Mbethe v United Manganese of Kalahari (Pty) Ltd (42213/2014) [2016] ZAGPJHC 8; 2016 (5) SA 414 (GJ) (11 February 2016)

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[2016] ZAGPJHC 8
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Mbethe v United Manganese of Kalahari (Pty) Ltd (42213/2014) [2016] ZAGPJHC 8; 2016 (5) SA 414 (GJ) (11 February 2016)

REPUBLIC
OF SOUTH AFRICA
IN
THE HIGH COURT OF SOUTH AFRICA,
GAUTENG
LOCAL DIVISION, JOHANNESBURG
CASE
NO: 42213/2014
DATE:
11 FEBRUARY 2016
In the matter
between:
LAZARUS
MBETHE
...............................................................................................................
Applicant
And
UNITED
MANGANESE OF KALAHARI (PTY)
LTD
.....................................................
Respondent
J U D G M E N T
WENTZEL AJ
1.
This is an application in terms of section
165(5) of the Companies
Act, 2008 (“the Act”) to institute a derivative action in
the name of the respondent, United
Manganese of Kalahari (Pty) Ltd,
in terms of a demand made by the applicant, Lazarus Mbethe, in terms
of subsection (2), which
the respondent has refused to comply with as
contemplated in subsection (4) (b) (ii).
2.
This has, in and of itself conferred upon
the applicant, as a
director and Chairman of the respondent,
locus standi
to
approach the Court in terms of subsection (5) as contemplated in
subsection (2) (b).
3.
However, the applicant insists that in bringing
the application he
does so, not do so only in his capacity as Chairman and a director of
the respondent, but also in his representative
capacity as Chairman
and director of Majestic Silver Trading 40 (Pty) Ltd (“MST”),
its majority shareholder and as
Chairman and director of Pitsa Ya
Setshaba Holdings (Pty) Ltd (“PYS”), and as a trustee of
the Kalahari Community Trust
(“KCT”), both indirect
shareholders of the respondent, for whose benefit the respondent was
allegedly formed. However,
no resolution to this effect was produced
and it is of some significance that neither PYS nor the Trust have
themselves leveled
the complaints against the management of the
respondent which is the subject matter of the current demand, nor are
they parties
to the current proceedings which have been launched in
the applicant’s name. The applicant thus, only has
locus
standi
to bring the current proceedings in his capacity as a
director of the respondent dealt with below.
THE FACTS
4.
The applicant is one of the largest producers
of manganese ore in the
world. The applicant was formed as a Special Purpose Vehicle for
Black Economic Empowerment purposes, which
was a precondition for the
granting of the prospecting and ultimately, mining rights to the
respondent on 10 March 2008.
5.
The shares in the respondent were allocated
in the ratio 51% to 49%
between a local company, Majestic Silver Trading 40 (Pty) Ltd (“MST”)
with BEE objectives,
and a Russian based company, Renova Manganese
Investments Ltd (“Renova”), that was tasked to establish
and run the
mining operations. With a view to benefiting the local
Kuruman community and to achieve its BEE objectives,  the KCT

was founded by the applicant and MST’s majority shareholding in
the respondent was in turn allocated to:
5.1.
Samancor Manganese-38%
5.2.
Chancellor House Minerals Resources -27%
5.3.
PYS- 27%
5.4.
KCT- 8%
6.
Although KCT’s shareholding is by far
the smallest shareholder
in MST, much has been made of its interest in the respondent in the
current application, whose interests
the applicant, as a trustee of
KCT, has claimed to champion. But more in this regard below.
7.
The respondent was established in 2005
and commenced with
exploration and feasibility studies pursuant to a new order
exploration permit granted to it in 2005. This was
followed by the
grant of a mining right. Mining operations commenced in 2008 and the
respondent soon became a multibillion rand
company with assets in its
balance sheet by 2014 valued in excess of R2.5 billion.
8.
With assets of this magnitude, attempts have
been made to skim off
the profits generated by the respondent through management and other
contracts, leaving little, in relative
terms, for the benefit of the
community for whose benefit KCT was formed. Indeed, there is no
evidence of any dividends having
been declared to the trust to date,
despite profits having been made. Amongst these contracts are the
extremely lucrative iron
ore crushing contracts awarded to mobile
operators which form the subject matter of the current application.
9.
In order to conduct its mining operations
the respondent requires to
crush the ore-bearing rock and commenced the construction of a fixed
crushing and screening plant which
was designed to handle the entire
projected production of ore-bearing rock. However, whilst this plant
was being built and thereafter,
to absorb increased demand, the
respondent elected to employ a number of mobile crushing and
screening contracting companies to
perform this task on a month to
month basis.
10.
One of such companies was Zastrospace, which was employed and

retained, it is conceded, not for commercial reasons but to further
broad BEE objectives and to benefit the some 27 local communities

that it purportedly represented. Indeed it is averred that the
Zastrospace contract has always been considered as an initiative
to
benefit local communities and it is conceded that it was not “
an
arm’s length
” transaction in the strict commercial
sense.
[1]
11.
The preservation of the Zastrospace contract, worth several
millions
of rands, which was allegedly terminated for commercial reasons due
to the decrease in demand for iron-ore, is an overriding
motivation
for the current application, as I will demonstrate below.
12.
Despite the termination of the Zastrospace contract, that of
another
mobile crushing operator, African Mining Contractors (“AMC”),
was retained in circumstances dealt with by me
below, which also
forms part of the complaints leveled against the management of the
respondent in the statutory demand.
13.
Zastrospace was introduced to the respondent by the applicant,
who
was admittedly long time friends with its CEO, Mr Roelofse
(“Roelofse”), who secured a substantial management fee
of
30 % for himself, through his management company, Cytopx (pty) Ltd
(“Cytopix”). Cintozene (Pty) Ltd (“ Cintozene”)

, is the majority shareholder of Zastrospace with the remaining 49%
of the shares being held through Mirodex (Pty) Ltd .
14.
It is averred that Roelofse’s proposed management fee
of 30%
was disclosed to the respondent in the business plan presented by him
to Mr Danie Lourens (“Lourens”), then
in charge of the
respondent
[2]
.
However, ultimately, this management fee was not claimed by Roelofse
personally and instead, was claimed through his management
company.
15.
In April 2013, Zastrospace was awarded a mobile crushing contract
by
the respondent. Over the period from May 2013 to May 2014, a period
of only one year, Zastrospace was paid an aggregate of R
32, 5
million of which the main expense was the management fee. Needless to
say, it was an extremely lucrative contract. Although
it was
submitted that it is safe to assume that one or more of the
shareholders of Zastrospace represent the 27 local communities
in
Kuruman, the reference supplied in support of this proposition does
not establish this.
[3]
The only reference I can find to substantiate this is that Roelofse
has been involved in the upliftment of the Kuruman community
in
projects over a protracted period of time
[4]
16.
Nevertheless, this was a substantial argument proffered in
support of
the continuation of the Zastrospace contract and was a basis upon
which the company was marketed to the respondent by
the applicant
[5]
.
There is very little evidence to support that this was in fact the
case as Zastropace itself only employed 18-20 persons at the
height
of its operations, with its payrolls reflecting only 12-13 employees
from the Kuruman communities
[6]
,
with Cytopix itself only employing 12 individuals  described as
“
skilled staff, administrative staff and safety officers
”
to render its management services
[7]
.
17.
During the period of the Zastrospace contract, Cytopix earned

approximately R 10.8 million as a management fee (but at least in
excess of R 7 million on the basis of the applicant’s argument

that its gross turnover was R 23 million and not R32 million.)
Although the averment is made that part of the 30% went to projects

in Kuruman, there is no evidence of this
[8]
.
Its wage bill, including that of its managing director, Roelofse was
R 365 508.33 per month of which it can safely assumed that
Roelofse,
quite apart from his interest in Cytopax, got the lions share. Its
expenses, apart from its management fee, were minimal
spending only R
11 000 per month on diesel and R8000 per month on administration
expenses. It can, thereofore, also be safely be
assumed that much of
its R 5 million in expenses largely was earned by way of salary by
Roelofse.
18.
Not that Cytopix is the only party to skim off the profits
of the
respondent through the auspices of consultancy fees and performance
bonuses. Lourens, the commercial manager of the respondent,
himself
earns a substantial management fee through his corporation, Pangolin
CC, of which he is the sole member, through a Business
Consultant
Agreement with the respondent. This was signed by Johan Kriek
(“ Kriek”) as CEO and Lourens on behalf
of the respondent
effective 1 January 2011
[9]
.
The investigation of this contract  and is also the subject of
one of the demands made.
19.
That brings me to the events that have sparked the current

application.
20.
Although the applicant alleges that Zastrospace was promised
a fixed
term contract at the end of May 2014
[10]
should it meet its crushing targets, which it did, the Zastrospace
contract was terminated in August 2014 at a procurement committee

meeting attended by Kriek and Louw, both directors, as well as Mr
Robinson Raimate
(“Raimate”) who was not, but
also participated in the decision. Raimate, who purports to act as
the deputy CEO of the
respondent, forms the subject of several of the
demands.
21.
Although the Memorandum of Association provides that the business
of
the respondent be conducted through various committees, which powers
of delegation are endorsed by section 72(1) of the Act,
in terms of
clause 12 of the shareholders agreement, such committees were
required to be presided over by persons who were directors
of the
respondent and could not make binding decisions unless ratified by
the Board. This is a requirement, endorsed by section
72(2) of the
Act and King III, which is in conflict with the Memorandum of
Association, which is the subject matter of the first
two demands
dealt with below.
22.
This notwithstanding, it was not until 19 November 2014, after
the
demand had been delivered by the applicant, that the Board resolved
to terminate all its mobile crushing contracts including
that of
Zastropace and AMC.
23.
This in itself is a story to tell. Although the respondent
has
insisted that there is nothing sinister in its termination of the
Zastrospace contract as it was terminated purely for commercial

reasons, its   crushing contract with AMC was not
terminated although its rates were only marginally lower than
Zastrospace
which had applied for and been granted an increase in its
rates. Indeed, the applicant was under the misapprehension that the
AMC
contract had replaced the Zastrospace contract. It would seem
also that attempts were made to
ex post facto
justify
the termination of the Zastrospace contract by querying the 30%
management fee earned by Cytopix and requesting details
of the
projects it allegedly benefitted. It is of marked significance that
those terminating the contract did not purport to do
so on anything
other basis than on commercial grounds.
24.
On hearing about the termination of the Zastrospace contract,
on 21
July 2014, the applicant, as Chairman of the respondent, instructed
the company secretary to suspend the holding of all committee

meetings as they were unlawful in so far as they were presided over
by Ramaite who was not a Board member, and were allegedly rogue,

making decisions which they could not validly make without Board
approval which were merely rubber-stamped by the Board. Insisting

that this would have effectively hamstrung the respondent’s
business which was conducted through the delegation by the Board
of
its powers to committees, this instruction was ignored by Kriek, Louw
and Raimate.
25.
On 17 October 2014, Mr Konstantin Sadovnic (“Sadovnic”),

the deponent to the answering affidavit and also a director of the
respondent, proposed the nomination of an alternative CEO to
the
applicant, who had been acting as such since 15 September 2005.
26.
This prompted the applicant, through his attorneys, to propose
that
the issue of rogue committees be addressed at Board level at a
meeting to be scheduled. This was dismissed out of hand by
the
respondent’s attorney,which left the applicant little
alternative but to address a statutory demand in terms of section
165
(2) of the Act to the respondent on 22 October 2014, which is the
subject matter of the current application
[11]
.
27.
Somewhat suspiciously, coincidentally, the Registrar of Mineral

