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[2011] ZAGPJHC 53
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Blue Square Advisory Services (Pty) Ltd v Mandingoane and Another (01082/2011) [2011] ZAGPJHC 53 (13 June 2011)
REPUBLIC
OF SOUTH AFRICA
SOUTH
GAUTENG HIGH COURT, JOHANNESBURG
CASE
NO: 01082/2011
DATE:13/06/2011
In
the matter between:
BLUE
SQUARE ADVISORY SERVICES (PTY)
LTD
....................................................
Applicant
and
MADINGOANE
POGISO
....................................................................................
First Respondent
SEPENG
WINSTON
.......................................................................................
Second
Respondent
JUDGMENT
PETER
AJ
[1]
The issue in this application is whether or not the first and second
respondents were lawfully removed as directors of the applicant
company by a valid members' resolution at a general meeting of
members convened on 26 November 2009 in terms of the provisions
of
section 220 of the Companies Act, 61 of 1973 ("the 1973 Act").
[2]
On 22 November 2005 one Johannes Hendrik Louw, whom I shall
hereinafter refer to as "Louw", the first respondent and
the applicant company, represented by Louw, executed a written
document entitled "Heads of Agreement". This document
served to record the intentions and agreements of the three parties
thereto. Recorded therein was an envisaged transaction between
Louw,
the first respondent and the applicant, that the first respondent
would acquire shares and claims in the applicant to the
extent of 50
percent. The transaction was subject to Louw successfully buying back
50 percent of the shares and claims from one
Naicker. The transaction
date was to be effective 1 November 2005. Transaction documents
mentioned therein were to include inter
alia a new shareholders'
agreement, a purchase and sale agreement, contracts of employment for
the executives, and rules and procedures
for the staff of the
applicant. An independent party was to conduct the valuation of the
business of the applicant at 1 November
2005 and the first respondent
was entitled to conduct a detailed due diligence on the business of
the applicant. The first respondent
was appointed an employee of the
applicant company. It was envisaged that a more formal contract of
employment would be drafted
in due course but that in the interim the
heads of agreement was to govern the working relationship between the
applicant and its
executives.
[3]
At the time of the conclusion of the agreement, the register of
members of the applicant company reflected that 50 percent of
the
issued shares therein were owned by the "Johan en Mercia Louw
Familie Trust (IT4819/99)" ("the family trust").
The
other 50 percent was held by Naicker. Both the family trust and
Naicker appear to have acquired their respective shares from
the
first registered member and subscriber to the memorandum, one Linda
Hall. Letters of Authority were issued by the Master of
the High
Court on 30 October 2002 in terms of the provisions of section 6(1)
of the Trust Property Control Act, 1988. The Letters
of Authority
certified that Louw, Mercia Pritch Louw to whom I shall hereinafter
refer to as "Mrs Louw", and one Karen
Coetzer, as the
nominee of Quadro Executive Estate Planning (Pty) Limited, were
authorised to act as trustees of the family trust.
[4]
On 14 February 2006 Louw and the applicant company and the trustees
of the family trust entered into a written agreement in
terms whereof
the trustees purchased from Naicker, Naicker's 50 percent of the
issued shares in the applicant for the sum of R150
000,00. On 16
February 2006 the first respondent was appointed a director of the
applicant. Thereafter and in April 2007, the second
respondent was
employed by the applicant and appointed a director of the applicant
in August 2007.
[5]
The principal commercial rationale for the involvement of the first
respondent, and later the second respondent, in the affairs
of the
applicant was to give the applicant black economic empowerment
("BEE") status and to assist the applicant in securing
contracts with municipal local authorities. The later involvement of
the second respondent in the affairs of the applicant was
with a view
ultimately that the first and second respondents collectively would
hold two-thirds of the equity in the applicant
company and further
enhance its BEE credentials.
[6]
Thereafter the relationship between Louw and the first and second
respondents deteriorated. Although this much is common cause,
there
are conflicting disputes, allegations and counter-allegations of
surreptitious competition with the business of the company,
maladministration and a struggle for control in which Louw
purportedly procured the appointment of additional directors, the
first
and second respondents dismissed Louw and Louw suspended the
first and second respondents. It is not necessary for present
purposes
to catalogue or detail the full extent of the disputes.
Suffice it to say that what transpired in the applicant company
echoes
the Western Schism that divided Europe at the end of the 14th
and the beginning of the 15th Centuries with rival papacies of
Avignon
and Rome furiously denouncing and excommunicating each other.
[7]
Matters came to a head when on 22 October 2009 Mrs Louw purported to
lodge with the applicant company a notice in terms of section
220(2)
of the 1973 Act and to requisition a special general meeting of the
company on 26 November 2009 for the purposes of removing
the first
and second respondents as directors of the company. On 26 November
2009 Louw purported to pass a resolution on behalf
of the members of
the company removing the first and second respondents as directors of
the applicant. On that date, the members'
register of the applicant
reflected as the name of its only member "Johan en Mercia Louw
Familie Trust (IT 4819/99)".
[8]
Mr Moorcroft, who appeared for the applicant, borrowing the title of
a song of the American musician Kris Kristofferson, submitted
to me
that I need not make a determination of "who's to bless and
who's to blame". Notwithstanding the myriad of disputes,
allegations and counter-allegations, I need concern myself only
whether or not the resolution removing the first and second
respondents
was properly passed.
[9]
The version of the applicant is that after the conclusion of the
heads of agreement with the first respondent, there was much
negotiation about the first respondent purchasing shares and
negotiation about the second respondent later acquiring shares but
no
agreement in this regard. No purchase price has ever been paid by
either the first or second respondents for the shares. When
matters
came to a head, Mrs Louw and Louw, acting on behalf of the registered
member, properly convened a meeting in terms of section
220 of the
1973 Act and passed an effective resolution removing the first and
second respondents as directors.
