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[2012] ZASCA 180
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Communicare and Others v Khan and Another (12/2012) [2012] ZASCA 180; 2013 (4) SA 482 (SCA) (29 November 2012)
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THE
SUPREME COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT
SCA Case No: 12/2012
Reportable
In the matter between:
COMMUNICARE
..........................................................................
FIRST
APPELLANT
COMMUNICARE
CONSTRUCTION
.......................................
SECOND
APPELLANT
HERMANUS JOHANNES
FOURIE
............................................
THIRD
APPELLANT
and
BLUMERUS
LODEWYK EZRA KHAN
....................................
FIRST
RESPONDENT
BARRY DEANE TILNEY
.....................................................
SECOND
RESPONDENT
Neutral
citation
:
Communicare
v Khan
(12/2012)
[2012] ZASCA 180
(29
November 2012)
Coram
: Cloete,
Cachalia, Malan and Shongwe JJA and Swain AJA
Heard
: 14 November
2012
Delivered:
29
November 2012
Summary
:
Rights of members of company to enforce articles of association
against company challenged – rights of respondents to vote
at
annual general meetings of first and second appellants, in respect of
election of directors classified as personal rights, as
opposed to
corporate rights and consequently not susceptible to control by
majority of members – rights enforceable against
first and
second appellants.
Order
On appeal from:
Western Cape High Court, Cape Town (Binns-Ward J sitting as court
of first instance):
The following order is
made:
The appeal is dismissed
with costs, including the costs of two counsel where employed and the
costs in the application for leave
to appeal, on the same basis.
JUDGMENT
_______________________________________________________________
SWAIN Aja (CLOETE,
CACHALIA, MALAN & SHONGWE JJA concurring):
The
two appellant companies, with the leave of the Western Cape High
Court, Cape Town (Binns-Ward J) seek on appeal the rescission
of an
order, granted in favour of the respondents, in which it was
declared that the election of the directors of the appellants,
at
their annual general meetings on 27 October 2009,
was
invalid and accordingly set aside.
The
election of four directors was necessitated by a provision in the
articles of association of the first and second appellants,
(quoted
in para 22 below), that a third of the members of their respective
boards was obliged to retire by rotation each year.
The articles in
addition provided that directors were also members of the first and
second appellants for the duration of their
office. The retiring
directors were however excluded from voting in the election of
successors, at the annual general meetings,
on the basis that their
retirement had to have occurred before a vacancy could be declared
and the election for a successor could
take place. As a consequence,
before the election took place, the retiring directors were deprived
of their status as members
and were ineligible to vote.
Two
of the grounds upon which the appellants (respondents in the high
court) opposed the relief sought by the respondents (applicants
in
the high court) and which form the basis of this appeal, were that
the resolutions were validly passed and in any event, that
the
respondents lacked the necessary locus standi to challenge their
validity. I shall deal with these questions in reverse order.
The
locus standi of the respondents was challenged on the basis that,
in accordance with the
decision in
Foss
v Harbottle
[1843] EngR 478
;
(1843)
67 ER 189
,
where
a majority of members at a general meeting are lawfully entitled to
correct, condone or ratify irregular conduct by the
company in the
management of its internal affairs, a court will not intervene at
the behest of a member to compel the company
to rectify such
conduct.
The
challenge raised by the appellants based upon this decision, was
that individual members have no right to enforce corporate
rights,
except when the irregularity complained of could not be remedied by
the company, or the member concerned’s individual
membership
rights had been affected adversely. It was submitted that on the
facts of the present case, the right of the respondents
to vote at
the annual general meetings of the appellants, was a corporate
right, not an individual member’s right; and
that any
irregularity in this regard (which was denied) was capable of being
rectified by majority vote, at any reconvened annual
general
meeting. The respondents contend however that the right is one which
belongs to individual members of the appellants
and as such, was not
susceptible to majority control, at an annual general meeting of the
appellants.
As
pointed out by the high court, the dichotomous categorisation of
members rights as individual or personal membership rights,
as
opposed to corporate membership rights, is well established.
Professor Pennington states that a court will incline to treat
a
provision as conferring a right on a member ‘only if he has a
special interest in its observance distinct from the general
interest which every member has in the company adhering to the terms
of its constitution’.
1
Professor
Blackman
2
refers to the rules in
the memorandum and articles which confer powers on the company and
categorises the conditions which must
be fulfilled for the exercise
of these powers,
as
‘constitutional powers’.