Resources faxed a notice to the respondent in terms of section 93 of
the Mineral and Petroleum Resources Development Act no 28
of 2002
(the Minerals Act”), for a compliance inspection which was to
have been conducted on 28 October 2014, but had to
be postponed for
personal reasons, pursuant to a prior notice
[12]
. These notices are inexplicably only signed by the Regional office
of the Department of Mineral Resources on 12 November 2014
and 28
October 2014 respectively, both post-dating the date of the first
scheduled inspection and the date of the latter notice,
preceding
also that of the prior notice.
28.
On the basis of these notices, the applicant avers that the
conduct
of the respondent in terminating the Zastrospace contract, which was
a substantial part of its BEE requirements enshrined
in its
shareholder’s agreement to appoint previously disadvantaged
vendors, has placed its mining rights in jeopardy.
29.
On receipt of the statutory demand, the directors of the respondent,

excluding the applicant, were given notice of a Board meeting to
consider the statutory demand. This meeting was held on 29 October

2014 where it was resolved to appoint attorneys to represent the
respondent and to request Mr Badenshorst SC to investigate and
report
to the Board on the demand in terms of section 165 (4) (a) of the
Act. An extension of time was requested for him to submit
his report
on 6 November 2014, which was not granted.
30.
The applicant avers that his exclusion from this meeting renders
the
resolution invalid as he, as a director, was obliged to be given
notice and the resolution passed was, in terms of clause 10.1
the
shareholders agreement, inquorate. This formed the basis of an
interlocutory application to set aside the appointment of the

respondent’s attorneys and to strike out Badenhorst SC’s
report. Save to state at this stage that the excuse proffered
for not
affording the applicant notice was that there was a conflict of
interest as he was the author of the demand, this aspect
does not
have to be decided by me as Mr Bham SC indicated that he did not
intend to rely on Badenhorst SC’s report. On the
basis of the
judgment of Davis J in
Mthumunye v Petroleum and Gas Corporation
of South Africa (SOC) Ltd and another
[2015] JOL 33744
(WCC) it
would appear that despite the averred conflict of interest, the
applicant was entitled to be given notice of the meeting
of the
demand and afforded an opportunity to address the Board thereon. In
the circumstances, the meeting held and the decisions
taken thereat
were invalid, including that to appoint Badenhorst SC to investigate
the demand. This will have an impact on the
question of costs.
31.
Hereafter, on 7 November 2014, notice was given to all

directors, this time including the applicant, of a Board meeting on
19 November 2014 to consider the termination of all the mobile

crushing contracts. The applicant declined to attend this meeting as
he stated that it was to be but a whitewash and to rubber
stamp the
decision already taken by the procurement committee to terminate the
Zastrospace contract  during August 2014.
32.
On 12 November 2014, the former of the aforementioned

inspection notice was again, so it would seem, faxed to the
respondent  to conduct an audit relating, inter alia to
procurement
and enterprise development and  mine community
development. It cannot be purely coincidental that this is the exact
date that
the 15 day period within which the respondent was entitled
to apply to set aside the demand in terms of section 165 (3) lapsed.
33.
On 19 November 2014 both the Board meeting was held, that predictably

resolved to terminate the Zastrospace contract, and the main
application was launched. This was one day before the 60 day period

within which Badenhorst SC’s report was required to be provided
(an extension not having been agreed to or granted by the
Court in
terms of section 165 (4)).  Although the point was taken that
the application was, on this basis premature, this
was on a
misreading of section 165(5) as I will demonstrate below.
34.
Of some significance is that, notwithstanding that the AMC
contract
was not cancelled by the procurement committee, the Board, it is
suspected having realized that it could not credibility
defend the
termination of the one crushing contract and not the other, resolved
to terminate this contract as well. However, a
scheme was put in
place, sanctioned by the Board, to purchase AMC’s equipment for
R 40 million instead.  This, despite
a recordal that it had been
proposed to purchase AMC’s equipment for R23 Million.
[13]
35.
Despite the assertion that an economic downturn and drop in
demand
had prompted the termination of the mobile crushing contracts, this
purchase was sought to be justified on the basis that
the machinery
was a bargain to be employed in the event of an upturn in the market.
Why mobile crushing contractors could not then
have been retained was
not explained nor was the vast sum paid for the plant for which the
company would at this stage effectively
mothball for a rainy day.
36.
I have little doubt that AMC’s machinery was purchased
as
compensation for the termination of its mobile crushing contract, the
continuation of which could not be justified in the face
of the
termination of the Zastrospace contract. I mention also that so
intent was the Board to justify the termination of the Zastrospace

contract allegedly on commercial grounds, that it also resolved at
this meeting to ratify the decision taken to conduct a forensic
audit
into the affairs of Zastrospace and in particular its management
contract with Cytopix which had hitherto never bothered
it. For the
first time, it professed concern as to whether such contract was
indeed benefitting the local community it was intended
to benefit. On
the contrary, Lourens, to whom the management contract was disclosed,
expressed no misgivings now expressed as to
the exorbitant management
fee claimed by Roelofse at the time.
THE STATUTORY DEMANDS
37.
The analysis of the law to the facts must be preceded by an
analysis
of the demands sought to be enforced. Five demands have been made
essentially aimed at:
37.1.
preventing the conducting of the business of the respondent through
rogue committees
and any persons other than Board members serving and
voting on any matter to be decided by such committees ;
37.2.
suspending: the holding of all committee meetings by Kriek and
Raimaite ;
37.3.
suspending Kriek as CEO pending an investigation of several
complaints leveled against
him including his decision to termintate
the Zastrospace contract and retain AMC which was not BEE compliant;
and
37.4.
investigating the consultancy agreement with Pangolin CC of which
Lourens was the
sole member;
37.5.
precluding Ramaithe, as a non Board member, from  sitting on any
committees
where it was prescribed that such be comprised of only
Board members; and
37.6.
interdicting Raimate from purporting to act as a deputy CEO when he
has not been
appointed as such;
37.7.
reinstating the Zastrospace contract, alternatively declaring its
termination unlawful
and of no force and effect.
38.
A proper analysis of the statutory demands against the aforementioned

factual matrix demonstrates that, although dressed up in the noble
cause of promoting good corporate governance and the upliftment
of
the Kuruman community, it is essentially all about the retention of
the Zastrospace contract . It was only after the purported

termination of this contract by way of committee that such committees
have become the subject of complaint by the applicant in
the
interests of good corporate governance. Needless to say the Court
approaches such concerns with some cynicism, as it does the

respondent’s
ex post facto
concerns about the community
to justify its termination of such contract.
REQUIREMENTS FOR THE STATUTORY
DERIVATIVE ACTION
39. The relevant portions of Section 165
provide:
65
Derivative actions
(1)  Any
right at common law of a person other than a company to bring or
prosecute any legal proceedings on behalf of that
company is
abolished, and the rights in this section are in substitution for any
such abolished right.
(2)  A
person may serve a demand upon a company to commence or continue
legal proceedings, or take related steps, to protect
the
legal
interests
of the company if the person-
(a)  is
a
shareholder
or a person entitled to be registered as a
shareholder, of the company or of a related company;
(b)  is
a
director
or prescribed officer of the company or of a
related company;
(c)  is
a registered trade union that represents employees of the company, or
another representative of employees of the company;
or
(d)  has
been granted leave of the court to do so, which may be granted only
if the court is satisfied that it is necessary
or expedient to do so
to protect a legal right of that other person
.
(3)  A
company that has been served with a demand in terms of subsection (2)
may apply within 15 business days to a court to
set aside the
demand
only on the grounds that it is
frivolous, vexatious or
without merit
.
(4)  If
a company does not make an application contemplated in subsection
(3), or the court does not set aside the demand in
terms of that
subsection, the company must-
(a)
appoint an independent and impartial person
or committee to
investigate the demand, and report to the board on-
(i) any
facts or circumstances-
(aa) that
may gave rise to a cause of action contemplated in the demand; or
(bb) that
may relate to any proceedings contemplated in the demand;
(ii)  the
probable costs that would be incurred if the company pursued any such
cause of action or continued any such proceedings;
and
(iii)
whether it appears to be in the best interests of the company
to pursue any such cause of action or continue any such
proceedings;
and
(b)
within 60 business days after being served with the demand, or within
a longer time as a court, on application by the company,
may allow,
either-
(i)
initiate or continue legal proceedings, or take related legal
steps to protect the legal interests of the company, as
contemplated
in the demand; or
(ii)
serve a notice on the person who made the demand, refusing
to comply with it
.
(5) A
person who has made a demand in terms of subsection (2) may apply to
a court for leave to bring or continue proceedings in
the name and on
behalf of the company, and the court
may
grant leave only if-
(a)  the
company-
(i)  has
failed to take any particular step required by subsection (4);
(ii)
appointed an investigator or committee who was not independent
and impartial;
(iii)
accepted a report that was inadequate in its preparation, or
was irrational or unreasonable in its conclusions or recommendations;
(iv)
acted in a manner that was inconsistent with the reasonable
report of an independent, impartial investigator or committee;
or
(v)
has
served a notice refusing to comply with the demand
, as
contemplated in subsection (4)(b)(ii); and
(b)  the
court is satisfied that-
(i)  the
applicant is acting in
good faith
;
(ii)  the
proposed or continuing proceedings involve the trial of a
serious
question of material consequence to the company
; and
(iii)
it
is in the best interests of the company
that the applicant be
granted leave to commence the proposed proceedings or continue the
proceedings, as the case may be.
(6)  In
exceptional circumstances, a person contemplated in subsection (2)
may apply to a court for leave to bring proceedings
in the name and
on behalf of the company without making a demand as contemplated in
that subsection, or without affording the company
time to respond to
the demand in accordance with subsection (4), and the court may grant
leave only if the court is satisfied that-
(a)  the
delay required for the procedures contemplated in subsections (3) to
(5) to be completed may result in-
(i)
irreparable harm to the company; or
(ii)
substantial prejudice to the interests of the applicant or
another person;
(b)
there is a reasonable probability that the company may not act
to prevent that harm or prejudice, or act to protect the
company‟s
interests that the applicant seeks to protect; and
(c)  that
the requirements of subsection (5)(b) are satisfied.
(7)
A
rebuttable presumption
that granting leave
is not in the best
interests of the company
arises if it is established that-
(a) the
proposed or continuing proceedings are by-
(i)  the
company against a third party; or
(ii)  a
third party against the company;
(b)  the
company has decided-
(i)
not to bring the proceedings;
(ii) not
to defend the proceedings; or
(iii) to
continue settle, or compromise the proceedings
(c)  all
of the directors who participated in that decision-
(i)
acted in good faith for a proper purpose;
(ii)  did
not have a personal financial interest in the decision, and were not
related to a person who had a personal financial
interest in the
decision;
(iii)
informed themselves about the subject matter of the decision to
the extent they reasonably believed to be appropriate;
and
(iv)
reasonably believed that the decision was in the best interests
of the company.
(8) For
the purposes of subsection (7)-
[Para.
(a) substituted by s. 104 of Act 3/2011]
(b)
proceedings by or against the company include any appeal from a
decision made in proceedings by or against the company.
(9)  If
a court grants leave to a person under this section-
(a)  the
court must also make an order stating who is liable for the
remuneration and expenses of the person appointed;
(b)  the
court may vary the order at any time;
(c)  the
persons who may be made liable under the order, or the order as
varied, are-
(i)  all
or any of the parties to the proceedings or application; and
(ii)  the
company;
(d)  if
the order, or the order as varied, makes two or more persons liable,
the order may also determine the nature and extent
of the liability
of each of those persons; and
(e)  the
person to whom leave has been granted is entitled, on giving
reasonable notice to the company, to inspect any books
of the company
for any purpose connected with the legal proceedings.
(10)  At
any time, a court may make any order it considers appropriate about
the costs of the following persons in relation
to proceedings brought
or intervened in with leave under this section, or in respect of an
application for leave under this section:
(a)  The
person who applied for or was granted leave;
(b)  the
company; or
(c)  any
other party to the proceedings or application.
40.
Interpreting the section ( in light of the aspects underlined
by me),
it is apparent that in terms of subsection (1), section 165 has
replaced the  common law derivative action with
a statutory
derivative action.
41.
Locus standi
is conferred upon a shareholder or a director to
serve a statutory demand upon a company (section 165(2)(a) and (b))
to commence
or continue legal proceedings, or to take related steps
provided that it can be established that this is to protect the
legal interests of the company
.
42.
However, a person other than a director or shareholder may
also make
such a demand with leave of the Court if it can be established that
it is either necessary or expedient to do so to protect
that person’s
(not the company’s) legal right ( section 165 (2) (c))
43.
On receipt of the demand, the company  on whom it is served
has
a number of options. It can either:
43.1.
apply to Court within 15 business days to set aside the demand
(section
165 (3)); or
43.2.
appoint an independent and impartial person or committee to
investigate whether
the demand is valid and whether to comply with
the  demand would be cost expedient and in the best interests of
the
company  and to report to the Board thereon within 60
business days, or such longer time that the Court, on application,
may
allow (section 165 (4)(a) read with subsection (b)).
44.
On receipt of such a report the company may either:
44.1.
comply with the demand ( section 165(4)(i)) ; or
44.2.
serve a notice refusing to comply with the demand (section 165(4)
(ii)).
45.
In order to bring proceedings in terms of section 165 (5) the

applicant bears and onus to establish that the prescribed procedural
requirements set out in subsection (5) (a) and the substantive

requirements set out in subsection (5) (b) are met. The incidence of
this onus and the threshold required to discharge it was the
subject
of much debate dealt with below.
46.
What is clear, however, is that the procedural requirements
are
disjunctive entitling the applicant to apply to bring a derivative
action if
any
of the following requirements have been met -
Either the company has:
46.1.
not complied with the demand within 60 business days after receipt of
the demand
or such extended period as may have, on application by the
company within the 60 day period been granted by the Court ( section