The
factual disputes
[10]
Mr Limberis, who appeared for the respondents, submitted to me that
this application should be dismissed by reason of material
disputes
of fact. In this regard, the respondents allege three oral
agreements. The first oral agreement is one alleged to have
been
concluded at about the time of the heads of agreement between the
first respondent, the company represented by Louw and the
family
trust ("the November 2005 agreement"). It was allegedly
agreed that, if Louw was unable to acquire Naicker's shares
or if the
first respondent or his nominee did not obtain ownership of the
shares for any reason, the first respondent would remain
a director
and employee of the applicant company and he would be paid, in
addition to his salary, one half of the net profits made
by the
company on all contracts procured after 1 November 2005.
[11]
The second oral agreement alleged by the respondents was by agreement
entered into after 14 February 2006, the date of the
written
agreement of sale of Naicker's shares ("the February 2006
agreement"). In terms of the February 2006 agreement,
the
respondents allege that the first respondent agreed with Louw, acting
on behalf of the family trust, that the first respondent
would hold
50,1% of the shares in the company for which the first respondent was
required to pay R150 000,00 to the family trust,
being the fair
market value of the shares as at 1 November 2005. At the time of this
agreement, the respondents allege that Louw
suggested that the first
respondent form a trust to hold the shares. The first respondent
agreed to consider the formation of his
own trust but alleged that it
was agreed that in the interim the family trust was to hold the
shares as his nominee until such
time as he instructed the family
trust to transfer the shares to him or his nominee. The first
respondent alleges that it was clearly
understood and agreed that he
would be entitled to the dividends and voting rights which attached
to the shares, or put differently,
these rights were to be exercised
by the family trust at his instruction until otherwise agreed.
[12]
The third oral agreement is alleged to have been concluded during or
about April 2007 ("the April 2007 agreement").
The
respondents allege that at that time they were negotiating with a
view to transfer one-third of the shares in the company to
the second
respondent, half of the second respondent's shares to come from the
first respondent and the other half from the family
trust or to
create a new structure in which the shares would so be held. The
respondents allege that it was agreed between the
applicant,
represented by both Louw and the first respondent, the first
respondent and the second respondent that until the shares
were
transferred to the first and second respondents, the company would
pay the first and second respondents one third each of
the net
profits made by the company on contracts, in addition to their
salaries and that they would both be employed by the company
and be
directors of the company for so long as the contracts continued to be
performed.
[13]
In essence therefore, the oral agreements alleged by the respondents
attack the resolution on two bases. The first is directed
at
underlying ownership and voting rights. This challenge is that
notwithstanding any registration in the members' register, the
first
respondent beneficially owned 50.1% of the shares and the voting
rights attaching thereto had to be exercised by the family
trust in
accordance with his instructions. The voting that Louw purported to
do on behalf of the family trust was in breach of
the February 2006
agreement and the resolution was thus invalid. The second basis of
attack is that there was an agreement of security
of tenure of the
respondent's directors; the passing of the resolution was in
violation thereof and unlawful and the resolution
thus invalid.
The
applicant's challenge to the factual disputes
[14]
The applicant challenged the efficacy of the February 2006 agreement
on the basis that any purchase of shares had to be in
writing. The
applicant denied the existence or conclusion of the oral agreements.
[15]
In regard to the requirement of writing, the applicant alleged that
the heads of agreement document required any subsequent
purchase and
shareholders' agreement to be in writing. Mr Moorcroft relied on the
case of Goldblatt v Freemantle
1920 AD 123.
At pages 128 to 129 of
the report, the following is said by Innes CJ:
"Subject
to certain exceptions, mostly statutory, any contract may be verbally
entered into; writing is not essential to contractual
validity. And
if during negotiations mention is made of a written document, the
Court will assume the object was merely to afford
facility ofproof of
the verbal agreement, unless it is clear that the parties intended
that the writing should embody the contract.
(Grotius 3.14.20 etc.).
At the same time it is always open for the parties to agree that a
contract shall be a written one (see
Voet 5.1.73. V. Leeuwen 4.2;
sec. 2, Deckers's note), and in that case there will be no binding
obligation until the terms have
been reduced to writing and signed.
The question is in each case one of construction'"
[16]
I am unable to agree with Mr Moorcroft's submission. This is so
principally for two reasons. First, as a matter of construction,
it
appears to me that the heads of agreement were executed to serve the
purpose of recording what was to be a binding agreement
until later
superceded. The heads of agreement did no more than record that the
parties envisaged that a more formal agreement,
one in writing, would
in due course be executed. The document properly construed does not
prescribe that the parties agreed that
the future agreement relating
to the purchase of the shares had to be in writing in order to be
valid. Secondly, even if the agreement
could so be construed as
prescribing a necessary formality, the formality provision itself
could be altered by agreement between
the parties. As Mr Limberis,
rightly pointed out in the context of the law relating to
non-variation clauses which prescribe the
formalities of writing and
signature, the formality provision itself will be capable of
variation unless entrenched, SA Sentrale
Ko-op Graan Maatskappy Bpk v
Shifren & Andere
1964 (4) SA 760
(A).
[17]
The next attack by Mr Moorcroft on the alleged oral agreement, was
that I should find factually that there was no basis for
such an
agreement and reject the allegations of the respondents in this
regard as being far fetched or clearly untenable. The basis
of this
attack was that it was common cause that on 26 November 2009 the
first and second respondents appeared at the meeting with
a somewhat
lengthy letter drafted by their attorney in which a number of
challenges to the validity of the meeting and proposed
resolution
were made. Nowhere in the letter were the oral agreements recorded.
However the affidavits disclosed a claim for preference
points made
in the bid of which Louw was the author. In the bid a claim for
points was made on the basis of a representation that
50.1 percent of
the applicant was owned by an historically disadvantaged individual,
thereby making reference to the first respondent.
The same document
records the first respondent as owning 50.1 percent of the
applicant's business with a note that the applicant
was in the
process of improving the BEE/HDI status to at least 60 percent. I do
not intend to express any view on the strengths
or merits of the
factual dispute other than to say that this is not a factual dispute
which is properly determined on affidavit
in motion proceedings.