3
He states that such
rules place duties and obligations on the company, without
necessarily conferring corresponding rights on
the shareholders.
4
It may be a matter of
some difficulty in a particular case to draw such a distinction.
The
issue for determination accordingly is whether the respondents have
the power to approach a court to enforce, against the
appellants,
their rights to effectively exercise their votes on the election of
directors at the annual general meetings of the
appellants. It
should be noted that the respondents were not denied the right to
vote
5
but contended that their
votes were adversely effected by the exclusion of the rights of the
four retiring directors to vote.
The
principle in
Foss
as
applied in
MacDougall
v Gardiner
(1875)
1 Ch D 13
, accordingly formed the basis for the argument advanced by
the appellants, whereas the decision in
Pender
v Lushington
(1877)
6 Ch D 70
, fulfilled a similar role in the argument of the
respondents. These are the leading cases in two lines of apparently
conflicting
authority, dealing with the broader issue of when a
member can compel a company to observe the provisions contained in
its articles
of association.
Before
examining these cases it is necessary to note two general principles
of company law. As stated by Trollip JA in
Sammel
& others v President Brand Gold Mining Co Ltd
1969 (3) SA 629
(A) at
678G-H:
‘
By
becoming a shareholder in a company a person undertakes by his
contract to be bound by the decisions of the prescribed majority
of
shareholders, if those decisions on the affairs of the company are
arrived at in accordance with the law, even where they adversely
affect his own rights as a shareholder. That principle of the
supremacy of the majority is essential to the proper functioning
of
companies.’
It
is this principle which informs the reluctance of courts to intervene
in matters concerning the internal management of a company.
In
terms of s 65(2) of the Companies Act 61 of 1973 (the Act), a member
possesses a right against the company to complain of an
irregularity, by virtue of the fact that, as decided in
Gohlke
and Schneider & another v Westies Minerale (Edms) Bpk &
another
1970 (2) SA 685
(A) at 692F-G:
‘
The
articles, therefore, merely have the same force as a contract between
the company and each and every member as such to observe
their
provisions.’
It
is in the context of a reconciliation of the right of a member to
enforce the articles against the company and complain of
an
irregularity committed by the company in respect of the articles,
and the right of the majority to correct, condone or ratify
the
irregularity, that problems arise, which lie at the heart of the
controversy.
At
the outset it must be noted that
Foss
was not concerned with
the rights of members to enforce the provisions of the articles
against the company. It was concerned rather
with the inability of
individual members to seek to enforce the rights of the company
‘where the alleged wrong is a transaction
which might be made
binding on the company or association and on all its members by a
simple majority of its members’.
(Per Jenkins LJ in
Edwards
v Halliwell
[1950]
2 All ER 1064
(CA) at 1066.)
In
others words, the enquiry was directed at wrongs allegedly done to
the company, in which the company itself should take action
to
remedy the wrongdoing,
and
the ability of a majority of its members to correct, condone or
ratify the wrongdoing. If the requisite majority of members
competently resolve to correct, condone or ratify the wrongdoing
against the company, a court would not intervene as the will
of the
majority would demand recognition.
Professor Blackman
6
accordingly questions
how the rule in
Foss
is
able to defeat members’ rights against the company where a
power which the company has to ratify a wrong against it,
is used
for an entirely different purpose, namely to defeat a member’s
rights against the company. As applied in
MacDougall
,
according to Professor Blackman, the result is that where a member
cannot enforce a provision in the articles against the directors
(because it is a provision the breach of which may be corrected,
condoned or ratified by the majority) the member is precluded
from
enforcing that provision against the company, by way of a personal
action. He concludes that the application of the rule
in
Foss
to matters for which it
was not intended, with the object of curtailing intracorporate
litigation,
‘
rides
roughshod over the members’ rights under the company contract
by allowing de facto departures from the constitution’.
7
The
desire to curtail intracorporate litigation was founded, according
to Mellish LJ in
MacDougall
(at 25), upon the need to prevent
litigation concerning irregularities, which are likely to occur in
the conduct of meetings
of companies.
By
contrast, in
Pender
, Jessel MR distinguished the decision in
Foss
, and the cases that followed it, on the basis that the
right which the member wished to assert against the company was ‘an
individual right in respect of which he has a right to sue’
(at 80-81). In the very nature of the right being personal
to the
individual member, a failure by the company to recognise such a
right, is beyond the power of the majority at the general
meeting.