165(5)(i) read with section 165 (4) (b);
46.2.
served a notice refusing to comply with the demand ( section 165(5)
(a) (i) read
with section 165(4) (b)(ii); or
46.3.
failed to appoint an independent and impartial person to investigate
and report
on the demand ( section 165 (5)(a)(i) ) or appointed an
investigator or committee  who was not independent and impartial
(
section 165 (5) (a)(ii)),accepted an inadequately prepared or
irrational or unreasonable report ( section 165 (5) (a)(iii) or acted

in a manner that was inconsistent with a reasonable report  (
section 165 (5) (iv)) .
47.
The service of a statutory demand in terms of section 165 (2)
is a
prerequisite for the bringing of an application in terms of
subsection (5) provided that, in exceptional circumstances, the

persons afforded
locus standi
may apply to Court for leave to
bring proceedings in the name or on behalf of the company without
making a demand or affording
the company the prescribed 60 days to
respond in accordance with subsection (4).
48.
Exceptional circumstances will only be found to exist if all
the
following requirements are met:
48.1.
The delay may result in irreparable harm to the company or
substantial prejudice
to the interests of the applicant or another
person;
48.2.
There is a reasonable probability that the company may not act to
prevent that harm
or prejudice, or to act to protect the company’s
interests that the company seeks to protect; and
48.3.
The Court is satisfied that the substantive requirements for relief
under subsection
(5) are met namely that:
48.3.1.    the applicant
is acting in good faith (section 165 (b)(i));
48.3.2.   the proposed or
continuing proceedings involve a trial of a serious question of
material consequence to the
company ( section 165(b) (ii)); and
48.3.3.   it is in the best
interests of the company that the applicant be granted leave to
commence the proposed proceedings
or continue the proceedings, as the
case may be ( and presumably to take the related steps contemplated
in subsection (2) (Section
165 (6) (c) read with subsection (5) (b)).
49.
Mr Brett SC, who appeared for the applicant, informed me that
the
application was also brought in terms of subsection (6). This was in
response to an averment by the respondent that the application
was
premature, which was not seriously persisted with by Mr Bham SC, on
behalf of the respondent, in as much as the application
was proceeded
with prior to receipt of the report by the investigator appointed to
consider the demand as required in terms of
subsection (4)(a),
Badenhorst SC, which brings me to the steps the company is entitled
to take on receipt of the demand.
50.
I point out that Mr Bham SC rightly conceded that on a proper
reading
of subsection (5), which is disjunctive and not conjunctive, an
application in terms of subsection (5) may be brought prior
to the
receipt of such a report if the company has served a notice refusing
to comply with the demand, which it was common cause
had transpired
prior to the launching of the application. It is thus not necessary
for me to consider whether exceptional circumstances
existed as
required in terms of section 165)(6) to bring proceedings in terms of
section 165(5).
51.
The respondent also averred that the report of Badenhorst SC,

commissioned in terms of section 165(4)(a), was not independent and
impartial and was irrational and unreasonable but Mr Bham SC
informed
me that the respondent did not seek to rely on Badenhorst SC’s
report. As
locus standi
was sufficiently conferred by the
notice served by the company refusing to comply with the demand, it
is not necessary for me to
consider the impartiality or otherwise of
Badenhorst SC’s report. As the report was not relied upon, it
is also not necessary
for me to consider whether the company had
authority to commission Badenhorst SC’s report save in the
context of costs. The
question of the authority of the Board to
appoint attorneys to consider and oppose the demand was not seriously
pursued in argument.
52.
That brings me to the substantive requirements set out in section

165(5) (b) which must be met.
53.
These are, in contrast to the procedural requirements, conjunctive,

all of which must be met. In order to succeed with his application,
it is incumbent upon the applicant to satisfy the Court that:
53.1.
the applicant is acting in good faith ( Section 165( 5)(b)(i)); and
53.2.
the proposed proceedings demanded:
53.2.1.    involves a
trial of a serious question of material consequence to the company (
section 165(5)(b)(ii));
and
53.2.2.   are in  the
best interests of the company (section 165(5)(b)(iii))
54.
I have essentially dealt with the procedural requirements and
it
remains only to consider whether the substantive requirements of the
section have been met warranting the granting of the application
to
compel compliance with each of the five demands by way of derivative
action.
55.
Before dealing with each of the requirements in the section
in the
light of each of the demands, I must first deal with the preliminary
points raised by Mr Bham SC.
56.
The first preliminary issue raised by Mr Bham SC is that
it is
entirely inappropriate to employ section 165 (5) to enforce the
demands as it is, by virtue of the nature of the demands,
akin to the
respondent seeking leave to sue itself on behalf of itself. In
furtherance of this argument he submitted that the applicant
had
employed section 165 (5) to get around the more stringent
requirements of section 163 to declare the relevant directors
delinquent.
57.
In the first place, I do not believe that this is an instance
of the
oppression of minority shareholders and therefore that section 163
would be applicable. In any event, I do not accept that
section 165
cannot be properly used in the current context, particularly where it
is averred that it is being invoked to promote
good corporate
governance, which at least covers the first four demands.
58.
A derivative action is available to shareholders and directors,

including minority shareholders, who are not restricted to redress in
terms of section 163 of the Act to ensure minority protection
where
the majority abuses their powers of control over the affairs of the
company. It is available to protect the legal interests
of the
company. The director or shareholder derives his right of action from
that of the company to redress wrong done to the company.
[14]
59.
However, the Courts will not generally interfere with the internal

management of the company where the majority acts lawfully as the
principle of majority rule is that the shareholders of a company
are
bound by the lawful decisions of the majority on the affairs of the
company  (
Sammel v President Brand Gold Mining Co
1969
(3) SA 629
A at 678 )
60.
It is not an instance of the company suing the company as contended

by Mr Bham SC, but a case of the company seeking redress against
those who control the company in the interests of the company.
In
this respect, a shareholder invoking his rights to bring a derivative
action in the name of the company seeks to protect the
company’s
rights, not his rights
qua
shareholder. Where the wrong is
done to the company, the proper plaintiff to redress the wrong is the
company itself and not the
shareholders, as the company is a distinct
legal entity from its shareholders.
[15]
61.
As was explained by Lord Davey in
Burland v Earle
[1902] AC
83(PC)
at 93
“
..in order to redress a wrong
done to the company …the action should prima facie be brought
by the company itself
”.
62.
The company derives its powers to commence litigation from
section
66(1) of the Act which provides that, subject to the Memorandum of
Incorporation, the business and affairs of a company
must be managed
by the board, which has the authority to exercise all the powers and
perform any function of the company, which
includes whether to embark
upon litigation. Thus the company itself is generally the proper
plaintiff to bring a legal action.
63.
But as was explained by MF Cassim in her article in the South
African
Law Journal, The Statutory Derivative Action Under the
Companies Act
of 2008
: The Role of Good Faith
[16]
,
this rule may :
“
give rise to problems and may
be the cause of injustice and inequity. The potential for abuse
arises where the wrongdoers who commit
a wrong against a company are
the directors themselves; …. The classic case or the genesis
of the derivative action is where
the alleged wrongdoers who have
harmed the company are the controllers of the company, so that the
wrongdoers subsequently use
their control to prevent the company from
instituting legal proceedings against them to remedy the wrong that
they themselves have
perpetrated against the company. The danger is
particularly acute when the wrongdoers have control of both the board
of directors
as well as the shareholders in general meeting…..-
so that the wrongdoers are able to exploit both their dominant
position
on the board as well as the shareholders in general meeting
to frustrate any decision or resolution to institute legal
proceedings
against them. For this purposes, the wrongdoers need not
even hold a majority of the company’s voting right themselves;
the
spectrum could extend to control of the majority of the votes
held in combination by the offending directors themselves and those

voting with them as a result of their influence, support, or simply
because of apathy. This is the classic case for a derivative
action.”
64.
Thus, the present case constitutes a classic case for the invocation

of the statutory derivative action contained in
section 165.
It is precisely where the party against whom the action is sought to
be brought is not a third party, but those who
control the affairs of
the company, that the derivative action is required to protect the
company from those who control the running
of its affairs.
65.
This can be no better explained than by Lord Denning in
Wallersteiner
v Moir (No 2)
[1975] All ER 849
(CA) at 857:
“
The [proper plaintiff] rule
is easy enough to apply when the company is defrauded by outsiders.
The company itself is the only person
who can sue. Likewise, when it
is defrauded by insiders of a minor kind, once again the company is
the only person who can sue.
But suppose it is defrauded by insiders
who control its affairs-by directors who hold a majority of
shares-who then can sue for
damages? Those directors are themselves
the wrongdoers.
If a board meeting is held, they will not
authorize proceedings to be taken by the company against themselves.
If a general meeting
is called, they will vote down any suggestion
that the company should sue themselves. Yet the company is the one
person who is
damnified. It is the one person who should sue. In one
way or another, some means must be found for the company to sue.
Otherwise
the law would fail in its purpose. Injustice would be done
without redress
.”
(These remarks  are also
of some import to Mr Bham’s second preliminary point dealt with
below).
66.
In this manner, the common law derivative action has given
protection
to minority shareholders to remedy a wrong to the company, which
would not be remedied by management because they are
the wrongdoers
themselves. It enables them to seek redress, in the name of the
company, against its own management through which
it, as an
artificial juristic person, can only act. In this respect, the
derivative action is not only a tool to protect minority
shareholders
but is a fundamental tool to enforce good corporate governance which
is a central tenant of several of the demands
sought to be enforced
by way of derivative action in the current application.
[17]
This is not a case of the company suing itself but rather a means of
controlling its management.
67.
Significantly, the statutory derivative action enshrined in
section
165
does not merely serve to protect the interests of minority
shareholders prejudiced by the actions of the majority, but confers
relief to all shareholders and to directors of the company seeking to
enforce good corporate governance in the interests of the
company as
contended by the applicant. Indeed, as set out above, it even extends
to a person whose legal right has been infringed
where it is
necessary and expedient to enable such person to sue in the name of
the company to protect that right.
(section 165
(2)(a)(b) and (d)).
20
0%">68.
Mr Bham SC seems to suggest that the latter is the primary
purpose of
the section, which he avers is not designed to allow the company to
essentially sue itself where it seeks to control
its directors.
However, this is plainly not the case as it is only where the
derivative action sought to be instituted is aimed
at outsiders or
third parties that the presumption in
section 165
(7) operates to
make the institution of such proceedings more difficult. This
presumption expressly does not apply where it is
sought to be brought
in circumstances like the present to reign in directors who it is
averred are acting contrary to the interests
of the company by
failing to adhere to the principles of good governance.
69.
That the section is an appropriate tool to enforce corporate

