Bayly and Others v Knowles (174/09) [2010] ZASCA 18; 2010 (4) SA 548 (SCA) ; [2010] 3 All SA 374 (SCA) (18 March 2010)

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[2010] ZASCA 18
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Bayly and Others v Knowles (174/09) [2010] ZASCA 18; 2010 (4) SA 548 (SCA) ; [2010] 3 All SA 374 (SCA) (18 March 2010)

THE
SUPREME COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT
Case No:
174/09
In
the matter between:
D
N BAYLY 1
ST
Appellant
SOUTH
AFRICAN ELECTRONIC
TRACKING
SYSTEMS LTD
2
ND
Appellant
F
T MARTIN 3
RD
Appellant
ELECTRONIC
TRACKING SYSTEMS AS 4
TH
Appellant
A
C STIPANOV 5
TH
Appellant
G
H VAN LAUN 6
TH
Appellant
M
JOHNSON 7
TH
Appellant
M
S JUUHL 8
TH
Appellant
and
A
L KNOWLES
Respondent
Neutral
citation
:
Bayly v
Knowles
(174/09)
[2010] ZASCA 18
(18 March
2010 )
Coram:
HARMS
DP, NUGENT, HEHER, LEACH JJA AND SERITI AJA
Heard:
2
March 2010
Delivered:
18
March 2010
Updated:
Summary:
Company
– Shareholders – oppression – shareholder in majority bloc
making fair offer for minority’s shares before litigation
–
effect on application under s 252 of the Companies Act 61 of 1973 –
offer by minority to purchase a majority shareholding –
interests
of company and remaining shareholders to be considered.
____________________________________________________________________________________
ORDER
On
appeal from:
South Gauteng High Court (Johannesburg) (Horn J sitting as court of
first instance).
1. The
appeal
is upheld with costs
including the costs of two counsel.
2. The
order of the court
a quo
is
set aside and replaced with the following:
‘
(a) The
application is dismissed.
(b) The
applicant is to pay the costs of the first to fifth respondents
including the costs of two counsel.’
JUDGMENT
___________________________
__________________________________________
HEHER
JA (Harms DP, Nugent, Leach JJA and Seriti AJA concurring):
[1]
This
is an appeal with leave of the South Gauteng High Court (Horn J)
against an order made in favour of the respondent under s 252(3)
of
the Companies Act 61 of 1973 directing and regulating the disposal of
shares in a small proprietary company.
[2] During
April 2004 Mr Knowles (the respondent) was invited by the Norwegian
holder of the rights to a vehicle-tracking system,
Electronic
Tracking Systems AS (‘ETS’, the fourth appellant), to acquire 50
per cent of the shares in South African Electronic
Tracking Systems
Ltd (the second appellant, hereafter referred to as ‘the company’)
which had been set up to market the system,
for R2 million.
[3] Unable
to afford the whole price, Knowles introduced Bayly (the first
appellant) to ETS as his co-investor. According to Knowles,
the two
of them reached a private agreement which the managing director of
ETS, one Siqueland, afterwards confirmed, to offer to
buy 51 per cent
of the shares, to borrow the funds required for the purchase from
certain brothers (one of whom, Fred Martin, is
the third appellant in
these proceedings) on the understanding that Bayly would be employed
by the company as its managing director
and Knowles as its sales and
marketing director ‘until we might decide otherwise’.
[4] On
20 December 2004 the negotiations were finalised. Bayly, Knowles and
ETS signed a shareholders’ agreement and an agreement
for the
purchase and sale of shares.
[5] The
relevant terms of the shareholders’ agreement, in summary, were as
follows:
(a) The
company would operate a business for the development, supply, sale
and support of products and solutions designed and manufactured
by
and for ETS.
(b) The
provisions of the agreement were to prevail in the event of a
conflict between its terms and those of the memorandum and articles
of the company. (The company statutes were not produced or relied on
in the proceedings. As will appear, other shareholders apparently
bought into the company. One does not know whether they bound
themselves to the terms of the agreement.)
(c) The
authorised and issued share capital of the company was R4000 divided
into 4000 ordinary shares of R1 each.
(d) ETS
was to own 49 per cent of the shares and Bayly and Knowles 25.5 per
cent each.
(e) The
shareholders would be entitled to appoint a maximum of four directors
between them, ETS two non-executive directors and Bayly
and Knowles
two executive directors of whom one would be the managing director.
The executive directors would be responsible for
the day to day
management of the company. Each director was to have an equal vote.
The shareholders were entitled to remove and replace
any director at
any time.