[18]
Accordingly it is necessary to consider the lawfulness of the
resolution in the light of the version of the respondents.
The
statutory framework
[19]
In order to determine whether or not the agreements, alleged by the
respondents, render the resolution to remove the respondents
as
directors invalid or ineffective, regard must first be had to the
provisions of section 220 of the 1973 Act, the relevant parts
of
which read as follows:
"220
(1) (a) A company may, notwithstanding anything in its memorandum or
articles or in any agreement between it and any director,
by
resolution remove a director before the expiration of his period of
office.
(2)
Special notice shall be lodged with the company of any proposed
resolution to remove a director under this section or to appoint
any
person in the stead of a director so removed at the meeting at which
he is removed, and, on receipt of notice of such a proposed
resolution, the company shall forthwith deliver a copy thereof to the
director concerned who shall, whether or not he is a member
of the
company, be entitled to be heard on the proposed resolution at the
meeting.
[20]
There are thus two important features to be noted from the provisions
of section 220. First that the power granted by a company
to remove a
director overrides anything in its memorandum or articles and
overrides any agreement between it and any director.
Secondly, the
power is exercised by resolution of which special notice is required
to be lodged and given.
[21]
Relevant to the passing of a resolution at a meeting in terms of the
provisions of section 220 of the 1973 Act are other provisions
of the
1973 Act, to which regard must be had. These are sections 181, 184,
186, 188, 189, 190,
193
and 197. The relevant provisions of these sections (with emphasis
added) are set out below:
"181(1)
The directors of a company shall, notwithstanding anything in its
articles, on the requisition of-
(a)
one hundred members of the company or of members holding at the date
of the lodging of the requisition not less than one-twentieth
of such
of the capital of the company as at the date of the lodgement carries
the right of voting at general meetings of the company
. . .
.
. . issue a notice to members convening a general meeting of the
company. . .
184
In the case of a company having only one member, such member present
in person or by proxy shall be deemed to constitute a meeting.
186(1)
(a) Unless the articles of a company provide for a longer period of
notice, the annual general meeting or a general meeting
called for
the purpose of passing a special resolution may be called by not less
than twenty-one clear days' notice in writing
and any other general
meeting may be called by not less than fourteen clear days' notice in
writing.
(3)
No resolution of which special notice is required to be given in
terms of any provision of this Act shall have effect unless
notice of
the intention to move it has been given to the company not less than
twenty-eight days before the meeting at which it
is moved . . .
188(1)
A company or other body corporate may, by resolution of its directors
or other governing body, authorize any person to act
as its
representative at any meeting of any company of which it is a member
or at any meeting of any class of members of that company.
(3)
A person authorized as aforesaid shall be entitled to exercise on
behalf of the company or other body corporate which he represents,
the same powers as that company or body corporate could have
exercised if it were an individual shareholder, debenture-holder or
creditor of the company in relation to which such person has been
authorized to act.
189(1)
Any member of a company entitled to attend and vote at a meeting of
the company, or where the articles of a company limited
by guarantee
so provide, any member of such company, shall be entitled to appoint
another person (whether a member or not) as his
proxy to attend,
speak, and vote in his stead at any meeting of the company 190 Unless
the articles of a company provide for a
greater number of members
entitled to vote to constitute a quorum at meetings of a company, the
quorum for such meetings shall
be-
(b)
in the case of a private company, not being a private company having
one member, two members entitled to vote, present in person
or by
proxy or, if a member is a body corporate, represented; and
(c)
in the case of a wholly-owned subsidiary company, the representative
of the holding company.
193(1)
Subject to the provisions of sections 194 and 195 and to the
exceptions stated in section 196, every member of a company
having a
share capital shall have a right to vote at meetings of that company
in respect of each share held by him.
197(1)
Any person present and entitled to vote, on a show of hands, as a
member or as a proxy or as a representative of a body corporate
at
any meeting of the company shall on a show of hands have only one
vote, irrespective of the number of shares he holds or represents.
(2)
On a poll at any meeting of a company, any member (including a body
corporate) or his proxy shall be entitled to exercise all
his voting
rights as determined in accordance with the provisions of this Act,
but shall not be obliged to use all his votes or
cast all the votes
he uses in the same way."
[22]
From the above provisions it is clear that members of the company are
critical role players. The directors of a company are
required to
convene a general meeting of the company upon a requisition of
members of the company, section 181(1)(a). A quorum
at the meeting is
determined by the presence of a member either present in person or by
proxy, sections 184 and 190. Where a company
or body corporate is a
member of a company, it may by resolution authorise a person to act
as its representative, section 188(1).
Such representative exercises
the power of the company or body corporate member as if such company
or body corporate were an individual,
section 188(3). Members may
appoint a proxy, section 189. Subject to exceptions not relevant in
the present case, members of a
company have the right to vote at
meetings in respect of each share held by such members, section 193.
These exceptions relate
to preference shares, section 194, different
classes of shares, carrying different voting rights, section 195 and
provisions relating
to voting rights of shares in existence at the
commencement of the 1973 Act, section 196. Voting rights are
exercised by members
either personally present or present through a
proxy or a company's representative of a body corporate, section 197.
Special notice
of 28 days must be given to members for a resolution
in terms of section 220, section 186(3) and section 220(2).
[23]
In relation to members of the company, sections 103, 104 and 109 of
the 1973 Act provide as follows:
"103
(1) The subscribers of the memorandum of a company shall be deemed to
have agreed to become members of a company upon
its incorporation,
and shall forthwith be entered as members in its register of members.
(2)Every
other person who agrees to become a member of a company and whose
name is entered in its register of members, shall be
a member of the
company.