governance was sanctioned by the Ontario Court of appeal in
Richardson Greenshields of Canada Ltd v Kalmacoff
[1995]BLR
(2d) 197 (CA) at 205 where it was emphasized that an important
purpose of a derivative action is that :
“
it helps guarantee some
degree of accountability and to ensure that control exists over the
board of directors by allowing shareholders
the right to bring an
action against directors if they have breached their duty to the
company
”.
70.
Similarly the US Courts have stressed that the purpose of a

derivative action is not merely to compensate the company but to
deter future misconduct by directors and ensure accountability
of the
directors and managers  of the company to the company and its
shareholders. (
Diamon v Oreamuno
24 NY 2d 494
).
71.
Cassim,
op cit
opines:
“
The derivative action could
potentially be very useful in promoting good corporate governance in
South African law, provided that
it is given a full life as an
effective remedy by which shareholders may hold corporate management
accountable and punish managerial
misconduct”.
In light of these vital purposes of
the derivative action, the courts should not impose artificial
confines on its availability.
Without effective mechanisms to enforce
the fiduciary and statutory duties of directors and prescribed
officers, directors would
be immune from legal control and
accountability…. For the new statutory derivative action to
play a useful role as a watchdog
in policing boards of directors, it
must be given teeth by the courts by means of a liberal and robust
interpretation.
”
[18]
72.
I propose to give it such teeth in line with the stated purpose
of
the Act set out in section 7, inter alia, to encourage high standards
of corporate governance (section 7(b) (iii)) and to encourage
the
efficient and responsible management of companies, which the Court is
obliged to have regard to in making an Order in terms
of the Act
(section 158 (b) (ii)).
73.
Sufficient safeguards are in place to prevent abuse in the
use of the
section by affording companies a right to set aside a demand made
that is frivolous or vexatious and brought, not in
the interests of
the company, but rather, to harass management ( section 165 (3) ).
74.
Where this is the case, the Court will not grant leave to bring

derivative proceedings against the directors or management in terms
of section 165 (5) and judicial oversight thus plays an important

role in preventing the section being abused. It is precisely to
prevent such abuse that the legislature has placed an onus on the

applicant to satisfy the court that the application is brought in
good faith and is in the interests of the company dealt with
by me
below.
75.
Indeed, in a recent judgment,
Larrett v Coega Development
Corporation (Pty) Ltd  and 2 others
in the East London
Circuit Local Division under case no EL 1139/2013 ; ECD 2639/2013
decided on 13 March 2015, Stretch J considered
whether or not section
163 of the Act was sufficiently wide to grant the court the power to
authorize the institution of an action
by the company as against a
third party where such institution has not been duly authorized by
the Board of Directors of the company.
76.
The court considered  the argument that this could not
be the
case as:
76.1.
Firstly, there is a separate section in the Act, namely section
165, which
has been designed to deal with this very situation and it
could not have been contemplated by the legislature that section 163
would afford the court such parallel powers; and
76.2.
Secondly, that section 163 is designed to deal more with the
internecine strife
amongst shareholders and directors of the company,
and not with its external relations with third parties.
77.
The Court held at paragraph [14]]:
“
After consideration of the
subsection, I am of the view that it was not contemplated by the
legislature that the broad powers granted
to the court by section
163(2) incorporate the power to authorize the institution of an
action against a third party in the absence
of a proper resolution to
that effect. It seems to me that the
legislature has
specifically designed section 165 for the very purposes of securing
the rights of someone such as the applicant
in the present
circumstances whilst at the same time ensuring the rights of the
company and those of the third party concerned
are properly taken
into account
. Extensive procedures have been created by
that section towards these very ends, such as subsection 16[5](4)(a)
which provides
that the company must (upon a demand being made to
commence or continue legal proceedings), appoint an independent and
impartial
person or committee to investigate the matter and to report
to the board on various aspects including the probable costs that
would
be incurred.
There are a number of checks and
balances built into a reasonably extensive section the ultimate
purpose of which is to create a
form of statutory derivative action.
Having gone to all this length to create such a vehicle for
derivative actions, it seems to me that the legislature could never

have contemplated that section 163 would allow, in effect, a
derivative action on the part of a person in the position of the
applicant.
[15] This view is supported by
Henochsberg  where the following is stated
[with regard to
section 163]
:
‘
Wide though they are, the
powers which are committed to the Court do not include the power to
‘authorize’ shareholders
to institute action in the name
of the company.’ ”
78.
This makes it clear that in circumstances like the present,
the
appropriate section to invoke is indeed section 165 and not 163 which
disposes of Mr Bham’s first preliminary point.
79.
Mr Bham’s second preliminary argument, that the current
dispute
should more properly be dealt with by proposing a resolution to the
Board which can be considered and voted upon, can also
be disposed
of. I accept Mr Brett SC’s submission that this would have
served no purpose in that the respondent rejected
the applicant’s
proposal for discussion at Board level at a meeting to be convened
out of hand
[19]
.
Any attempt by the applicant to pass a resolution to this effect
would have been quashed by those against whom the demands were

directed. To call such a meeting and go through the motions
would have been an exercise in futility. In this respect, I make

reference to the salutary comments of Lord Denning quoted by me
above.
80.
I am thus satisfied that the applicant has
locus standi
and
that section 165(5) is an appropriate means to secure enforcement of
the demands aimed at the enforcement of good governance
of the
company which, as I will demonstrate , would at least cover the
first to fourth demands . Whether it may appropriately
be used to
enforce the fifth demand aimed at reinstating the Zastrospace
contract is another matter with which I will deal below.
81.
This, having been decided I propose to deal with the requirements
for
relief in terms of section 165 (5) in turn and then to examine
whether they have been satisfied with regard to each or the
demands.
82.
The onus is on the applicant to satisfy the court, on a balance
of
probability, of his good faith and the fulfillment of the other
requirements set out in section 165(5)(b). (
Swanson v Pratt
[2002] NSWSC 583
;
(2002) 42 ACSR 313
at para 26 and
Mouritzen v Greystone
Enterprises (Pty) Ltd
2012 (5) SA 74
(KZD) at para [59]) .
83.
I propose first to deal with the question whether the demands
involve
a serious question of material importance to the respondent and
whether it is in the best interest of the respondent that
the
applicant be granted leave to take steps to enforce them. Thereafter,
I will deal with the question whether even if this is
established,
the applicant is acting in good faith in seeking to enforce the
demands made or whether he is acting for some collateral
purposewhich
would preclude relief.
84.
In this respect, the substantive requirements of section 165
(5) (b)
are interrelated: a matter which involves a serious question of
material importance is more likely to be in the best interests
of the
company to pursue. Similarly, it could be assumed that a matter that
satisfies these requirements is sought to be enforced
in good faith
unless the contrary appears.
The  best interests of the
company
85.
Mr Bham SC insisted that it is incumbent on the applicant to
show not
only, that the derivative action sought to be instituted may be in
the interests of the company but, that it in fact,
is
in the
best interests of the company. In this respect Mr Bham relied upon
the comments in
Swansson v Pratt
supra quoted with approval in
Mouritzen v Greystone Enterprises
supra at para [62], that it
must be established not that the proposed derivative action:
“
may be or appears to be, or is
likely to be, in the best interests of the company
but,
that it is in the best interests of the company
”.
86.
Mr Bham SC also sought to rely upon the presumption contained
in
subsection (7) that the proceedings are not in the best interests of
the company where the requirements set out in section 165(7)(c)
are
met, but only where the proposed proceedings are by the company
against a third party or by a third party against the company

(section 165 (7)(a)). This does not apply to proceedings by the
company against its directors.
87.
Section 165 (8)(a) specifically excludes from third parties,
and thus
the operation of the presumption, any applicant who is related or
inter-related to the company which must thus exclude
an application
by a shareholder, a director or trade union of the company . The
presumption, thus, must only apply to persons other
than those upon
whom
locus standi
is conferred in terms of subsection (2)(a)
(b) or (c) to whom leave is granted under subsection (2)(d).
88.
It is designed to cater for the situation only where the wrongs
are
committed by third parties or outsiders and not the management of the
company or its controllers against whom the controllers
of the
company decline to act because they are related parties or have some
or other association with the outsider ( as was the
case before
Stretch J in
Larrett v Coega development Corporation (Pty) Ltd
(
supra) )
.
89.
In this respect I point out that the requirements set out in

subsection (7) for the presumption to operate, are conjunctive and
not disjunctive and thus all the requirements must be met.

Thus, it is a prerequisite that the proposed proceedings involve a
third party rendering the application of the presumption inapplicable

in the present matter.
90.
The presumption that the action is
not
in the interests of the
company in these instances makes it substantially more difficult for
a derivative action to be brought
against an outsider and is not
designed to assist the respondent in an action like the present,
which is aimed at wrongdoings done
by its own directors where the
presumption has no application. This is a strong indication that the
legislature did not wish to
place too onerous a burden on an
applicant seeking to employ the section to enforce good corporate
governance.
91.
This does, however, that the section can be employed simply
for the
asking. On the contrary, the onus on the applicant to establish the
substantive requirements of the section provides an
important
safeguard and judicial oversight to prevent the abuse of the section
to unduly harass a company’s management for
a collateral
purpose, which is an aspect with which I will deal in some detail
below.
92.
Assuming in favor of the applicant, that each of the demands
is a
matter of substantial importance if they are in the interests of the
respondent, I propose now to consider whether enforcement
of each of
the demands is in fact in the interests of the respondent.
The first demand
93.
The essence of the first statutory demand is that there are

provisions in the shareholder’s agreement relating to Board
Committees which are in conflict with the provisions of the
Companies
Act and
King III
Report on Corporate Governance for South
Africa 2009
in so far as they relate to activities, authority and
quorate decision making processes.
94.
In paragraphs 20 and 22 of the demand it is stated that:
“ 20.
It is apparent that the shareholders agreement of UMK is in
conflict with the provisions of the Act and King III in relation to
the activities, authority and quorate decision-making processes of
the Board Committees. It is consequently bad in law thus rendering

void or voidable matters purportedly decided by them to the extent of
such inconsistencies
21
We further demand that all requisite legal and related steps taken to
declare all decisions
taken by any Board Committee of UMK in conflict
with the law as set out above null and void and of no force and
effect, in particular
those of the SIC, the Contracts and Purchasing
Committee and the Operations Committee since May 2013, and take all
legal and related
steps to unwind any legal obligations purportedly
created for UMK as a result  of such decisions’’.
95.
This would obviously include the decision to terminate the