(f) The
day to day affairs and activities of the company would be managed by
Bayly in his capacity as managing director of the company.
(g) No
shareholder could alienate any shares unless first offered to the
other shareholders in proportion to their holdings existing
at the
date of the offer.
(h) A
deemed offer to the remaining shareholders would arise upon cessation
of employment of any shareholder unless otherwise agreed
in writing.
(i) The
parties entered into the agreement on the basis of trust and they
recorded an intention to observe good faith in contracting
and
dealing with each other.
[6] The
sale agreement provided that ETS sold 2040 shares (51%) to Bayly and
Knowles in equal proportions for R2 million.
[7] There
can be no doubt that Bayly and Knowles entered into this relationship
on the understanding that both would participate equally
in the
management of the company.
[8] The
company appears to have prospered. But the first seeds of dissension
between Bayly and Knowles were sown by early in 2006
when Bayly, in
the face of resistance by Knowles, employed Fred Martin as a
consultant. Although Knowles yielded the point, the matter
continued
to rankle with him. According to his founding affidavit this event
initiated a marked change in the relationship between
himself and
Bayly which gradually intensified. The deterioration was manifested
in a strategy allegedly adopted by Bayly to undermine
communications
between Knowles and the techinical division, and in a reluctance to
discuss the business, as well as the exclusion
of Knowles from
decision-making in the company.
[9] Bayly,
in his answering affidavit, admitted that an alienation developed but
blamed other causes: a lack of attention to the interests
of the
company on the part of Knowles, and an inclination to develop and
favour other business interests.
[10] Although
these competing explanations were extensively canvassed in evidence
the court
a quo
did
not find it necessary to resolve the differences and neither do I for
reasons which will
appear.
[11] Whatever
may have been simmering under the surface of their relationship,
nothing which disclosed a problem occurred until 22
October 2007,
when Bayly caused the cancellation of the petrol cards and credit
card issued to Knowles for use in his employment,
without prior
discussion or notice.
[12] On
1 November Bayly informed Knowles that he intended to make an offer
for the purchase of the latter’s entire interest in
the company. On
9 November he submitted a draft offer in the form of a proposed
Amending Shareholders’ Agreement (which purported
to reflect both
ETS and the company as parties to it).
1
[13] The
proposal provided for the resignation of Knowles as a director with
effect from 1 November 2007, the sale of his shares (now
6333 in
number) to Bayly for a price of R2 million, and further
‘
[To]
the extent that the third shareholder [ie Knowles] is an employee of
the company in any capacity, such employment relationship
is by
mutual consent terminated, against signature of this agreement.’
It
contemplated Knowles’s retention by the company as a distributor on
a retainer of R40 000 per month for six months and thereafter
on
the basis of commissions and an annuity income. The proposal also
included an undertaking by Knowles in restraint of trade in
favour of
the company.
[14] At
the end of November the company withheld payment of the salary and
medical aid contributions due to Knowles. By this time,
according to
his subsequent founding affidavit, the mutual trust and confidence
between Bayly and himself had been destroyed beyond
the possibility
of restoration.
[15] On
12 December Mr Cyril Ziman, the attorney representing Knowles, sent a
letter to Bayly setting out a counter proposal, involving
a procedure
which included an independent enquiry and valuation of Bayly’s
shareholding by an accountant, a first option to purchase
in favour
of Knowles, and, on failure to exercise that right, an option to
purchase in favour of Bayly, and, failing exercise by
both, a right
in either party to apply for a winding up of the company. The counter
offer was to remain open until 14 December, after
which, Knowles
would seek a winding up of the company.
2
[16] The
counter-offer was said in the attorney’s letter to be ‘a fair
proposal to resolve the impasse’. Bayly then and thereafter
disputed that. He made it clear that he had no intention of disposing
of his shares. From this time threats and demands took over.
Settlement negotiations failed. On 18 December 2007 Knowles called at
the company’s place of business in order, so he said, to
attend to
his duties, only to find that his office was locked and his books,
records and personal belongings had been boxed and removed.
[17] During
January 2008 Knowles telephoned Siqueland, who declined to take
sides. He said he had no objection to Knowles purchasing
Bayly’s
shares or remaining a director of the company. The third appellant,
Martin, had by this time acquired shares in the company
and had,
according to Knowles, aligned himself with Bayly. Together they held
a majority in the equity.
3
[18] On
25 January 2008 Knowles applied to the Johannesburg High Court for
interim orders for the reinstatement of his company benefits,
payment
of salary and medical aid contributions, access to the financial
records of the company and restoration of access to its
business
premises.