(3)
A company shall, subject to the provisions of its articles, enter in
the register as a member, nomine officii, of the company,
the name of
any person who submits proof of his appointment as the executor,
administrator, trustee, curator or guardian in respect
of the estate
of a deceased member of the company or of a member whose estate has
been sequestrated or of a member who is otherwise
under disability or
as the liquidator of any body corporate in the course of being wound
up which is a member of the company, and
any person whose name has
been so entered in the register shall for the purposes of this Act be
deemed to be a member of the company.
(4)
Subject to the provisions of section 213 (1) (b), the bearer of a
share warrant may, if the articles of the company so provide,
be
deemed to be a member of the company within the meaning of this Act,
either for all purposes or for such purposes as may be
specified in
the articles.
104
A company shall not be bound to see to the execution of any trust,
whether express, implied or constructive, in respect of any
share.
109
The register of members of a company shall be prima facie evidence of
any matters directed or authorised to be entered therein
by this
Act."
[24]
Before considering the legal efficacy of the agreements alleged by
the respondents, it is necessary to make some observations
about
trusts.
Trusts
[25]
The 5th edition of Honore's South African Law of Trusts, 2002,
("Honore"), describes a trust as "a legal institution
in which a person, the trustee subject to public supervision, holds
or administers property separately from his or her own, for
the
benefit of another person or persons or for the furtherance of a
charitable or other purpose". This description has been
quoted
with approval most recently in Lupacchini and Another NO v Minister
of Safety and Security
2010 (6) SA 457
(SCA), as a description of a
trust as a "legal relationship of a special kind".
[26]
The statutory definition of a trust in terms of the Trust Property
Control Act, 57 of 1988 is as follows:
"'trust'
means the arrangement through which the ownership in property of one
person is by virtue of a trust instrument made
over or bequeathed-
(a)
to another person, the trustee, in whole or in part, to be
administered or disposed of according to the provisions of the trust
instrument for the benefit of the person or class of persons
designated in the trust instrument or for the achievement of the
object stated in the trust instrument; or
(b)
to the beneficiaries designated in the trust instrument, which
property is placed under the control of another person, the trustee,
to be administered or disposed of according to the provisions of the
trust instrument for the benefit of the person or class of
persons
designated in the trust instrument or for the achievement of the
object stated in the trust instrument,
but
does not include the case where the property of another is to be
administered by any person as executor, tutor or curator in
terms of
the provisions of the Administration of Estates Act, 1965 (Act 66 of
1965)"
[27]
The English textbook Hanbury and Martin, Modern Equity, 18 ed 2009 p
49 describes a trust as follows:
"A
trust is a relationship recognised by equity which arises when
property is vested in (a person or) persons called the trustees,
which those trustees are obliged to hold for the benefit of other
persons called cestuis que trust or beneficiaries."
[28]
This description is given after it is noted that many attempts have
been made to define a trust but none of them have been
wholly
successful. The author notes that it is more useful to describe than
to define a trust and then to distinguish it from related
concepts.
[29]
Typically a trust has a creator. Where the trust is created during
the lifetime of the creator it is referred to as an inter
vivos
trust. The creator of the trust is variously referred to as the
donor, founder or settlor. A testamentary trust may be created
by
will through a testator. In Honore, the institution of trust is
compared with other legal institutions such as contracts, agency,
partnership and others. A trust is thus a matrix of multilateral
rights and obligations involving a person who creates the trust,
at
least one person who accepts the obligations as trustee, generally
including a person who is a beneficiary and the public roles
of the
Master and the High Court. At its heart, whether described as an
institution, an arrangement or a relationship, a trust
is a legal
relationship governing the ownership or control of assets and their
enjoyment.
[30]
A trust is not a person and does not have legal personality. In
Commissioner for Inland Revenue v Friedman and Others NNO
[1992] ZASCA 190
;
1993 (1) SA
353
(A) at 370E-I the following is said by Joubert JA:
"Is
a trust a legal persona? According to the Anglo-American law of
trusts a trust has no legal personality. P W Duff Personality
in
Roman Private Law Cambridge University Press (1938) at 206:
'Maitland
showed [Collected Papers vol 3 (1911) 321-404)] that by vesting
property in trustees, rather than in corporations or associations,
English lawyers evaded many questions that have caused difficulty
abroad.'
See
R W Ryan in his unpublished Cambridge doctoral thesis entitled 'The
Reception of the Trust in the Civil Law' (1959) at 11: 'A
trust is
certainly not a legal person'. The position is the same in our law of
trusts. See Commissioner for Inland Revenue v MacNeillie's
Estate
1961 (3) SA 833
(A) at 840G-H: 'Neither our authorities nor our
Courts have recognised it as a persona or entity. It is trite law
that the assets
and liabilities in a trust vest in the trustee.'
Consult also Braun v Blann and Botha NNO and Another
[1984] ZASCA 19
;
1984 (2) SA 850
(A)
at
859E-H:
'In
its strictly technical sense the trust is a legal institution sui
generis . . . .The trustee is the owner of the trust property
for
purposes of administration of the trust but qua trustee he has no
beneficial interest therein.'
It
is clear therefore that a trust is not an incorporated company. Nor
is a trust a body of persons unincorporate whose common funds
are the
collective property of all its members. There is also no basis for a
submission that because the statutory definition of
'person' in s 1
of the 1962 Act was extended to include a deceased estate, it should
by analogy be further extended to include
a trust. The conclusion is
inescapable that a trust is not a 'person' within the meaning of that
word in the 1962 Act".
[31]
Often in commercial usage, reference is made to a trust as if it were
a legal person and in a sense other than a matrix of
legal
relationships. Perhaps it is that people making such commercial usage
are unaware of the legal nature of a trust and unaware
that a trust
is not a legal person like a company which exists by reason of a
legal fiction. Be that as it may, courts have not
been astute to find
such reference meaningless but rather give such reference a meaning
in its context. Thus where a testator made
a bequest of the residue
of his estate to two named trusts which were family trusts which he
had created shortly before the execution
of his will, it was held to
be a valid bequest to the trustees in their capacities as such of the
trusts therein mentioned, Kohlberg
v Burnett NO & Others
1986 (3)
SA 12
(A). Similarly where in a suretyship a trust was described as
the principal debtor, this was interpreted to be a description of
the
trustees of the trust in their capacities as such and the suretyship
was valid in that it complied with the provisions of section
6 of the
General Laws Amendment Act 50 of 1956; extrinsic evidence was
permissible to identify the trustees, BOE Bank Ltd (formerly
NBS
Boland Bank Ltd) v Trustee, Knox Property Trust
[1999] 1 All SA 425
(D).