It
is unnecessary on the facts of this case to attempt to reconcile
these apparently conflicting lines of authority, because Mr
Hodes
SC, who together with Mr Brusser SC, appeared for the appellants,
quite correctly conceded in argument that the right of
members of
the appellants to vote on the election of directors, was a personal
and not a corporate right. Consequently, as in
Pender
, the
MacDougall
line of cases are distinguishable, by virtue of
the nature of the right possessed by the respondents.
I
agree with the view of the high court and the concession by Mr Hodes
that a member’s right to vote at a general meeting
and have
his or her vote counted, would ordinarily fall within the category
of personal membership rights. Each member has a
special interest in
the observance of this right, distinct from the general interest
which the members have in the observance
by the company of its
articles.
For
the sake of clarity, it should be noted that the provisions of the
Act are applicable in the present case, as the conduct
complained of
occurred on 27 October 2009. In terms of
s 165(1)
of the
Companies
Act 71 of 2008
, it appears that a personal action by a member at
common law, to enforce rights which vest in a member in the
articles, has not
been abolished.
8
The
respondents accordingly possessed the necessary locus standi to
challenge the resolutions in question.
I
turn to consider the issue whether the resolutions appointing the
directors taken at the annual general meetings, were in fact
valid.
What has to be determined, on a proper interpretation of article 15
of the Articles of Association of both appellants
(which are in
identical terms),
is
whether directors who retire at an annual general meeting are
entitled to vote in respect of the election of individuals to
fill
such vacancies. The article reads as follows:
‘
ROTATION
OF DIRECTORS
15.
At the first annual general meeting of the company all the directors
shall retire from office, and at the annual general meeting
in every
subsequent year one-third of the directors for the time being, or if
their number is not three or a multiple of three,
the number nearest
to one-third, shall retire from office, provided that the director
appointed by the Regional Government, shall
not retire from office by
reason of effluxion of time.
15.1
The directors to retire in every year shall be those who have been
longest in office since their last election, but as between
persons
who became directors on the same day, those to retire shall, unless
they otherwise agree among themselves, be determined
by lot.
15.2
A retiring director shall be eligible for re-election.
15.3
The company at the annual general meeting at which a director retires
in manner (
sic
) aforesaid or at any general meeting may fill
the vacancy office by electing a person thereto.
15.4
If at any meeting at which an election of directors ought to take
place the offices of the retiring directors are not filled,
unless it
is expressly resolved not to fill such vacancies, the meeting shall
stand adjourned and the provisions of articles 7.7
and 7.8 shall
apply
mutatis mutandis
to such adjournment, and if at such
adjourned meeting the vacancies are not filled, the retiring
directors or such of them as have
not had their offices filled shall
be deemed to have been re-elected at such adjournment meeting unless
a resolution for the re-election
of any such director shall have been
put to the meeting and negatived.
15.5
The company may from time to time in general meeting increase or
reduce the number of directors, and may also determine in
what
rotation such increased or reduced number is to retire from office.
15.6
Unless the members otherwise determine in general meeting any casual
vacancy occurring on the board of directors may be filled
up by the
directors, but the director so appointed shall be subject to
retirement at the same time as if he had become a director
on the day
on which the director in whose stead he is appointed, was last
elected a director.
15.7
The directors shall have the power at any time, and from time to
time, to appoint a person as an additional director who shall
retire
from office at the next following ordinary general meeting, but shall
be eligible for election by the company at that meeting
as an
additional director.’
In
terms of the Articles of Association of the appellants and the facts
which are common cause, the only members of the appellants
who were
entitled to vote on the appointment of directors at a general
meeting, were the directors of the company who were members
because
they were directors. It is therefore apparent that the eligibility
of retiring directors to vote as members, in respect
of the election
of directors to fill vacancies in their number, was dependent upon
their status as directors remaining as such,
until the election took
place.
At
the annual general meeting, the retiring directors were excluded
from voting on the election of directors, on the basis of
legal
advice which had been obtained by the company secretary, at the
request of one of the directors. If their exclusion was
contrary to
the articles, then the election of the directors was irregular, and
falls to be set aside.
The
judgment of the high court referred to the rule that the articles
are to be interpreted in the same manner as a contract or
statute,
and must be taken to be a complete memorial, and the interpretation
must be approached with sensible regard to the business
or practical
result, which the parties apparently sought to achieve by its
production, or adoption.
