The 2001 Act states the price must be “fair and reasonable”. Dissenting shareholders, companies and arbitrators embroiled in the appraisal process are given little guidance by the 2001 Act on how a “fair and reasonable price” is to be determined. The only guidance being in connection with shares listed or traded on the stock market, whereby the price is that at which such shares were traded at the close of business on the day prior to the date of the resolution (excluding any appreciation or depreciation directly or indirectly induced by the action or its proposal).

Court Exemption to Buy-Out Remedy
The company may apply under the 2001 Act to the court for an order to exempt the company from the obligation to purchase the shares of a minority shareholder where one of the following occurs:
(a) The purchase would be disproportionately damaging to the company
(b) the company cannot reasonably be required to finance the purchase
(c) it would not be just and equitable to require the company to purchase the shares.

The court has wide powers under the 2001 Act to make such other order as it thinks fit, including, the liquidation of the company. However, under the 2001 Act the company shall apply to be exempted from the purchase obligation if the company has, following reasonable efforts, been unable to find a person to purchase the shares and the board has resolved that the purchase by the company would result in the company failing to satisfy the solvency test. Here again the court has wide discretionary powers to make such orders as it deems fit.

The Prohibition of Disproportionate Rights Removed
The provisions of the 1984 Act regarding the prohibition of disproportionate rights as to voting, dividends or appointing and removing directors which had been the cause of great concern have now been done away with by the 2001 Act. Companies will now be able (subject to the Stock Exchange Regulations as regards listed companies) to issue different classes of shares which have weighted voting rights or weighted dividends rights. Companies will thus now be able to issue what is known as “Golden Shares” (shares with disproportionate rights). The 2001 Act only prohibits the board to authorise a dividend to be paid in respect of some and not all or of a greater of some shares than others in a particular class (unless, inter alia, the shareholder has agreed in writing to a lesser dividend or no dividend at all).

For further information, contact: DE COMARMOND & KOENIG
Tel: +230 212 22 15 Fax: +230 208 2986 E-mail: koenig@intnet.mu