Zastrospace contract.
96.
In this respect reliance is placed upon section 72 (1) and
(2) of the
Act which provides:
“
Board committees
72(1)
Except to the extent that the Memorandum of Incorporation of a
company provides otherwise, the board of a company
may-
(a)
appoint any number of committees of directors; and
(b)
delegate to any committee any of the authority of the board
.
(2)
Except to the extent that the Memorandum of Incorporation of
a company
, or a resolution establishing a committee,
provides
otherwise
, the committee-
(a)
may include persons who are not directors
of the company, but-
(i)
any such person must not be ineligible or disqualified to be a
director in terms of
section 69
; and
(i)
confirm the determination of the board; or
(ii)
no such person has a vote on a matter to be decided by the
committee
;
(b)
may consult with or receive advice from any person; and
(c)
has the full authority of the board in respect of a matter
referred to it.”
97.
Although Mr Bham put great emphasis on the fact that in terms
of
section 72 (2) the Act , a committee may include persons who are not
directors of the company, there is an important proviso
that no such
persons may not vote on a matter to be decided on by the committee.
Raimate, who was not a Board member, voted
together with the other
committee members to terminate the Zastrospace contract. The
resolution of the Board to ratify of this
decision was passed
ex
post facto
after the statutory demand complaining hereof was
delivered.
98.
The applicant, moreover, complains that the Board Committees
acted
autonomously and “
no longer in accordance with delegated
authority
” and that “
the board of UMK over time
effectively abdicated the business and affairs of UMK to the board
committees
”.
99.
Mr Bham avers that this is in accordance with both the shareholders

agreement and the respondent’s Memorandum of Incorporation, to
which section 72 of the Act is subject,  inasmuch as
:
99.1.
Sections 71 and 81 of the Memorandum of Association  provides:
“
79
The directors may delegate any of their powers to committees
consisting of such member or members of
the body as they think fit.
Any committee so formed shall in the exercise of the power so
delegated, conform to any rules that
may be imposed on it by the
director.
81
A committee may meet and adjourn as it thinks fit. Questions arising
at any meeting
shall be determined by a majority of votes of the
members at present
, and in the event of an equality of votes the
chairman shall have the casting vote.”
99.2.
Clause 12.1  of the shareholder’s agreement provides:
“
12.1
The board shall be entitled to delegate its powers to the
committees set out  in 12.2 and set at the committees as may be
incorporated
by the board from time to time,
which
committees may include representatives other than members of the
board
with requisite expertise in various designated
fields. Any committee so formed shall in the exercise of the
functions delegated
to them, conform to any rules that may be imposed
on that committee by the board.”
100.
In terms of section 15 (7) of the Act, where there is a conflict
between the
shareholder’s agreement and the Act, the Act
prevails which permits a non- director to sit on, but not make
decisions of
a committee.
101.
In terms of clause 12.2.4 of the Appendix to the Shareholder’s
Agreement,
the Contracts Purchasing Committee, which purported to
take the decision to terminate the Zastrospace contract, did not have
decisions
making powers.There it is made clear not only that in
assessing whether to procure a vendor, general commercial
considerations
must be taken into account, but also that such a
committee has no authority to make decisions itself but only to
determine and
make recommendations to the Board.
102.
From the transcripts of the interviews with the key players
conducted
by Badenhorst SC, I have little doubt that the
Contracts and Purchasing Committee purported to take the decision to
terminate the
Zastrospace contract itself and not merely to recommend
to the Board that it do so. It was only after Badenhorst SC expressed
the
view that this decision was invalid unless ratified by the Board,
that this was done on 19 November 2014 ( although I am mindful
that
the notice of this meeting was given on 7 November 2014 and  his
report was not served on the respondent until the date
of the
meeting. I can only assume that the respondent had insight into the
views expressed by him in his report before it was formally

delivered.)
103.
Whether these transcripts can properly be referred to by me where
there
has been an application to strike out such report and Mr Bahm
has indicated he does not wish to rely thereon, is debatable but need

not be decided by me in view of my finding on the papers before me
that a decision was improperly  taken at committee level
to
terminate the Zastrospace contract which could only be taken by a
duly constituted Board of the respondent on recommendation
by the
relevant committee.
104.
Although  in terms of section 163(2), the Court is given the
express power
to rewrite the provisions of the shareholders agreement
, there was no claim that I do so by the respondent.
105.
In addition, the Memorandum of Incorporation make it clear that
committees
must be presided over by directors where a committee makes
critical decisions. Decisions relating to procurement, and
axiomatically
termination, must by definition be critical decisions.
It follows that the Contract and Purchasing Committee does not have
any
decision making powers. Indeed, none of the committees have
critical decision making powers.
106.
Thus, although it may be correct that Ramaite may have validly
sat on
the various committees of the respondent, he was not entitled
to participate in any decision made by such committees which would

have rendered the Contract and Purchasing Committee’s decision
to terminate  the Zastrospace contract invalid, on the

assumption that his vote would have been necessary to render such a
decision quorate. But for its ratification, the decision taken
could
validly be attacked and set aside.
107.
I thus find that there was merit in the complaint regarding the
authority of
the Contracts Purchasing Committee to terminate the
Zastrospace Contract.
108.
Be that as it may, once ratified, the decision taken to terminate the
Zastrospace
contract was validated and there is thus no cognizable
cause of action to unwind the decision to terminate same. It is
significant
that Zastrospace itself has not sought to dispute the
validity of the termination of its contract.
The second demand
109.
The second demand is in two parts. The first is aimed at the
transgressions
by Messrs Kriek, the CEO, of the respondent and
Ramaite in repudiating the applicant’s direction, as Chairman
of the respondent,
to the company secretary that all committees be
suspended. The second is aimed at Lourens and the consultancy
agreement he has
procured for his close corporation, Pangolin CC.
110.
The applicant avers that contrary to his instruction, Kriek and
Ramaite had
reconvened meetings of certain committees and in so doing
had acted.. “
in a rogue and unauthorized manner by
willfully defying the instructions of the Chairman of the Board of
UMK…
”
111.
This is premised on the assumption that the applicant was entitled,
qua
Chairman, without reference to the other directors, to
instruct the suspension of all committees.
112.
The applicant has, however, not been able to demonstrate which
provision of
the Shareholder’s Agreement conferred such a power
on him to give such an instruction. Indeed, in terms of clause 11.1
of
the Shareholders Agreement, the Chairman does not have a casting
vote at any meeting of the shareholders or directors and control
over
the management of the respondent was vested in the CEO.
113.
Moreover, in view of the fact that the business of the respondent is
essentially
conducted through committees, the said persons were
probably justified in ignoring the instruction, which would, had it
been implemented,
have effectively hamstrung the respondents
business, which could never be in its best interests.
114.
I thus do not find that there is any basis to interdict Kriek and
Ramaite from
convening and holding committee meetings subject to the
caveat that I have found that no decisions may be taken by such
committees
by non-Board members, like Ramaite.
115.
Accordingly, I find that this complaint does not have merit.
116.
Moreover, on 11 August 2014, the respondent’s attorney
addressed a letter
to the respondent recording the applicant’s
suspension as a director and Chairman of UMK on 21 July 2014 to which
all the
directors of the respondent acquiesced. If this decision was
indeed validly taken, the applicant would have had no authority, even
qua
Chairman, to direct the suspension of Board Committee
meetings.
117.
Related to this aspect of the second demand is the demand that
Kriek be interdicted and restrained from acting as CEO of the
respondent and that he be removed as CEO forthwith, alternatively
be
suspended pending the outcome of an enquiry into his averred
misconduct detailed in paragraph 33.4 of the demand. Included in

these averments of misconduct is the repudiation by Kriek and Raimate
of the applicant’s instruction to suspend all committee

meetings, which I have found he had no authority to order.
118.
With regard to the remaining complaints of misconduct against Kriek,
whilst
there may be merit in them, there is insufficient evidence
before me to establish this.
119.
However, I am mindful that all that is required is that a legally
cognizable
cause of action be established and that the threshold in
this regard is not high ( an aspect with which I will also deal
below).
I do, also, take cognizance of the fact that it is only
demanded that Kriek be suspended pending the outcome of disciplinary
proceedings
to be taken against him on these bases and it is thus not
necessary for me to decide whether the attacks on him are justified
but
only if they are sufficiently established to warrant his interim
suspension.
120.
Even if this were the case, should these complaints be found to be
made as
part of a personal vendetta against Kriek for the part he
played in terminating the Zastrospace contract, the applicant would
not
be granted leave to pursue same. In this respect, it is
significant that one of the complaints leveled against Kriek is aimed
at
the validity of the   decision  taken by him at the
Contracts Purchasing Committee meeting to terminate the Zastrospace

Contract and to procure the allocation of another service provider,
AMC  which was not BEE compliant
[20]
. This is tied up with the question whether the Zastrospace contract
was indeed itself BEE compliant which will be dealt with by
me
below.
121.
However, it is important to note at this stage that I suspect that it
is
the complaint about the termination of the Zastrospace
contract that is essentially behind this aspect of the second demand
which,
if not pursued in good faith in the interests of the
respondent, would serve to negate the second demand, no matter how
meritorious.
122.
I have indicated above my misgivings regarding the Pangolin
Consultancy Agreement
and an investigation into same may well be
warranted. This is so particularly as Lourens would appear to be
somewhat conflicted.
It is unlikely that the applicant would be able
to secure a resolution to this effect by the Board of the respondent,
notwithstanding
its resolution to conduct a forensic investigation
into the Zastrospace contract. Again, no matter how meritorious this
may be,
should such an investigation be pursued as part of a personal
vendetta against Lourens, the requirements to pursue such an
investigation
would not be established.
The third demand
123.
The third demand is directed at Ramaite as a consequence of his
participation
on the Social Investments Committee and the Contracts
Purchasing Committee, without being a member of the Board, and his
continued
participation in the face of the applicant’s
instruction to suspend all committees.
124.
As I have said, although I accept that Ramaite may, in terms of the
Act and
the Memorandum of Association, sit on board committees, he
may not be party to any decisions purportedly taken or
recommendations
made by such committees.  This applies in
particular to his participation in the decision to terminate the
Zastrospace contract
and the decision to appoint AMC allegedly in
breach of the duties of the Social Investments Committee as set out
in clause 8 to
appendix 12.2.3   to the Shareholders
agreement.
125.
In support of this demand the applicant seeks also to rely upon
clause 12.4
of the shareholders agreement  and King  III :
125.1.     Clause
12. 4 of the shareholders agreement requires members of committees to
comply fully with the
requirements of the
Companies Act and
King III;
and
125.2.     Paragraph
131 of King III provides that :
“
Committees,
other than risk committees should only comprise members of the board
and should have a majority of non-executive directors.
The majority
of the non-executive directors serving on these committees should be
independent. Committees should be chaired by
independent
non-executive directors, other than the executive committee which is
ordinarily chaired by the CEO”.
126.
As I have said, in so far as Raimate purported to take a decision to
terminate
the Zatrospace contract, his actions would be unlawful and
contrary not only to the appendix to the Shareholders Agreement, the

Act and King III. However, the Act is subject to the Memorandum of
Association which permits such conduct and trumps the Act and
the
Shareholders Agreement.
127.
There is thus no merit in the complaint made that Ramaite sit on
Board Committees
but there is merit in the complaint that such
committees make decisions as they are only entitled to make
recommendations.
The fourth demand
128.
The fourth demand is directed at precluding  Ramaite from
purporting to
act as deputy CEO when he is not even a member of the
Board. Mr Isaac Letshalo (“Letshalo”) was appointed the
deputy
CEO by the Board in February 2013 with effect from 1 April
2013 to replace  Ramaite. Despite this, it is averred that
Ramaite
refuses to relinquish his position as deputy CEO and purports
to act as such.
129.
This has not been countered by the respondent save to state that he
is the
de facto
co- CEO with Letshalo, if not legally
appointed as the deputy CEO, which is accepted by the other
directors.
130.
The office of CEO, as is that of deputy CEO, is a substantial
position with
wide ranging powers which cannot simply be assumed. In
terms of clause 11.2 of the Shareholders Agreement, the CEO is
responsible
for the day to day management of the respondent and when
read with paragraph 60 of King III, this includes ensuring that the
respondent
comply with all relevant laws and good governance
principles.
131.
Accordingly, in so far as Ramaite concedes that he acts as deputy
CEO, albeit
in conjuction with Letshalo, this is not authorized and
there is thus merit in this demand. The shareholder’s
agreement,
moreover , does not contemplate a deputy CEO.
132.
However, again, if it is found that this complaint, albeit worthy of
merit,
is directed at  Ramaite because he was party
to the termination of the Zastrospace contract, the applicant’s
bona fides
in pursuing this demand may be questioned and would
preclude relief to pursue this demand.
The fifth demand
133.
The applicant admits that the retention of the  Zastrospace
contract cannot
be justified on commercial grounds. He also admits
that Zastrospace itself would not have a claim in law to enforce its
contract;
indeed it has made no attempt to do so. The applicant has
not been able to establish any legal obligation to contract with
Zastrospace
other than an unsubstantiated averred understanding that
if it met its crushing targets, a fixed term contract would be
concluded
with it. There is no substantiation for this.
134.
It is for this reason that the applicant has sought to pin its case
for the
continuation of this contract on the averred obligation of
the respondent to promote the interests of the community in line with