Central
to the reasoning of the high court was that a proper construction of
the articles envisaged ‘a seamless transition
of
directorships, whether by re-election, deemed re-election or
replacement’ in respect of the scheme of rotational
retirement.
The
cornerstone in the reasoning of the high court was that article 11
provided for a minimum number of directors, namely eight
and article
7.5, provided for a quorum of members namely five personally
present. Accordingly, in the event there was no seamless
transition
of directors, a hiatus may occur when the company were to be
deprived of the one-third of the directors, who were
obliged to
retire. By virtue of the fact that directors were also obliged to
function as members, a quorate meeting might be
rendered non-quorate
midway through its business, when the retiring directors were
deprived of this status, and the election
of directors was reached
on the agenda, requiring their exit from the meeting. The high court
also pointed to the fact that if
all the vacancies were not filled
there might be a period when the company would have to function
without the requisite number
of directors, until the situation could
be remedied at a resumption of the annual general meeting in terms
of article 15.4.
Mr
Hodes criticized the reasoning of the high court on the basis that
the number of directors has nothing to do with the issue
of whether
an annual general meeting, or other general meeting, has the
necessary quorum which is determined by the number of
members
present. However, the number of members present is directly
determined by the number of directors present, who by virtue
of
their status as directors are also members. Mr Janisch, who appeared
for the respondents, submitted that no such disruption
would occur
if the respondents’ interpretation prevailed.
Mr
Hodes also pointed to the fact that on the evidence, the absence of
the retiring directors, did not have as a consequence that
the
meeting was rendered non-quorate. Mr Janisch’s answer was that
the enquiry was directed at establishing the potential
consequences
of the appellants’ construction, not with what had actually
occurred at the meeting.
Mr
Hodes,
in addition,
submitted
that the danger of such a hiatus and its effect upon the workings of
a general meeting, could be avoided by conducting
all of the
business on the agenda, before the election of directors was held.
As pointed out by Mr Janisch, this solution does
not deal with the
problem which arises if the vacancies are not filled at the meeting,
with the result that the appellants might
have to function with less
than the requisite number of directors, until the resumed annual
general meeting.
In
interpreting article 15, the language used must be considered in the
light of the ordinary rules of grammar and syntax, the
context in
which the provision appears, the apparent purpose to which it is
directed, and the material known to those responsible
for its
production. The process is objective, not subjective. A sensible
meaning is to be preferred to one that leads to insensible
or
unbusinesslike results, or undermines the apparent purpose of the
document. (
Natal Joint Municipal Pension Fund
v Endumeni Municipality
2012 (4) SA 593
(SCA) para 18.)
An
interpretation which does not exclude the possibility of a hiatus
occurring between the retirement of a director and the election
of a
replacement would ascribe to article 15 a meaning with an
unbusinesslike result and would undermine the apparent purpose
of
this article.
The
arguments advanced were directed at illustrating from the point of
view of the opposing protagonists that phrases such as
‘shall
retire from office’, ‘the annual general meeting at
which a director retires’, ‘a retiring
director shall be
eligible for re-election’, and ‘the retiring directors’
meant either that a process of retiring
was intended,
or
that retirement as a
fait accompli
was intended. However, where article 15 can
legitimately be interpreted to avoid a hiatus and thereby produce a
businesslike result,
it is that interpretation that should in my
view be adopted, and the court a quo was correct in doing so. In
reaching this conclusion,
I do not overlook the
argument advanced by Mr Hodes that article 15.3 provides that at an
annual general meeting ‘at which
a director retires’ the
company ‘may fill the vacancy office by electing a person
thereto’, and that the use
of the word
‘
vacancy’
can only refer to a
fait
accompli
, namely a director’s post
which is already vacant, because he or she has retired. I agree with
the submission of Mr Janisch
that the high court dealt with this
argument comprehensively,
concluding correctly
that the fact that a retiring director will leave a vacancy that may
be filled by an election, does not mean
that the vacancy must
already have existed at the time of the election. The elected or
re-elected director moves seamlessly into
the vacancy that follows
the election. If the incumbent is not re-elected, he is bound to
vacate (retire) as soon as the result
is known. If his vacancy is
not filled for any reason, he remains in office until the resumed
annual general meeting, at which
he either vacates, or is
re-elected.
