A shareholder in a company can also act in the capacity of an employee of the company. This is very common in smaller enterprises and raises valid questions as to what the legal consequences would be if “shareholder-employee” misconducts themself.

A “shareholder-employee” can be defined as any person who acts in their capacity as both shareholder and employee of the company. As a shareholder, he or she owns a percentage of value in the company and exercises voting rights. Unlike just an external shareholder, a shareholder-employee in terms of a shareholder’s agreement also offers a service to the company in return for remuneration on an employee level.

Which Act would be applicable when dealing with “shareholder-employees”? You would say: “Now wait! It is no secret that the Labour Relations Act 66 of 1995 (LRA), is not applicable where there is a shareholders’ agreement.

Section 57(1) of the Companies Act 71 of 2008, must be considered when it comes to the governance of companies and particularly defines a shareholder as:
“a person who is entitled to exercise any voting rights in relation to a company, irrespective of the form, title or nature of the securities to which those voting rights are attached.”

When interpreting this definition, it becomes clear that a shareholder is not an employee, but only exercises certain rights related to their interest or well-being of the company. A person can only become entitled to these rights if they own a certain percentage of value in the company, despite the fact that they do not manage the company on a day-to-day basis or form part of the company’s daily operations.

In light of the above, this alludes to the fact that, the Companies Act will enjoy jurisdiction over disputes arising out of the shareholders’ agreement and the application thereof. When a shareholder also has employee status in a company and receives income for services rendered, due consideration should be given to the two respective roles within the company. It is important to note that, even though he or she forms part of the shareholders’ agreement, nothing prohibits him or her from concluding an employment contract with the company and being remunerated for the services rendered.

The definition of a shareholder is miles apart from the definition of an employee. In terms of Section 213 of the LRA defines an employee as:

  1. Any person, excluding an independent contractor, who works for another person or the state and who received or is entitled to receive any remuneration; and
  2. Any other person who in any manner assists in carrying on or conducting the business of the employer.

If any dispute arises out of a contract of employment, the LRA would become applicable, and any employee who made himself guilty of misconduct may be dismissed, given that such a dismissal is procedurally and substantively fair. The shareholder in his or her capacity as an employee may exercise any of the rights contained within the Labour Relations, Basic Conditions of Employment or Employment Equity Act.

It begs the question, which statute would enjoy jurisdiction over a dispute where a shareholder in terms of the Companies Act also acts in his or her capacity as an employee as defined in Section 213 of the LRA. This is exactly where the two acts’ meet.

In the matter of Hydraulic Engineering Repair Services v Ntshona & Others – (2008) 29 ILJ 163 (LC), Mr. Ntshona was a shareholder in the company and employed as Marketing and Sales Director of the Company. The matter was initially heard at the CCMA, where the Commissioner ruled that Mr. Ntshona was an employee of the company in terms of the LRA and that an unfair dismissal had occurred. The company took the matter on review, insisting that Mr. Ntshona was not an employee of Hydraulic Engineering, but an equal shareholder in the company and that it is impossible to be both an employer and an employee at the same time.

On review, the Court made use of the dominant impression test to evaluate whether an employment relationship existed. The dominant impression test requires the Court to look at the relationship between the parties in its totality. The aspects that indicate an employment relationship and those indicating some other forms of a relationship should be identified.

In the Court’s application of the aforesaid test, the Court ruled that the employee had rendered services to the company as Marketing and Sales Director and was required to manage this part of the business on a day-to-day basis. In return, he would receive remuneration. The Court concluded that the relationship between the parties pointed to nothing else but an employment relationship.

In the Chillibush v Johnston and Other [2010] 6 BLLR 607 (LC), the applicant was both the Creative Director and shareholder of the company. A clause in the shareholders’ agreement stated that it may supersede any contract of employment concluded between the director and the company. The Court then found that an automatic termination clause in a shareholders’ agreement may not supersede the LRA.

In larger companies, it may not always be the case where a shareholder is also an employee, and proper consideration should be given to determine the nature and role of a shareholder within a company and whether there is an existence of an employment relationship. If the nature and role of a shareholder fall within the definition as set out in Section 213 of the LRA, the CCMA will enjoy jurisdiction to entertain disputes arising from the employment relationship.

In a situation where a company wants to remove a shareholder from the company and terminate the employment relationship, the Companies Act and the LRA will apply. In such instances, there would be two separate procedures. The shareholders would be put to vote on a resolution to buy the shareholder out of the company, and a disciplinary enquiry should be conducted in his or her capacity as an employee.

If you have any labour related queries, kindly contact your nearest CEO office for a consultation.

Article by: Shaun Venter
Dispute Resolution Official – Pretoria