4
He gave notice of an application to
seek orders for the sale to him of Bayly’s shares in the company
(with the alternatives previously
included in the counter-proposal,
including an order winding up the company). The legal foundation of
the application was s 252 of
the Act.
5
Bayly, Martin, ETS and Stipanov
opposed. They made common cause.
[19] Horn
J, before whom the application was argued, could find no
justification for winding up the company. He said in his judgment:
‘
The
way the court can achieve the objects of section 252 without taking
the drastic step of liquidation is to order that the majority
shareholders purchase the shares of the minority shareholder or for
the minority shareholder to purchase the shares of the majority.
.
. .
According
to the uncontested facts in the present matter the applicant has
already rejected the offer by the first respondent to purchase
his
shares because the offer by the first respondent was far below the
true value of the shares. The applicant has put forward a
counter
offer wherein the value of the shares is more realistically stated.
However, the first respondent has failed to respond to
the
applicant’s proposal. This means that the applicant can do nothing
at this juncture to protect his investment and in effect
has no
remedy to redeem his investment with the second respondent. I have
studied the relief set out in the notice of motion and
I find the
proposals contained therein eminently fair and a realistic way to
deal with the matter.
.
. .
It
is a matter of fact that the applicant has been excluded from
participation in any business activities of the second respondent.
All financial and management information which the applicant has been
entitled to has been withheld from him. He has lost all perks
and
benefits, including salary due to him by virtue of his employment
with the second respondent. He has been effectively prevented
from
having any say in the affairs of the second respondent.’
[20] Counsel
for the appellants submitted that the learned judge misdirected
himself in the quoted passages. I agree. I find it necessary
to refer
to only two instances which, in my view, are sufficient to dispose of
the appeal.
[21] As
a matter of fact, there was no averment or admission in the
affidavits (or in the correspondence that preceded them) that
Knowles
had rejected Bayly’s draft offer because the price offered was ‘far
below the true value of the shares’ (or was otherwise
unreasonable
in its terms). On the contrary, both in correspondence and under oath
Knowles confined himself to the assertion that
the offer was
‘unacceptable’ to him, without, as one might have expected,
offering reasons for his refusal to take it up. (In
fact, his reasons
do not require the exercise of imagination since his attitude as
manifested in the counter-proposal and in the
argument before us was
simply a refusal to dispose of his shares to Bayly, thereby leaving
him in control of the company. As Knowles
viewed the matter, not
without justification, it was he who had brought Bayly into the
company, built up its business by his efforts
and sales acumen and
then been unfairly shut out.
[22] As
might be anticipated, Bayly described his offer as ‘under the
circumstances . . . more than fair to [Knowles]’. Ordinarily
such
an averment would call for closer examination.
6
But, in this instance, far from provoking a denial from Knowles, it
elicited only the following response:
‘
I
state that a fair and equitable proposal was made by me to [Bayly] in
annexure “AK” [ie the letter from his attorney].’
Having
eschewed the opportunity of meeting the express averment of fairness
it was not open to Knowles to contend otherwise. Horn
J should
therefore have approached the application upon the basis that Bayly
had made a fair offer for Knowles’s shares.
[23] I
am bound to say that certain remarks of Hoffman J, as he then was, in
Re a company (No 006834 of
1988), ex parte Cremer
[1989] BCLC 365
(Ch D) at 368 apply four-square to the allegations
made by Knowles in this case:
‘
Taken
at their face value, these allegations amount at most to high-handed
conduct in certain matters. There is nothing in them which
can carry
a serious imputation of dishonesty. This is an ordinary case of
breakdown of confidence between the parties. In such circumstances,
fairness requires that the minority shareholder should not have to
maintain his investment in a company managed by the majority with
whom he has fallen out. But the unfairness disappears if the minority
shareholder is offered a fair price for his shares. In such
a case, s
459 was not intended to enable the court to preside over a protracted
and expensive contest of virtue between the shareholders
and award
the company to the winner.’
After
his elevation to the House of Lords the learned judge found cause to
address the issue again in
O’Neill
v Phillips
, at 1106H-1107C:
‘
In
the present case, Mr Phillips fought the petition to the end and your
Lordships have decided that he was justified in doing so.