[32]
It is also possible to refer to a trust in a sense that refers
neither to the matrix of legal relationships nor the trustees
in
their capacity as such, but rather the trust estate as an
accumulation of assets and liabilities. Thus a trust, in the sense
of
a trust estate has been held to be "a debtor in the usual sense
of the word" for the purposes of
section 2
of the
Insolvency Act
of 1936
and thus capable of being sequestrated, Magnum Financial
Holdings (Ptty) Ltd (in liquidation) v Summerly and Another NNO
1984
(1) SA 160
(W). In the context of an accumulation of assets and
liabilities, although not a legal person, a trust estate has been
described
as a separate entity, Land and Agricultural Bank of South
Africa v Parker and Others
2005 (2) SA 77
(SCA) at 83G-84H. In this
sense, the assets, held or controlled in trust and the liabilities,
incurred by the trustees, satisfaction
of which may be had by
recourse to the trust assets, are a separate entity just like a
deceased estate or the joint estate of people
married in community of
property performing juristic acts with regard to such estate in terms
of the provisions of
section 15
of the
Matrimonial Property Act, 88
of 1984
.
[33]
The observations made thus far in respect of trusts are in respect of
trusts and trustees in the narrow sense. There is a wider
sense in
the use of the word "trustee" as it describes someone who
is bound to hold or administer on behalf of another
or for some
impersonal object and not for his or her own benefit, Honore pp3-4.
In England the notion of a constructive trust,
one which arises by
operation of law, is employed to impose obligations through the
application of equitable doctrines in factual
situations which give
rise to remedies in the South African Roman Dutch legal system
through the application of principles of contract,
delict and unjust
enrichment, Honore pp131-136.
The
efficacy of the alleged agreements
[34]
In the February 2006 agreement, the first respondent asserts
ownership of 50.1 percent of the shares of the company. It is
possible to own shares without being registered as the member. This
is possible where shares are purchased and acquired and as
a matter
of property, ownership is transferred by way of cession without
registration in the members' register. Ownership may pass
on
conclusion of the cession without delivery of share certificates or
transfer forms, Botha v Fick
[1994] ZASCA 184
;
1995 (2) SA 750
(A). The register of
members is prima facie proof of ownership of the shares, section 109
of the 1973 Act. The court is entitled
to go behind the register to
ascertain the identity of the true owner. Thus where a registered
member sold his shares and became
insolvent after ownership had
passed to the purchaser but before registration had taken place in
the name of the purchaser, the
court could go behind the register and
make a determination that notwithstanding registration in the name of
the insolvent seller,
the shares were not assets in the insolvent
seller's estate, McGregor's Trustees v Silberbauer
(1891-1892) 9 SC
36.
Similarly upon the death of one of two registered members both of
whom held shares as trustees, without any personal beneficial
interest therein, for an overseas bank, the court could go behind the
register to declare that no part of the shares registered
in their
names belonged to the deceased estate. No stamp duty was payable in
respect thereof to the master, Randfontein Estates
Ltd v The Master
1909 TS 978.
[35]
The concept of a nominee as an agent to hold shares in his name and
be the registered member on behalf of a nominator or principal,
has
been recognised as a convenient and accepted practice. The principal
whose name does not appear on the register is usually
described as
"the beneficial owner" which is not juristically speaking
within the South African legal system, Oakland
Nominees (Ptty) Ltd v
Gelria Mining & Investment Co (Ptty) Ltd
1976 (1) SA 441
(A) at
453. This is so because the concept of a "beneficial owner"
is a concept of equitable ownership as distinct from
legal ownership
applicable in English trust law but inappropriate to characterise the
personal rights of a beneficiary in a trust
or a principal in a
principal agent relationship in South African law. This is a common
practice and well understood commercially
although the employment of
trust terminology is done perhaps in the wide sense. The courts have
gone behind the register to recognise
the beneficial owner's interest
to enforce the rights of the beneficial owner visa a vis the nominee
and to compel the nominee
to deliver to the beneficial owner the
share certificates together with the necessary transfer documents,
Standard Bank of South
Africa Ltd and Another v Ocean Commodities Inc
and Others
1983 (1) SA 276
(A). Where shares have been sold and ceded
by a registered member, the court could go behind the register to
identify the purchaser
as the true owner of the shares and rectify
the register to reflect the purchaser as the registered member in
circumstances where
the seller refused to sign the necessary transfer
forms to facilitate registration in the purchaser's name, Botha v
Fick (referred
to above). In an appropriate case it is open for a
court to go behind the register to identify a beneficial owner for
the purposes
of determining who controls that company, as a matter of
fact, notwithstanding a nominee registered as the owner where such
factual
control is relevant as in admiralty proceedings, MV Heavy
Metal: Belfry Marine Ltd v Palm Base Maritime SDN BHD
1999 (3) SA
1083
(A) at 1106H-I. Where a registered member had sold his shares
but registration has not yet taken place in the register in the
purchaser's
name, it is permissible for the court to go behind the
register to ascertain the true nature of the seller member's interest
in
order to determine whether or not it is just and equitable to wind
up a company at the instance of the member who is no longer the
owner
of the shares in respect of which he is registered as the member,
Kalil v Decotex (Pty) Ltd and Another
1988 (1) SA 943
(A).