broad economic empowerment principles required in terms of the
Shareholders Agreement, the Act and King III.
135.
This, the applicant   argues is in accordance with good
governance.
This, so it is argued, includes complying with the BEE
and social responsibility provisions contained in section 7 of the
Act
to promote high standards of corporate governance as
appropriate, given the significant role of enterprises within the
social and
economic life of the nation. This is  in accordance
with the principles of good governance including fairness,
accountability,
responsibility and transparency recommended in
paragraph 5 of King III and clause 12.4 of the Shareholders Agreement
which places
a fiduciary duty on the directors of the respondent to
promote the interests of the community. This, the applicant insists,
the
Zastropace contract was designed to promote.
136.
Furthermore, so it is averred, the respondent submitted a Mining Work
Programme
and Social and Labour Plan (“SLP”) which was a
precondition for its application for  its mining rights which
included
aligning local economic development projects to the
municipal intergrated development plans, supporting the recruitment
of suitable
local labour, encouraging their training and
enhancing local job creation .
137.
Adhering to these undertakings, the respondent set up a Social
Investment Committee,
which  in terms of appendix 12.2.3 to
provide overall guidance to the respondent on its social investment
programme . There
such committee is required to:
137.1.      guide
the implementation of the social investment programme and the
allocation of resources
to deserving causes:
137.2.      identify
focus areas for social development and make recommendations to the
Board of Directors;
137.3.     identify
projects that will serve the needs of the communities within which
the company is conducting
business;
137.4.     be
responsible for promoting the company’s profile and image
within the communities;
137.5.     ensure
the alignment of social investment projects with the company’s
business objectives;
137.6.     ensure
that all projects undertaken are sustainable and will empower,
develop, uplift the communities
concerned;
137.7.     develop
guidelines for allocating resources to communities in terms of the
social investment program.
138.
Not only did the respondent undertake to adhere to these social
responsibilities
in tendering for its mineral rights, but, it is
argued, that adherence with these duties is a precondition for the
continuation
of such right.
139.
In terms of the executive summary of the Shareholders Agreement, the
respondent
undertook to endeavor to provide for local procurement
opportunities where feasible and to grow the potential for utilizing
local
service providers via its procurement processes. Pursuant to
this obligation, the respondent formulated a procurement plan that

aimed at providing historically disadvantaged individuals and local
service providers with a preferred supplier status. In this
respect
it was obliged to evaluate the BEE status of all prospective service
providers.
140.
Thus, it is argued that the applicant as a director and shareholder,
is entitled,
in the interests of good corporate governance (which
must axiomatically be in the interest of the respondent), to ensure
that the
Zastrospace contract, which was BEE compliant and allegedly
furthered these objectives, was not replaced with the AMC contract,

which was not BEE compliant , and did not.
141.
In this respect the applicant stresses that the respondent is a
special purpose
vehicle to achieve the upliftment of all stakeholders
and participant disadvantaged persons.
142.
This, it is argued, precludes the directors of the respondent from
terminating
the Zastrospace contract on purely commercial grounds,
which it is stated was never the basis upon which the contract was
awarded
to Zastrospace in the first place.
143.
Mr Bham argued that it was an absurd proposition to suggest that the
directors
of a company have any other fiduciary duty but to make a
profit for the shareholders of the company that they serve. Indeed,
such
a duty is endorsed in the Act itself.
144.
However, although I accept that commercial considerations are
paramount in
properly running a company, there is, in light of the
provisions relied upon by the applicant, and in particular section 7
of the
Act, an element of social responsibility in executing that
function. This would include preferring a BEE compliant service
provider
over  one that is not.
145.
Mr Bham SC also argued that good corporate governance demands that
the business
of the respondent be conducted for a profit and on sound
commercial grounds. He also states that a nefarious right to be
appointed
as a contractor is not sufficient, and that a legal right
to the enforcement of the Zastrospace contract must be established,
relying
on the express wording in section 165(2) quoted above. There
it is made clear that a statutory demand may only be served to
protect
the “
legal interest
” of the company.
146.
There is much to be said for this argument. However, although it is
accepted
that Zastrospace would have no legal right to enforce its
contract, it is not the third party’s right that is relevant
but
rather that of the company itself. The respondent would have a
legal interest to protect its mining right, which the applicant
maintains is in jeopardy as a result of the cancellation of the
Zatrospace contract. The applicant maintains that as the advancement

of the community was a precondition to the granting of the
respondent’s mining rights, the maintenance of BEE compliant
contracts is central to the preservation of such right.
147.
Subject to
section 47
of the
Mineral and Pretoleum Resources
Development Act no 28 of 2002
,the respondent’s a mining right
may be cancelled or suspended if it fails to honor or carry out any
arrangement or agreement
or undertaking including the undertaking
made by it in terms of the Broad Based Socio Economic Empowerment
Charter and Social and
Labour Plan on which the Minister relied for
the granting of the Mining right. The applicant avers that as
compliance notices have
been served on the company, the cancellation
of the Zastrospace contract may put its mining right in jeopardy.
148.
As I have said, the timing of these notices is somewhat suspect, as
are the
dates upon which they purport to be signed. Bearing in mind
the onus on the applicant, the delivery of these notices is a far cry

from establishing that the respondent’s mining rights are
indeed in jeopardy; a supposition that the cancellation of the

Zastrospace contract might place the respondent’s mining right
in jeopardy is not sufficient no matter how low the threshold
of
proof may be dealt with below.
149.
There is no evidence what the results of the scheduled inspection was
or that
the cancellation of the Zastrospace contract put the
respondent’s mining right in jeopardy, notwithstanding that the
proposed
inspection was scheduled to have taken place on 2 December
2014.
150.
In any event, in the scheme of the respondent’s business, it
has not
been established that the Zastrospace contract is a serious
question of material consequence to the respondent as required in
terms
of subsection (5) (b) (ii) where it is not cardinal to the
preservation of the respondent’s mining right and where it has

not been demonstrated that it  provides substantial benefit to
the local community .
151.
As I have said, where it is established that the preservation of the
Zastrospace
contract is not justified in the name of good corporate
governance or to preserve its mining rights, this calls into question
the
bona fides
of the other demands made in the name of
good corporate governance, particularly where it is suspected that
they were only made
as a consequence of the cancellation of the
Zastrospace contract.
152.
In this respect, the question arises whether the respondent has
satisfied
the Court that the application has not been brought for the
collateral purpose of reinstating the Zastrospace contract.
Section
165(5)
makes it clear that even if it can be established that the
demands are of material significance and are in the best interest of

the respondent, leave will not be granted to enforce them unless it
is shown that the application if brought in good faith. This,
is a
self standing requirement and not merely one of the factors to be
taken into account as is the case with the equivalent English

legislation.
153.
The requirement of good faith, thus, can be a determinant, which, if
not established,
may be fatal to an application under the section.
This makes the question of onus with regard to the requirement of
good faith
crucially important, a fact fully appreciated by Mr Brett
who sought to persuade me not only that the threshold level of
evidence
the applicant was required to produce to establish good
faith was a low one, but also that good faith should be presumed
unless
there is cogent evidence to the contrary which it was the onus
of the respondent to produce. I have a number of difficulties with

these propositions, as I will demonstrate below.
Good Faith
154.
The South African statutory derivative action has been substantially
influenced
by that in Australia, Canada and England.  The
leading Australian case of
Swansson v RA Pratt Properties Pty Ltd
[2002]
NSWSC
583
,
quoted with approval in
Mouritzen v Greystone Enterprises (Pty)
Ltd
2012 (5) SA 74
at paragraph [51]
,
laid
down that there are two interrelated questions in determining good
faith. First, the applicant must honestly believe that
a good cause
of action exists and that it has a reasonable prospect of success.
As  a converse of this, the applicant
must also show that
the application is not brought for a collateral purpose. In this
respect, the requirements of good faith in
subsection (5) are a
corollary of the requirements of bad faith in subsection (3) where
not only must it ne shown that the demand
is frivolous and vexatious,
but also that it is without merit.  The merits of the demand are
thus a crucial aspect of the
requirement of good faith and the
absence thereof.
155.
In
Swanson v RA Pratt Properties Pty Ltd
(
supra)
, it
was held that the applicant may be disbelieved if his proclaimed
interest in the pursuit of the action is so unreasonable that
no
reasonable person in the circumstances of the applicant would hold
such a belief. In this respect the first part of the test
of good
faith is not purely a subjective one, but has an objective element
and is tied up with the requirement that the demands
have merit and
are in the interests of the company.
156.
In this resect, the requirement of good faith is also inextricably
tied up
with the other substantive requirements in the subsection.
Where it is not shown that the proposed action has merit (in the
sense
that a legally cognizable cause of action exists), and is in
the interests of the company , it would be harder for the applicant

to satisfy the Court that the application is brought in good faith as
no reasonable person would in such circumstances want to
pursue such
an action. Conversely, where the derivative action appears to have
merit and is in the interests of the company, it
would more readily
be accepted that the applicant is acting in good faith unless there
are objective circumstances to establish
otherwise.
157.
But this does not mean that there is lesser threshold required to
establish
good faith than required to establish the other
requirements of the section which must be established by the
applicant on a balance
of probabilities .
158.
There is no reported case directly on  this issue. However, Mr
Brett SC
referred me to the comments of  Myburgh AJ in
Amdocs
SA Joint Enterprise (Pty) Ltd v Kwezi Technologies
2014 (5) SA
532
GJ concerning the requirements that the company needs to satisfy
to set aside a
section 165(2)
demand set out in terms of
section 165
(3). He argued, on the strength of these comments, that a
lesser standard of proof is required to be established for relief
under
section 165
(5), relying also upon the article on this topic by
MF Cassim, The Statutory Derivative Action Under the
Companies Act of
2008
: The Role of Good Faith, published in the South African Law
Journal
[21]
,
on whose research I have substantially relied in writing this
judgment.
159.
On the strength of these authorities dealt with by me below, Mr
Brett
SC argued that to establish good faith, all that need be
established was that there was some prospect of success in the sense
of
a legally cognizable cause of action. If this is established, so
he argued, good faith should be presumed, in the absence of evidence

to the contrary by the respondent, in essence shifting an evidentiary
burden, if not the burden of proof in this regard to the
respondent.
160.
In Mouritzen’s case (
supr
a)
Ndlovu J, dealing with an application under
section 165(5)
to
bring a derivative action, dealt with the foreign legislation upon
which our statutory derivative action is based. Relying on
Swansson
v Pratt
(
supra
),
he explained the significance of the   requirement of good
faith as follows:
“
[58] It is
necessary to determine whether, on the facts of this case, the
acrimony between these two brothers was the cause of the
applicant
seeking to have proceedings instituted against the second respondent
in the name of the company. It is important that
there must be a
demonstration of good conscience and sincere belief on the existence
of reasonable prospects of success in the
proposed litigation and,
therefore, absence of ulterior motive, on the part of an applicant.
In Swansson v Pratt the
leaned Judge stated:
“
[I]n my opinion,
there are at least two interrelated factors to which the Courts will
always have regard to in determining whether
the good faith
requirement of
s.237(2)(b)
is satisfied. The first is whether the
applicant honestly believes that a good cause of action exists and
has a reasonable prospect
of success. Clearly, whether the applicant
honestly holds such a belief would not simply be a matter of bald
assertion: the applicant
may be disbelieved if no reasonable person
in the circumstances could hold that belief. The second factor is
whether the applicant
is seeking to bring the derivative suit for
such a collateral purpose as would amount to an abuse of process.
These two factors will in
most, but not all, cases entirely overlap: if the Court is not
satisfied that the applicant actually holds
the requisite belief,
that fact alone would be sufficient to lead to the conclusion that
the application must be made for a collateral
purpose, as to be an
abuse of process. The applicant may, however, believe that the
company has a good cause of action with a reasonable
prospect of
success but nevertheless may be intent on bringing the derivative
action, not to prosecute it to a conclusion, but
to use it as a means
for obtaining some advantage for which the action is not designed or
for some collateral advantage beyond
what the law offers. If that is
shown, the application and the derivative suit itself would be an
abuse of the Court’s process: Williams
v Spautz
[1992]
HCA 34
;
(1992)
174 CLR 509
,
at 526. The applicant would fail the requirement of
s.237(2)(b).
”
[59]
In my view, factual proof of any pre-existing personal animosity
between the parties, such as in the present instance, does
not per
se serve as conclusive proof that any person referred to in
section 165(2) of the Act is not acting in good faith
in serving a
demand under that subsection, or instituting an application under
section 165(5). However, personal animosity between
the opposed
parties
is
an
important factor which the Court will always take into account
together with other relevant evidentiary material presented before