I
conclude that on a proper interpretation of article 15 the directors
who retire at an annual general meeting are entitled to
vote as
members in respect of the election of individuals to fill such
vacancies. The exclusion of the retiring directors from
voting was
accordingly unjustified and the resolutions appointing replacement
directors were correctly declared invalid by the
high court and set
aside.
The
concession that a member’s right to vote at a general meeting
and have his or her vote counted, constituted a personal
right of a
member, the denial of which was not susceptible to correction,
condonation or ratification by the majority at the
general meeting,
disposes of the appellants’ argument that the high court
failed to consider whether the irregularity could
have been
corrected in this manner.
A
further argument advanced by Mr Hodes was that the right of the
respondents to vote, was not adversely affected by virtue of
the
exclusion of the rights of the four retiring directors to vote,
because at least the first respondent, did vote at the meeting.
In
other words, the respondents on the evidence lack locus standi to
challenge the validity of the resolution.
The
high court dismissed this argument relying upon the decision in
Spiliopoulos & another v The Hellenic Community of
Johannesburg & others
1938 WLD 160
at 166 where Greenberg JP
held that:
‘
I
think that in the present case it is sufficient for the applicants to
show that their rights as shareholders have been violated
by a
diminution of the effect of their votes through the voting of a
substantial number of persons who were not entitled to vote…’
In
the present case the opposite scenario is true, ie fewer members
voted than were entitled to and I understood Mr Hodes to argue
that
as a consequence, the votes of the respondents were not diminished,
but were in fact enhanced. The inherent fallacy in this
argument, is
that its validity depends upon the assumption that the votes of the
excluded members, would have been cast in opposition
to those of the
respondents. If those votes would have supported the votes cast by
the respondents, then it could not be concluded
that their mere
exclusion enhanced the votes of the respondents. The high court
correctly summarised the argument as follows:
‘
The
right to exercise a vote as a member goes limping if the effect of
the vote is that it is not properly counted in the context
of all the
other votes that might be validly cast on the issue in question. In
other words if the voting procedure admits votes
that could not
validly be cast, the vote that the member entitled to vote casts is
devalued by a diminution of its effect as a
proportion of the total;
likewise, if the votes of members entitled to vote are invalidly
excluded, the effect of the vote of the
member allowed to cast a vote
is adversely effected if the votes of the excluded members might have
weighed with the members vote
in determining the result.’
In
addition, having found that the exclusion of the right of the
retiring directors to vote in respect of the election of directors,
was contrary to article 15, and that the relevant resolutions were
invalid and correctly set aside, the respondents’ voting
rights were adversely effected by this conclusion, because the votes
they cast were without cause or effect.
As
regards the issue of costs, Mr Janisch asked for the costs of two
counsel where employed, for the reason that his erstwhile
leader, Mr
Duminy SC, was indisposed. No argument to the contrary was advanced
by Mr Hodes. The costs of the application for
leave to appeal were
reserved for the decision of this court.
In
the result it is ordered that:
The
appeal is dismissed with costs, including the costs of two counsel
where employed and the costs in the application for leave
to appeal,
on the same basis.
K G B SWAIN
ACTING JUDGE OF APPEAL
APPEARANCES:
FOR FIRST AND P HODES SC
(WITH HIM R BRUSSER SC)
SECOND APPELLANTS:
INSTRUCTED BY KRITZINGER ATTORNEYS
CLAUDE REID INC,
BLOEMFONTEIN
FOR FIRST AND M JANISCH
SECOND RESPONDENTS:
INSTRUCTED BY CLIFFE DEKKER HOFMEYR INC
MATSEPES INC,
BLOEMFONTEIN
1
Professor
R R Pennington
Company Law
6 ed (1990) at 651 in Blackman infra
fn2 at footnote 23.
2
Michael
Blackman ‘Members’ rights against the company and
matters of internal management’
(1993) 110
SALJ
473
at 477.
3
Such
powers it seems would be synonymous with ‘corporate rights’.
4
Supra
fn2 at 477.
5
The
second respondent however, alleged that the proxy he had given to
one of his fellow members, who voted at the meeting, had
been
irregularly obtained and exercised.
6
Blackman
supra at 478-479.
7
Above
at 479.
8
F
H I Cassim, M F Cassim, R Cassim, R Jooste, J Shev and J Yeats
Contemporary Company Law
2 ed (2012) at 821.