[36]
In none of the reported cases has it ever been held permissible for
the court to go behind the members' register in order to
confer
membership status on a beneficial owner, in the absence of an
application for rectification of the register. In fact in
Lourenco
and Others v Ferela (Ptty) Ltd and Others (No 1)
1998 (3) SA 281
(T),
Southwood J declined to go behind the register, at the instance of an
alleged true owner of shares whose ownership had not
been registered
in the register of members, in order to give the true owner the
status of member which was a necessary prerequisite
to an application
for relief from oppression in terms of section 252 of the 1973 Act.
[37]
In matters such as the status of its member vis a vis the company, it
has long been the policy of the law that the company
should concern
itself only with the registered owner of the shares, Standard Bank of
South Africa
Ltd
and Another v Ocean Commodities Inc and Others
1983 (1) SA 276
(A) at
289A-B. This policy is embodied in the provisions of section 104 of
the 1973 Act. In Pender v Lushington
(1877) 6 Ch 70
, the articles of
association of the company provided that every member was to have one
vote for every complete number of ten shares
held with a voting limit
that no shareholder shall be entitled to more than 100 votes. A
beneficial shareholder interested in more
than 1000 shares, with the
object of increasing its voting powers, arranged for its shares to be
held through nominees so as to
be able to cast 649 votes. The company
rejected the votes and in proceedings by a member to restrain the
rejection of votes, Jessel
MR held the following at 77-78:
"It
appears to me that it is plain from the reading of these articles
alone that the articles meant to refer to a registered
member, but I
think it is made, if possible, plainer - though I doubt whether it
could be made plainer when you come to consider
that it would not be
possible to work the company in any other way, for how else could the
company hold meetings or demand a poll,
or have the votes taken by
scrutineers? - but if possible it is made plainer by the 19th
article, which says: "The executors
and administrators of a
deceased member shall be the only persons recognised by the company
as having any title to his share,"
and also provides that "the
company shall not be affected by notice of any trust." And the
30th section of the Companies
Act, 1862 says: "No notice of any
trust express, implied, or constructive, shall be entered on the
register, or be receivable
by the Registrar in the case of companies
registered under this Act and registered in England or Ireland."
It comes, therefore
to this, that the register of shareholders, on
which there can be no notice of trust, furnishing the only means of
ascertaining
whether you have a lawful meeting or a lawful demand for
a poll, or of enabling the scrutiny as to strike out votes.
The
result appears to be manifest, that the company has no right whatever
to enter into the question of the beneficial ownership
of the shares.
Any such suggestion is quite inadmissible, and therefore it is clear
that the chairman had no right to enquire who
was the beneficial
owner of the shares, and the votes in question ought to have been
admitted as good votes independent of any
enquiry as to whether the
parties tendering them were or were not, and to what extent, trustees
for other persons beneficially
entitles to the shares."
[38]
In Societe Generale de Paris and Another v The Tramways Union
Company, Ltd, and Others
(1884-1885) 14 QB 424
(CA) Lindley, LJ said
the following at pages 451-452:
"But
if shares in companies registered under the Companies Act, 1862, are
spoken of as choses in action, care must be taken
not to overlook the
fact that their transferee has a legal, and not merely an equitable,
right to become a shareholder. If a shareholder
in a company governed
by the Companies Act, 1862, does not transfer his shares, but agrees
to transfer them or to hold them upon
trust for another, either
absolutely or by way of security, there can be no doubt as to the
validity of the agreement, nor as to
the effect of it as between the
parties to it. As between them the agreement or trust can be
enforced; but as regards the company
the shareholder on the register
remains the shareholder still. He is the person entitled to exercise
the rights of a shareholder,
- for example to vote as such, to
receive dividends as such and to transfer the shares."
[39]
In Inland Revenue Commissioners v J. Bibby & Sons, Ltd 1945 1 All
ER
667 (HL), Lord Macmillan held the following at 671:
"As
was said by Jessel, M.R., in Pulbrook v, Richmond Consolidated Mining
Company (2), [(1878),
9 Ch D 610]
at p. 615:
'The
company cannot look behind the register as to the beneficial interest
but must take the register as conclusive and cannot enquire
. . .
into the trusts affecting the shares.'
So
far as the company is concerned the relation between such of its
shareholders as happen to be trustees and their beneficiaries
is res
inter alios. It may be that a trustee shareholder may, as between
himself and his cestuis que trust, be under a duty to
exercise his
vote in a particular manner, or a shareholder may be bound under
contract to vote in a particular way (cf. Puddephatt
v Leith (3)
[[1916] 1CH 200]). But with such restrictions the company has nothing
to do. It must accept and act upon the shareholder's
vote
notwithstanding that it may be given contrary to some duty which he
owes to outsiders. The remedy for such breach lies elsewhere."
[40]
The February 2006 agreement alleges in effect that the first
respondent was the beneficial holder of 50,1% of the registered
shares of the applicant company. As such, the votes cast in respect
of such shareholding were required to be in accordance with
the first
respondent's instructions. Even if that were so, agreements between a
registered shareholder and a beneficial shareholder
in respect of the
voting rights of the company are res inter alios acta. The first
respondent cannot, vis a vis the applicant company,
aver that a
resolution was improperly passed on account of the fact that behind
the register he was either a beneficial owner of
the shares or held
the rights to direct the manner in which shares ought to be voted and
the vote was not in accordance with his
instructions. Accordingly the
factual dispute in relation to the existence of the February 2006
agreement is not a material dispute
relating to the efficacy of the
resolution. It does not assist the respondents.
[41]
The November 2005 and April 2007 agreements are relied upon and must
be examined. Insofar as the applicant company might have
been a party
to the agreements, the provisions of section 220 operate to override
any restraint on the removal of the respondents
as directors. There
are two differences between the two agreements. First the second
respondent was not a party to the November
2005 agreement. Secondly
the family trust is not alleged to have been a party to the April
2007 agreement. The provisions of section
220 override the April 2007
agreement which is only between the company and the directors.