But I think
that parties ought to be encouraged, where at all possible, to avoid
the expense of money and spirit inevitably involved
in such
litigation by making an offer to purchase at an early stage. This was
a somewhat unusual case in that Mr Phillips, despite
his revised
views about Mr O’Neill’s competence, was willing to go on working
with him. This is a position which the majority
shareholder is
entitled to take, even if only because he may consider it less
unattractive than having to raise the capital to buy
out the
minority. Usually, however, the majority shareholder will want to put
an end to the association. In such a case, it will
almost always be
unfair for the minority shareholder to be excluded without an offer
to buy his shares or make some other fair arrangement.
The Law
Commission (
Shareholder
Remedies
paras
3.26 to 3.56) has recommended that in a private company limited by
shares in which substantially all the members are directors,
there
should be a statutory presumption that the removal of a shareholder
as a director, or from substantially all his functions
as a director,
is unfairly prejudicial conduct. This does not seem to me very
different in practice from the present law. But the
unfairness does
not lie in the exclusion alone but in exclusion without a reasonable
offer. If the respondent to a petition has plainly
made a reasonable
offer, then the exclusion as such will not be unfairly prejudicial
and he will be entitled to have the petition
struck out.’
[24] The
failure to accept Bayly’s offer has important consequences for
Knowles. In English law the making of a reasonable offer
for the
shares of an oppressed minority is enough to counter reliance by the
complainer on s 459 of the Companies Act (the equivalent
of s 252).
Pursuit of the complaint in the face of such an offer is evidence of
abuse of the process sufficient to strike out such
reliance
in
limine.
The principle of
encouraging affected parties to use the procedures provided in the
articles (or in a shareholders’ agreement) to
avoid ‘the expense
of money and spirit’ is laudable. In the context of s 252 the
failure of a minority shareholder to accept
a reasonable offer for
his shares and leave the company in the hands of the majority is, at
least, strong evidence of a willingness
to endure treatment which is
prima facie inequitable despite the choice of a viable alternative.
If that is so it would not ordinarily
behove him to continue to
complain about oppression. The rule, however, cannot be absolute. In
Re Data Online Transactions
(UK) Ltd
[2003] BCC 510
,
for example, it was held reasonable for a petitioner to refuse an
otherwise acceptable offer where there was not a reasonable prospect
that the offeror would be able to meet the financial commitment
involved. One can conceive of cases where the offer, although
reasonable,
may be so tainted by bad faith or ulterior motive as to
excuse non-acceptance. In the context of the present appeal, however,
the
absence of reasoned opposition to the acceptance of the offer
defeated reliance on the inequity inherent in the deliberate
alienation
of Knowles from his right to participate in the management
of the company. Knowles had the power both to protect and redeem his
investment
in the company before he approached the court but, because
he was insistent upon his right to retain his shares, he elected not
to
do so. Thereby he abrogated his right to rely on the inequity
inherent in the conduct of the company.
[25] A
second serious flaw in the reasoning of the learned judge relates to
his finding that the facts of the case justified an order
compelling
Bayly to sell his shares to Knowles. In any exercise of a discretion
under s 252(3) the court is bound to consider not
only the interests
of the warring shareholders but also those of shareholders who have
stood apart and the best interests of the
company itself. There is no
indication that the court did so. A re-appraisal of the question
drives one to the opposite conclusion.
[26] Although
Bayly was not a majority shareholder by reason of his own
shareholding alone, the order sought by Knowles would have
changed
the whole balance of the shareholding and rendered him the majority
shareholder while transforming the interests of the other
remaining
shareholders from a
de facto
majority into a minority.
To all intents and purposes the matter required to be approached on
the basis that Bayly indeed commanded
a majority.
[27] As
Hoffman J remarked in
Re a
company, ex parte Cremer
,
above, at 367h
‘
I
think it must be very unusual for the court to order a majority
shareholder actively concerned in the management of the company
to
sell his shares to a minority shareholder when he is willing and able
to buy out the minority shareholder at a fair price.’
The
wide discretion afforded the court by s 252(3) does not however
exclude that possibility in appropriate circumstances. But here
there
were no such circumstances. The company was viable and successful. It
had become so under the direction of Bayly over more
than three
years. The sympathy factor arising from Knowles’s propulsion of
Bayly to the position of chief executive was no more
than an
historical curiosity. Knowles had striven hard for the success of the
company and had participated to some (uncertain and
undisclosed
degree) in its management, as was his contractual right and his duty
as a director, but it was Bayly who held the helm,
hired and fired,
and had the confidence of the staff (some twenty in number at the
time of the application). He also maintained the
essential level of
co-operation and goodwill between the company and its supplier ETS.