the Court in a given situation, in determining whether or not an
applicant has, on a balance of probabilities, satisfied the ‘good

faith’ requirement. In Swansson v Pratt the Court
pointed out:
“
To
take another example: a derivative action sought to be instituted by
a current shareholder for the purpose of restoring value
to his or
her shares in the company would not be an abuse of process even if
the applicant is spurred on by intense personal animosity,
even
malice, against the defendant: it is not the law that only a
plaintiff who feels goodwill towards the defendant is entitled
to
sue: see eg Dowling v Colonial Mutual Life Assurance Society
[1915]
HCA 56
;
(1915)
20 CLR 509
at
521-2;
21
ALR 425
at
433; IOC Australia Pty Ltd v Mobil Oil Australia Ltd
[1905]
HCA 28
[1905] HCA 28
; ;
(1975)
11 ALR 417
,
at 426-7. On the other hand, an action sought to be instituted by a
former shareholder with a history of grievances against the
current
majority of shareholders or the current board may be easier to
characterize as brought for the purpose of satisfying nothing
more
than the applicant’s private vendetta. An applicant with such a
purpose would not be acting in good faith.”
[60] Indeed, there is no
requirement in law that the directors of a company need to be friends
or even to be in talking terms. What
is of utmost fundamental
importance, amongst others, is the fiduciary duty which they
individually owe to the company of which
they are the directors. This
aspect of a director’s responsibility vis-à-vis his
or her company is equally
relevantly important in relation to this
application, in that such fiduciary duty entails, on the part of
every director, the same
duty as required of an applicant under
section 165(5)(b), namely, to ‘act in good faith’ and ‘in

the best interests of the company’. Recently, in Da
Silva v CH Chemicals
39
the
Supreme Court of Appeal (per Scott JA) reminded all concerned
that “[i]t is a well-established rule of
company law that
directors have a fiduciary duty to exercise their powers in good
faith and in the best interests of the company.
”
(my
emphasis)
161.
In
Amdoc’s
case
(
supra
),
Myburgh JA dealt with the converse situation where the onus was on
the company to establish the absence of good faith in order
to set
aside a demand on the basis that it was vexatious, frivolous and
without merit in terms of section 165 (3).
With regard to the latter requirement, Myburgh AJ held that an
applicant for relief in terms of s 165(3) was entitled to succeed
if
he was able to demonstrate that the demand was without merit in the
sense that it could not succeed- If it appeared that the
demand was
misdirected in the sense that it was either bad in law or was at odds
with the facts to the extent that the proposed
action could not
succeed, then it could properly be set aside. In this respect, the
applicant company bore the onus and the absence
of merit had to be
clearly demonstrated.
This is in direct
contradistinction to the first part of the good faith requirement in
section 165(5) where only a legally cognizable
cause of action need
be shown which if, established, it will be assumed is pursued in good
faith unless no reasonable person would
possibly seek to pursue it.
162.
Myburgh JA, distinguished the
Australian case of
Swansson v Pratt
( supra) on the basis that the Australian statute differed from the
South African one in as much as South African Court is obliged
to
interpret our legislation in line with the principles enshrined in
the Constitution which had a  central tenant, the promotion
of
accountability and access to the Courts  (at para [4]). He also
distinguished
Mouritzen
,
which had approved
Swansson v Pratt
on the basis that it dealt with subsection (5) and not (3) of the
Act. He found that :
[17] …. it seems to me that the
correct approach is to consider the gravamen and thrust of the demand
and to ask whether,
on the available evidence, the company
might
conceivably succeed in the envisaged action/s.
I
specifically say ‘might conceivably’ for it seems to me
that the issues of probability cannot properly be taken
into account
at this stage.
The threshold which a complainant has to cross is a
low one. Conversely, the onus and persuasion which an applicant for
relief in
terms of section 165(3) bears is a rather heavy one
”.
163.
Relying on these statements, Mr Brett SC
argued that the threshold was a low one and  in demonstrating
that the continuation
of the Zastrospace contract
might
be
delivering some benefit to the
community is as high as the onus the applicant has to discharge goes
in establishing that there was
conceivably a cause of action to
enforce the Zastrospace contract. He argued that there was no onus on
the applicant to show that
such contract in fact was for the benefit
of the community.
164.
Mr Brett also sought to persuade me that
once a cognizable cause of action is established, it was incumbent on
the respondent to
establish the absence of good faith by
demonstrating that the demand was brought for a collateral purpose as
to amount to an abuse
of the process.
165.
Analysing this argument in light of the two
stage approach to determining good faith espoused in
Swansson
v Pratt
, in essence what he suggests
is that the first element of good faith, upon which the applicant
bears the onus, is established
merely by showing that the respondent
might conceivably succeed in its derivative actions. This is a
relatively easy onus to discharge
166.
Once this is established, so it was argued,
the onus  shifts to the respondent to show that notwithstanding
this, the application
has been pursued for a collateral purpose, a
substantially more onerous onus to discharge, in essence, making no
distinction between
the onus under subsection (3) on a company
seeking to set aside a demand and that on it under subsection (5) to
resist an application
to sue in the name of the company.
167.
I  think that this takes the words of
Myburgh JA too far. It also serves to conflate the onus and the
requirements of subsections
(3) and (5) which the legislature has
made distinct. It also flies in the face of the express intent of the
legislature to place
the onus on an applicant wishing to institute a
derivative action to demonstrate good faith. As I have said, this is
an important
safeguard to prevent the section being abused to pursue
personal vendettas and advance collateral interests. Were good faith
simply
to be presumed unless the contrary is proved, these important
safeguards would be lost.
168.
To require an applicant wishing to
institute a derivative action to demonstrate his good faith would not
serve to deprive persons
seeking to protect the interests of the
company against bad corporate governance or discourage accountability
but rather serve
to protect the section against abuse. This is
particularly so where the onus to show the elements of good faith in
the sense required
in
Swansson v Pratt
is a substantially less onerous an onus
to discharge than that on a company wishing to set aside a demand
under subsection (3) which
involves establishing not only that the
demand is without merit but is also brought frivolously and
vexatiously. That is sufficient
safeguard to ensure that a legitimate
demand is not too readily quashed and set aside. That is sufficient
to ensure that accountability
and good corporate governance can
readily be enforced.
169.
The requirement of good faith subsection
(5)(b)(i) (in respect of which the person making the demand bears the
onus) is not simply
the corollary of the requirements in subsection
(3) ( in respect of which the company wishing to set aside the demand
bears the
onus. Although I accept that where an application is
vexatious or frivolous, this would demonstrate the absence of good
faith (
or bad faith), there is no  onus on the respondent to
disprove good faith ( proved simply by showing that there is some
conceivable
cause of action) by showing that the application is
vexatious or frivolous. On the contrary these words are not mentioned

in the subsection and it is made quite clear that the applicant
seeking relief under the subsection bears the onus to discharge
both
elements of good faith, including that the application has not been
brought for a collateral purpose. There is no onus on
the respondent
to establish this.
170.
I can not  accept is that on the mere
assertion of good faith , established, not by a demonstration of bona
fides, but rather
only by establishing that the respondent might
succeed in its action, the onus would shift to the respondent
to refute this
by establishing that the application has been brought
in bad faith in the sense that it has been pursued for a collateral
purpose.
The legislature has quite clearly placed a substantive
onus on an applicant seeking to bring a derivative action to show
that he is acting in good faith which requires his establishing both
elements of the requirement of good faith set out in
Swansson
v Pratt
. This is a substantive self-
standing requirement for relief.
171.
Mr Brett also sought to persuade me that
although the applicant bears the onus to prove good faith in the
sense outlined above,
there is a presumption to this effect which it
is incumbent on the respondent to rebut by tendering evidence to the
contrary.
172.
In this respect, Mr Brett SC relied on the opinions expressed by
Cassim op
cit at 521. Having regard to the approach in Australia and
Canada to their legislation, upon which our derivative action has
been
based, she argues that:
“
The
question arises as to the level of  evidence that is required to
establish good-faith. Must the applicant actually prove
that this
application is brought in good faith -in which case the onus of proof
is a weighty one- or will the courts  presume
that the applicant
is acting in good faith unless the facts and circumstances of the
matter show a lack of good faith? It is submitted
that the better
approach for the South African courts to espouse would be the latter
approach. Where a derivative action appears
to have merit and is in
the best interests of the company, it should be presumed that the
applicant is acting in good faith, unless
there are objective facts
and circumstances to establish otherwise. To require applicant to
prove his or her good faith positively
would be to impose a
restrictively heavy burden that would discourage prospective
applicants from seeking permission to litigate
to protect the
company’s legal interests. More importantly, it would also
gives rise to the problem of how applicant is to
prove his or her
good faith and what type of evidence would suffice, bearing in mind
that good faith is largely a subjective test
which depends upon the
applicants state of mind  or his  or her  honest
belief that the company has a good cause
of action. As I have
discussed above, although the proposed test for  good faith is
the subject of one, it is relative or
qualified by an objective
inquiry; if a reasonable person, in light of the objective
circumstances of the matter, could not reasonably
have believed that
the company has a valid  cause of action with reasonable
prospects of success, the applicants assertion
of his or her honest
belief  could stand to be rejected. This submission ( ie
that a South African applicant should
be presumed to be in good faith
unless there are objective acts and circumstances to the contrary) is
buttressed by considerable
authority and other comparable
jurisdictions, especially Canada and Australia. It is nonetheless
noteworthy that even in these
jurisdictions this issue has elicited
conflicting approaches.
In this regard, in
Canadian law, good faith has been held to exist where there is prima
facie evidence that the applicant has proper
motives, such as a
reasonable belief in the claim. The issue of good-faith is a question
of fact to be determined on the circumstances
of each case. Numerous
Canadian cases have adopted the view that the applicant will be
presumed to be acting in good faith where
the  proposed action
appears to have merit. The onus then shifts to the respondents to
show a lack of good faith for instance,
by showing that the applicant
is pursuing a private vendetta or some other collateral purpose.
However, there are other Canadian
decisions that have espoused a
different approach, and have ruled that a substantial onus lies on
the  applicant who must
prove positively  that he or she is
acting in good faith.
Similar trends may
be observed in Australian law. By  and large, the general
attitude of the Australian courts is that the
applicant is to be
regarded as acting in good faith unless there is some factor that
indicates bad faith. The applicants may generally
prove his or her
honest belief that a good cause of action exists and has a reasonable
prospect of success, on fairly low evidence.
But this would not
simply be a matter of ‘bald assertion’ , as the court
proclaimed in Swansson v Pratt. The applicant
may be disbelieved if
no reasonable person in the circumstances could hold that belief…..”
173.
On this basis she suggests:
Accordingly, the
better route for South African courts to  take is to presume
that the applicant is acting in good faith, unless
there are
objective circumstances that established otherwise.
174.
I do not believe that there is any basis for such a presumption
particularly
in the absence of a statutory presumption of good faith
in the section where the legislature has dealt with presumptions
where
it has felt necessary but has not seen fit to do so with regard
to the requirement of good faith dealt with me above. The onus to

establish good faith remains on the applicant ; there is no
evidentiary burden  on the respondent to establish the absence

of
bona fides
, let alone an onus.
175.
Although generally the Canadian courts require that the applicant
substantiate
this on a balance of probabilities (where the Australian
Courts apply a less stringent test and will accept the bona fides of
the
applicant unless bad faith is shown), a bald assertion of good
faith on both approaches is not sufficient.
176.
Accepting that the applicant, as a director and officer of the
respondent,
may be  acting in good faith in pursuing the first
four demands in the interests of the good management of the company,
this
does not necessarily apply to the fifth demand.
177.
Mr Brett SC argued that this onus has been discharged by the
applicant’s uncontroverted assertion that he has no interest
whatsoever in the Zastrospace contract. The respondent has been
unable, so he argued, to disprove this and the only connection
between the applicant and Roelofse shown by the respondent, apart
from the fact that they are friends and the applicant introduced