Nevertheless, in relation to such agreements
it has been held that as
between the director and the member concerned, the agreement is
capable of enforcement. Thus in Stewart
v Schwab
1956 (4) SA 791
(T)
and Amoils v Fuel Transport (Pty) Ltd
1978 (4) SA 343
(W), the
directors concerned were able to obtain interdicts interdicting and
restraining the members from voting in favour of a
resolution in
contravention of their obligations under and in terms of the
agreement to the directors concerned. However the difficulty
presented in this case is that this issue is not raised in the
context of an application for an interdict to interdict a threatened
harm. The contractual breach of the voting member is raised as a
ground, after the fact, that the vote ought to be rejected vis
a vis
the company. It appears to me that an interdict is an appropriate
remedy precisely not only because specific performance
of an
agreement is sought but further that if a vote is taken in breach of
the agreement, the harm would be irreparable in that
a valid
resolution would be passed. That this is so is evident from
authorities referred to above. Any agreement as between a member
and
a director that the member would not exercise his or her voting
rights to remove a director is res inter alios acta and has
nothing
to do with the company.
[42]
In an application for an interdict, the company is not sought to give
effect to the agreement; the enforcement of the agreement
is sought
as between the member and the director. In the present case, the
first respondent seeks to hold the company bound to
the agreement
with Louw and the family trust. Mr Limberis submitted that the ground
upon which the company could be held bound
to the contract was that
the agreement was with the entire registered membership of the
company. As such, when the vote was taken
to pass the resolution, the
"company in general meeting" was thus a party to the
agreement and its breach. For that reason
Mr Limberis submitted to me
that I ought to hold the company bound.
[43]
I have two difficulties with this argument. The first is that the
argument is constructed at making the company a party to
the
agreement by extending the members qua members to the company in
general meeting. The problem the respondents have in this
regard is
that the result of such extension is to find that the company is a
party to the agreement. The company was in any event
a party to both
the November 2005 and April 2007 agreements. The express wording of
section 220 overrides any agreement to which
the company is a party
and permits the company to remove the director notwithstanding any
agreement between it and the director.
The second difficulty I have
is that equating the majority members with the company in general
meeting is in fact an argument that
Stewart v Schwab was wrongly
decided and that even an agreement between the members and the
director is overridden by the provisions
of section 220. This
argument, that the words "the company" in section 220 means
the company in general meeting which
is the majority of shareholders
assembled in general meeting, was raised by counsel in Desai v
Greyridge Investments (Ptty) Ltd
1974 (1) SA 509
(A) at 513E-G. This
argument was not determined as, on the facts of that case, it was
held that there was no agreement not to remove
the directors
concerned.
[44]
Accordingly both the November 2005 and April 2007 agreements are
similarly a factual disputes which are not material in that
they
cannot assist the respondents.That however is not the end of the
matter.The applicant's papers must nevertheless show that
a
resolution was validly passed at the meeting which was properly held.
The
members who passed the resolution
[45]
In order for the company to pass a valid resolution in terms of
section 220 of the 1973 Act, it must be carried by a majority
of
votes of the members, either present in person or by proxy or, in the
case of a body corporate represented in terms of section
188. In the
present case the question arises who was the member that passed the
resolution. In this enquiry the provisions of sections
103 and 104 of
the 1973 Act, must be read in the light of the relevant provisions of
sections, 32, 52, 54, 60 and 65 of the 1973
Act. The relevant parts
of which (with emphasis added) read as follows:
"32
Any seven or more persons or, where the company to be formed is a
private company, any two or more persons associated for
any lawful
purpose or, where the company to be formed is to be a private company
with a single member, any one person for any lawful
purpose, may form
a company having a share capital or a company limited by guarantee
and secure its incorporation by complying
with the requirements of
this Act in respect of the registration of the memorandum and
articles.
52
. . .
(2)
If the company is to have a share capital, the memorandum shall
state-
(a)
(i) the amount of the share capital with which it is
proposed to
be registered and the division thereof into shares of a fixed amount;
or
(ii)the
number of shares if the company is to have shares of no par value;
(b)the
number of shares which each subscriber undertakes to take up, stated
in words opposite his name: Provided that no subscriber
may
take
less than one share.
54
(1) The memorandum shall be and be completed in the form prescribed.
(2)
The memorandum of a public company shall be signed by not less than
seven subscribers and of a private company by one or more
subscribers, stating their full names, occupations and residential,
business and postal addresses, and each subscriber shall sign
the
memorandum in the presence of at least one witness who shall attest
the signature and state his residential, business and postal
address.
60
(1) The articles shall be and be completed in the form prescribed.
(2) The articles shall be signed by each subscriber of the
memorandum
stating his full name, occupation and residential, business and
postal address, in the presence of at least one witness
who shall
attest the signature and state his residential, business and postal
address.
65
(1) From the date of incorporation stated in the certificate of
incorporation, the subscribers of the memorandum together with
such
other persons as may from time to time become members of the company,
shall be a body corporate with the name stated in the
memorandum,
capable of exercising all the functions of an incorporated company,
and having perpetual succession, but with such
liability (if any) on
the part of the members to contribute to the assets of the company in
the event of its being wound up as
provided by this
Act.
(2)
The memorandum and articles shall bind the company and the members
thereof to the same extent as if they respectively had been
signed by
each member, to observe all the provisions of the memorandum and of
the articles, subject to the provisions of this Act."
[46]
Thus company may be formed by one or more persons, section 32. Those
persons are the subscribers to the memorandum who are
required to
sign the memorandum, section 54(2) and articles of association,
section 60(1). The shares taken up by each subscriber
are recorded
next to the name of each subscriber in the memorandum, section
52(2)(b). Upon incorporation the persons who were the
subscribers
form the body corporate with juristic personality, together with such
other persons who become members of the company,
section 65. The
persons who were the subscribers to the memorandum are deemed to be
the first members of the company and are required
to be entered
forthwith in the register of members, section 103(1). Every other
person who agrees to become a member of a company
and whose name is
entered in its register of members, becomes a member of the company,
section 103(2).