When a choice between Knowles and Bayly needed
to be made, ETS showed
where its confidence lay. Knowles mostly worked away from the
company’s premises selling the product. By
the time of the judgment
he had ceased employment and not participated in management for more
than a year. The effect of forcing
Bayly out and placing Knowles in a
position of control would have had effects on the company which can
only be guessed at. (The change
would be even more extreme now that
more than two years have elapsed since his last involvement.)
[28] It
follows from all these considerations that the only practicable order
that could have been made in the circumstances was one
which directed
Bayly to acquire Knowles’s shares. But Knowles did not seek an
order having that effect.
[29] Counsel
for Knowles, perhaps appreciating the weakness of his client’s case
for the purchase of Bayly’s shares, concentrated
on the relief of
liquidation on the just and equitable ground. But Horn J had not made
such an order and Knowles had not noted a
conditional cross-appeal
against his failure to do so. Strictly-speaking that excludes
consideration of the matter. It needs to be
pointed out, however,
that in urging this aspect of his case, counsel fell into a double
trap: liquidation would destroy a perfectly
viable company, as all
agreed; but, in doing so, it would provide no redress to Knowles for
such oppression as he may have suffered.
The first consequence is one
that a court will avoid except in the most extraordinary
circumstances; the second would favour revenge
above reason –
financially Knowles might even be prejudiced by a sale in
liquidation. Nothing more need be said on this aspect.
[30] The
following order is made:
1. The
appeal is upheld with costs including the costs of two counsel.
2. The
order of the court
a quo
is
set aside and replaced with the following:
‘
(a) The
application is dismissed.
(b) The
applicant is to pay the costs of the first to fifth respondents
including the costs
of two counsel.’
____________________
J
A HEHER
JUDGE
OF APPEAL
A
PPEARANCES:
APPELLANTS
: S
F Burger SC and J W Steyn
Instructed
by Le Roux Mathews & Du Plessis, Johannesburg;
Symington
& De Kok, Bloemfontein
RESPONDENT
: J
Blou SC
Instructed
by Cyril Ziman & Associates Inc, Johannesburg
Naudes
Inc, Bloemfontein
1
The question of whether ETS knew and approved of the proposal was
not canvassed in the subsequent correspondence or affidavits.
All
that we know is that ETS, after initial equivocation, sided with
Bayly in the litigation.
2
The counter-proposal was taken up by Horn J and included verbatim in
his order in the application. Counsel for the appellant justly
described it as ‘elaborate, unwieldy and expensive’. An order
designed to regulate the disposal of interests in a company pursuant
to s 252 should, as far as practically possible, achieve an
expeditious, straightforward and inexpensive termination in the
relationship
and exclude the potential for further disputes.
3
The realignment of shares between 2004 and 2008 was not explained by
anyone in the application. The parties seem to have accepted
that by
the time proceedings commenced the respective holdings in the
company were as follows:
Knowles 6333 31.67%
Bayly 6333 31.67%
Martin 5833 29.17%
Stipanov 500 2.50%
ETS 500 2.50%
Van Laun 250 1.25%
Johnson 250 1.25%
Juuhl 1 0.01%
Van Laun (sixth
appellant) and Juuhl (eighth appellant) were the non-executive
directors appointed by ETS. Johnson (seventh appellant)
resided in
the United Kingdom; the origin of his holding seems to precede the
involvement of the present antagonists in the company.
Stipanov
(fifth appellant) is said by Knowles to have been in a relationship
with Bayly.
4
Knowles did not pursue the claim for interim relief.
5
Section 252 provides (in so far as relevant):
‘(1) Any member of a
company who complains that any particular act or omission of a
company is unfairly prejudicial, unjust or
inequitable, or that the
affairs of the company are being conducted in a manner unfairly
prejudicial, unjust of inequitable to
him or to some part of the
members of the company, may, subject to the provisions of subsection
(2), make an application to the
Court for an order under this
section.
. . .
(3) If on any such
application it appears to the Court that the particular act or
omission is unfairly prejudicial, unjust or inequitable,
or that the
company’s affairs are being conducted as aforesaid and if the
Court considers it just and equitable, the Court may,
with a view to
bringing to an end the matters complained of, make such order as it
thinks fit, whether for regulating the future
conduct of the
company’s affairs or for the purchase of the shares of any members
of the company by other members thereof or
by the company and, in
the case of a purchase by the company, for the reduction accordingly
of the company’s capital, or otherwise.’
6
Cf
O’Neill v Phillips;
In
re A Company (No 00709 of
1992)
[1999] UKHL 24
;
[1999] 1 WLR 1092
(HL) at 1107C-1108B
[1999] UKHL 24
; ;
[1999] 2 All ER 961.