Roelofse to the respondent, is that they both use the domain name of
the Ukupha Group with whom they both have close links. Were
the
burden of proof to shift to   the respondent as contended
by Mr Brett SC, this would not be sufficient to disprove
the
assertion by the applicant that he has no interest whatsoever in the
Zastrospace contract . Alive to this, Mr Brett SC submitted
that a
finding as to the overall onus to establish good faith was
fundamental to the outcome of the application. He inasmuch impliedly

conceded that the applicant had not discharged the substantial onus
that the application had not been brought for a collateral
purpose.
178.
Moreover, the assertion that the applicant has no interest in the
Zastrospace
contract does not necessarily establish that the
applicant is acting in good faith in pursuing it. On the contrary,
his absence
of interest in the contract may be indicative of the
opposite. In this respect the comments of Cassim op cit  p 523
are apposite:
“
While an
applicant’s self interest will not necessarily destroy his or
her good faith  ( as I have discussed above),
the absence of any
self interest may conversely be taken to show an absence of good
faith . This certainly was the position under
the common law
derivative action, under which it was more difficult to establish
good-faith if the shareholder had  little
incentive to sue on
behalf of the company. For instance in High Street Capital
vTchigirinsky (No 2)
[22]
where is shareholder who sought to bring a common-law derivative
action held less than 1% of the company shares, which it purchased

only after the alleged wrongdoing had entered  public domain (
and thus at a price  which reflected the market response
to the
alleged wrongdoing ), the court found that the shareholder lacked
good faith. Pure altruism is rarely the  motive for
costly and
lengthy derivative litigation, particularly bearing in mind that it
is the company that will benefit from the success
of the action,
while the applicant benefits only indirectly from the enrichment of
the company.
A similar trend may
be gleaned from Canadian and Australian law, in which useful
signposts may be unearthed to navigate the way
forward for South
African courts. In this retard, in assessing whether an applicant has
a collateral purpose, the Australian courts
may rely on evidence to
draw inferences about applicant’s motives, and the extent to
which the courts scrutinize the good
faith criterion varies depending
on the applicant financial interest in the company and his or her
incentive to sue on behalf of
the company: in other words, his or her
self interest. According to Swansson v Pratt, when an applicant has
nothing obvious to
gain by the success of the derivative action, the
court may have a reason to be more circumspect in scrutinizing the
good faith
criterion. Conversely, good faith may be more easily
established, for instance, when the applicant in a derivative claim
seeking
the recovery of the company’s property is currently a
shareholder in the company with more than a token shareholding with

the consequence that the derivative action, if successful, would
increase the value of the applicants shares.
Similarly, if an
applicant is a current director or officer of the company, good faith
may be proved by the applicant showing that
he or she has a
legitimate interest in the welfare and the good management of the
company, and that the purpose of the derivative
action is to protect
these interests…
On
the other hand it may be more difficult to establish good faith if
the applicants are shareholders with merely a token shareholding
in
the company, or if  the applicants have nothing obvious to gain
by the success of the statutory deriviative action or otherwise
have
little incentive to sue on behalf of the company. When an applicant
has little to gain and little incentive to sue on behalf
of the
company, he or she is more likely to be found to be motivated by a
personal vendetta amounting to abuse of process-for instance
where
there is a history of grievances against the majority shareholders or
the board of directors of the company. In contrast,
an applicant who
stands to gain by the success of a derivative action is more likely
to be found to be acting in good faith even
if he or she is spurred
on by intense personal animosity against the defendant”.
179.
In this respect the applicant, averring no personal interest, is in a
conundrum
as this may be indicative of bad faith .
180.
Similary, although it  would generally be in the interests of
the company
to enforce good corporate governance, where this is in
truth and in fact aimed at precluding the  cancellation of the
Zastrospace
contract by committees which are presided over my non-
Board members ,  the absence of good faith would nevertheless
preclude
a derivative action to enforce these demands. This is
particularly so where the complaints about good governance were not
raised
before the Zastrospace contract was terminated by a committee
decision in which a non Board member, Ramaite participated.
181.
It is similarly of significance that it is this very committee member
who it
is averred improperly acts as deputy CEO against whom the
remaining demands are directed. It is thus crucial that the
preservation
of the Zastrospace contract has merit and is in the
interests of the company to establish that the application is pursued
in good
faith. Where this is not the case, it will more likely be
that it is pursued for a collateral purpose particularly where the
applicant
has no interest in the continuation of the contract. Where
this is shown to be the case, it will inevitably rebut the prima
facie
assertions of good faith in pursuing the other demands
notwithstanding that they, being directed at good corporate
governance,
may themselves be in the interests of the company.
182.
The questionable nature of the purported entitlement to continue with
the Zastrospace
contract serves also to disprove the averment of good
faith. This is all the more so where this is not based on a legally
cognizable
cause of action apart from an amorphous obligation in line
with the Constitution,
section 7
of the
Companies Act and
King III to
promote the interests of the community failing which the respondent’s
mining right may be in jeopardy.
183.
However, even if this is established, this does not mean that the
requirements
will be satisfied as good faith is a separated and
distinct precondition for the granting of relief and  the
absence of good
faith will preclude relief even if the contemplated
action has merit , is in the interests of the company and is a matter
of substantial
importance to it. In this respect the South African
statute is different from the English one where good faith is not a
stand alone
and distinct requirement but is but merely one of the
factors to consider in granting relief .
184.
Whether or not the application is pursued in good faith depends upon
all the
circumstances of the case, including the fact that the
complaints made in the other demands were not hitherto ever
complained about.
One gets the impression that it was only after the
cancellation of this contract that the applicant became so concerned
about corporate
governance and the unlawful conducting of the
applicant’s business through committees.
185.
It is of some significance that in formulating the first demand
it is
averred that any decisions taken by such committees in conflict
with the Act and King III would be void or voidable, which would

include the decision taken by the procurement committee to cancel the
Zastropace contract. Indeed it is expressly stated in the
fifth
demand that the termintation of the Zastrospace contract is contrary
to the requirement that only the Board could terminate
the contract
[23]
186.
There is no evidence as to how the community has benefited from the
Zastrospace
contract and the Court is left with the impression that
its BEE status was but window dressing and that the contract has
served
to enrich Roelofse and not the community. The same would seem
to apply to the KCT as although it is averred that it was formed by

the applicant with the specific purpose of representing the BEE
requirement which enabled the applicant to capture its mining right
,
there is no evidence that a single dividend has been declared to the
community. I have already stated that the employment of
18 to 20
persons from the local community does not satisfy the stated purpose
to benefit the Kuruman community.
187.
With the Zastrospace contract looming in the background to all the
demands
which has as its beneficiary a close friend of the applicant
who was introduced to the respondent by him, something more than the

applicant’s declaration under oath that he has no interest,
direct or otherwise in the Zastrospace contract is required for
the
applicant to discharge the onus of good faith.  This would have
been some demonstration that his new found concern with
corporate
governance was not tied to the termination of the Zastrospace
contract. It would have required some proof that his attacks
on
Ramaite were not directed at him as a result of his decision to
terminate the Zastrospace contract . It would have required

substantial proof that he indeed has the interests of the Kuruman
community at heart and that the continuation of such contract
is to
the benefit of the community. He would have to show that the
termination of the Zastrospace contract would  probably
put the
respondent’s mining right in jeopardy.
188.
The applicant has not discharged his onus of establishing any of
these facts.
In the result, the demands have not been established to
be in the interest of the respondent or to have been brought in good
faith.
Even although the first four demands may have merit if viewed
in isolation, because they are inextricably tied up with the
Zastrospace
contract, the inference is inescapable that they have the
termination of the Zastrospace as their motivation or collateral
purpose.
189.
In the circumstances I find that the applicant has not established
the requirements
for relief under section 165 (5) and in the result,
the application must dismissed.
190.
As an aside ,  I do not agree with the view expressed by Cassim
that even
if the requirements for relief had been satisfied, I would
nevertheless have had a discretion to refuse relief in view of

the use of the word “
may
” in subsection (5) .
This, with respect to the learned author , is a misreading of the
subsection where  the word “
may
” is used in
the sense of permitting the Court to grant relief only if the
requirements are met and not otherwise. It is expressly
provided that
the court “
may grant relief only if”
the
requirements are satisfied. The use of the word “
may
”
in this context does not confer discretion but rather authority to
the Court to only grant relief if the requirements of
the subsection
are satisfied. Where they are  satisfied, there is no residual
discretion conferred upon the court not to grant
relief.
191.
This, however, is not necessary for my decision, as I have found that
the requirements
are not satisfied and thus I am precluded from
granting leave to the applicant to bring proceedings on behalf of the
respondent
as contemplated in the demands.
192.
Costs should follow the result. As the matter is one involving a
substantial
amount of money tied up in the continuation of the
Zastrospace contract, I believe that these costs should  include
the costs
consequent upon the employment of two counsel which were
employed on both sides.
193.
However, as I have found that the Badenhorst SC’s report had
not been
validly commissioned as the applicant was not given notice
of the meeting at which it was resolved to appoint him as an
impartial
investigator, these costs should not include the costs of
his report. As I believe that there was merit in the application to
strike
out,  I propose to grant the costs of that application to
the applicant.
194.
I accordingly make an Order as follows:
194.1.     The main
application is dismissed with costs including the costs consequent
upon the employment of
two counsel. These costs do not include the
costs of Badenhorst SC’s report.
194.2.     The costs
of the interlocutory application to set aside the appointment of the
respondent’s
attorneys and Badenhorst SC and to strike out
Badenhorst’s report are awarded to the applicant.
SM WENTZEL
ACTING JUDGE
COUNSEL FOR THE APPLICANT
J BRETT (SC)
INSTRUCTED BY NATALIE
LUBBE & ASSOCIATES
COUNSEL FOR THE RESPONDENT A BHAM
(SC)
INSTRUCTED BYMERVYN TABACK INC
DATE OF HEARING 26 OCTOBER 2015
DATE OF JUDGMENT 11 FEBRUARY 2016
[1]
.
Appl HOA para 52.2 p 28; RA para 41 p 219
[2]
At least by 26 June 2014, and prior to the
termination of the Zastrospace contract, the respondent was aware of
this: annexure
5, AA p 113
[3]
Applicant’s main argument in reply para
36.1.3 p 12; Fifth demand, para 36 p54
[4]
RA para 79 p 241
[5]
AA para 20 p 8
[6]
AA para 34 p 92
[7]
insert ref
[8]
annexure 5 AA p113
[9]
annexure SLM 11, appl suppl aff p447
[10]
RA para71 p 234
[11]
p 26
[12]
p 69 and 71.
[13]
P 275
[14]
Esmanco (Kilner House) v Greater London Council
[1982] 1 WLR 2
(QB).
[15]
Foss v Harbottle (
[1843] EngR 478
;
1843) 2 Hare 461
,
76 ER 189.
Despite the abolition of the common law derivative action, the
proper plaintiff rule set out in Foss v Harbottle continues to

apply, ; MF Cassim, The Statutory Derivative Action Under the
Companies Act of 2008
: The Role of Good Faith (2013) 130 The South
African Law Journal 496 at 497-8
[16]
ibid at p 499
[17]
Cassim ( supra ) at 500
[18]
Cassim supra at 504
[19]
FA annexure A to the demand p 58  and
annexure C p 66
[20]
Demand para 33.4.2-3 p 48. As I have said, this
is not factually correct and AMC was retained while Zastrospace was
not but did
not replace Zatropace.
[21]
(2013) 130 p 496
[22]
[2006]BCC 209 an English case concerning the
common law derivative action ( on which South African common law was
previously based]
[23]
Demand para 36.6