[47]
Accordingly a member must be a person whose name is entered in the
company's register. The family trust is named in the register
as the
member holding the entire share capital of the company. Mrs Louw
requisitioned the general meeting, on behalf of the family
trust,
purporting to act in terms of a resolution of the trustees dated 12
November 2002 which empowered each of the trustees to
act
individually to perform various specified activities and generally
all other dealings authorised in terms of the trust deed.
Whether
this resolution of trustees is permissible in terms of the trust deed
or a violation of the principle that trustees should
act jointly,
Nieuwoudt and Another NNO v Vrystaat Mielies (Edms) Bpk
2004 (3) SA
486
(SCA), Thorpe and Others v Trittenwein and Another
2007 (2) SA
172
(SCA), Parker's case, referred to above, is not something I am
able to determine as the trust deed is not before me and I assume
that the conduct of Mrs Louw was authorised by all the trustees. Both
Mrs Louw and Louw were present at the meeting of 26 November
2009.
Louw purported to represent the family trust through the instrument
of a proxy in the form of a resolution signed by all
three trustees
of the family trust.
[48]
Nevertheless for the resolution of the applicant company to be valid
it had to be passed by or on behalf of a member. Whether
or not that
was done is determined with recourse to the register of members. The
difficulty the applicant faces is that the name
in the register is
the family trust which is neither a person nor a body corporate or
unincorporated, Friedman's case. The trust
is a legal relationship,
Lupacchini's case. The register does not disclose the name of a
person. If by the name of the family trust
one reads in a legal
relationship or a trust estate there is no reference to a person,
rather meaningless words. A trust is a legal
relationship incapable
of owning anything. The trust estate, in the sense of an accumulation
of assets and liabilities, similarly
cannot be the member as it too
is not a person. If by the name of the family trust one is to read
therein the trustees of the family
trust in their capacities as such,
as was done in Kohlberg's case and BOE Bank referred to above, there
is at least a reference
to persons.
[49]
The applicant's difficulties are not resolved by this reading of the
expression. There is no compliance with the provisions
of section
103(2) which requires the name of the member to be registered.
Registration by reference to office requires an enquiry
involving
evidence of identity extrinsic to the register. The applicant's
difficulties are further compounded by the provision
of article 5.4
of the articles of the company which corresponds to articles 47 of
Table A and 48 of Table B of Schedule 1 of the
1973 Act. This article
provides that where a share is jointly held any one of the joint
holders may vote as if he were solely entitled
to the voting right.
Where however more than one of the joint holders are present wither
in person or by proxy, the vote of the
joint holder whose name is
entered on the statutory register first is to be recorded as the only
eligible vote. An enquiry that
identifies three trustees who are to
be considered joint holders of the shares does not assist in
determining whose name is registered
first.
[50]
To embark on such an enquiry, to identify the who are the trustees,
requires recourse to the trust deed and the letters of
authority of
the master. These are matters with which the company is neither
required nor permitted to concern itself, section
104. It is the
register that is supposed to identify and disclose the names of the
members. The name of the member ought to be
reflected on the
register. Where this is not so it is permissible for the court to go
behind the register in proceedings to rectify
the register. There
were no such proceedings before me. No doubt were there such
proceedings it might then have necessary to determine
the factual
dispute relating to the existence of the February 2006 agreement.
[51]
The applicant and the trustees are the author's of their own
misfortune. For whatever reason they chose to keep the names of
the
trustees off the register and then exercise, when it suited them, the
rights accorded to members as if their names were reflected
on the
register. It is the trustees who were the owners of the shares. To
the extent that the shares are trust assets one or more
of the
trustees names ought to have been reflected on the register in order
to exercise the voting rights attaching to the status
of a member.
The
2008 Act
[52]
Shortly after this matter was argued, the 1973 Act was for the most
part repealed by section 224 of the Companies Act 71 of
2008 ("the
2008
Act")
which came into effect on 1 May 2011 by proclamation in the
Government Gazette 34236 of 26 April 2011. Notably section
71(1) of
the 2008 Act, the equivalent of section 220 of the 1973 Act, operates
to override any agreement between the shareholder
and the director.
Thus the relief in Schwab and Amoils would seem to be no longer
competent. Significantly the 2008 Act does not
use the term "member"
of a company except in relation to a non profit company. A
"shareholder" is the holder
of a share issued by a company
and who is entered as such in certificated or uncertificated
securities register. A person for the
purposes of the 2008 Act is
defined to include a juristic person. A juristic person in turn is
defined to include a trust. There
is no equivalent of section 104 of
the 1973 Act. Whether the 2008 Act permits the registration of a
trust as a shareholder, or
includes trusts for the purposes of going
behind the register for the purposes of determining control and the
existence of a relationship
giving rise to related and inter-related
parties, for the purposes of corporate governance is happily a
question upon which I need
not embark; this is possibly a task for
another court in the future.
Conclusion
[53]
When the 2008 Act came into effect on 1 May 2011 it did so without
retroactive effect. Accordingly the 2008 Act has no effect
on the
validity resolution or the meeting of 26 November 2009.
[54]
The resolution was thus passed by Louw whose name was not reflected
on the register as a member. Louw acted in terms of a proxy
on behalf
of the trust which is not a person and thus not a member. To the
extent that Louw acted on behalf of all three trustees
(of which he
was one), since none of their names were reflected in the register,
he could not be said to have on behalf of any
member.
[55]
The resolution was not the resolution of a member and was thus
invalid and ineffective as an instrument to remove the respondents
under section 220 of the 1973 Act.
[56]
I make the following order: the application is dismissed with costs.
J
R PETER ACTING JUDGE
SOUTH
GAUTENG HIGH COURT, JOHANNESBURG
APPEARANCES
J
Moorcroft, for the applicant instructed by Donald Graham Attorneys,
Johannesburg
E
A Limberis SC, for the respondent instructed by Fluxmans Inc,
Johannesburg