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[2011] ZASCA 160
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Grey Global Group Inc v Khumalo and Another (725/10) [2011] ZASCA 160 (28 September 2011)
THE
SUPREME COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT
Case no
:
725/10
In the matter
between:
GREY GLOBAL GROUP
INC
….........................................................................................
Appellant
and
BONGANI
KHUMALO
….......................................................................................
First
Respondent
GREY
GROUP SOUTH AFRICA (PTY) LTD
…...............................................
Second
Respondent
Neutral citation:
Grey Global v Khumalo
(725/10) [2011]
ZASCA161 (28 September 2011)
Coram: Lewis, Maya,
Malan and Theron JJA and Petse AJA
Heard: 13 September
2011
Delivered
28 September 2011
Summary: Where option to sell shares is exercised, binding agreement
of sale comes into existence and prescribed modes of performance
of
obligations do not make sale conditional.
ORDER
On
appeal from: South Gauteng High Court, Johannesburg (Maluleke J
sitting as court of first instance):
1 The appeal is upheld with costs including those of two
counsel.
2 The order of the high court is set aside and replaced
with:
‘
The orders sought in prayers 1 and 2 of the
notice of motion are granted, with costs.’
JUDGMENT
LEWIS
JA (MAYA, MALAN and THERON JJA and PETSE AJA concurring)
[1] In July 2003 Mr B A Khumalo, the first respondent in
this appeal, bought 25.1 per cent of the shares in Grey Group South
Africa
(Pty) Ltd (Grey Group), the second respondent, from Grey
Global Group Inc (Grey Global), the appellant, for R8 million.
Payment
was made by the delivery of a promissory note in the form
prescribed by the agreement by Khumalo to Grey Global. A share
certificate
was delivered to Khumalo as agreed. The sale agreement
was made conditional on the conclusion of a shareholders’
agreement.
That too was concluded by the parties.
[2] The shareholders’ agreement contained various
provisions regulating the positions of the respective parties. I
shall refer
to them in due course. Central to this appeal is an
option given to Khumalo to sell his shares (a put right) to Grey
Global after
the fifth anniversary of the conclusion of the
shareholders’ agreement, at a price to be determined in
accordance with a
formula. Khumalo exercised the option, but when the
price was determined at zero, he asserted that the option was
conditional and
that he was not obliged to deliver the share
certificate to Grey Global. Grey Global applied for an order
compelling Khumalo to
deliver the share certificate. Maluleke J in
the South Gauteng High Court, Johannesburg held that the option was
conditional and
dismissed the application but granted leave to appeal
to this court.
[3] I shall turn to the core of the appeal shortly. It
should be noted first, however, that pursuant to the shareholders’
agreement, Khumalo was appointed as a non-executive chairman of Grey
Group, and received director’s fees as remuneration.
[4] The dispute between the parties centered on the
interpretation of clauses 3.2.3, 3.2.5 and 3.5 of the shareholders’
agreement.
Clause 3 as a whole dealt with the future sales of shares
by the parties. So, for example, Grey Global had the right to
purchase
Khumalo’s shares (a call right) on or within 90 days
of the fifth anniversary of the agreement (clause 3.2.2). The put
right
conferred on Khumalo was expressed as follows:
‘3.2.3
Khumalo Put Right
. On or within 90 days following
the fifth anniversary of the Agreement, Khumalo shall have the right,
but not the obligation, to
require Grey to purchase all, but not less
than all, of the Shares then owned by Khumalo (”Put”).
Any exercise of the
Put shall be made in accordance with the terms
and procedures set forth in section 3.5.’
[5] Clause 3.5.1 required that put or call rights should
be exercised by written notice. Clause 3.5.2 provided that the
‘closing’
for the purchase and sale of shares pursuant to
the exercise of a put or a call should be within 60 days after the
exercise of
the put or the call, and clause 3.5.2(i) provided that
Khumalo was required to deliver the share certificate with a
declaration
of transfer signed by him 14 days before the date of
delivery.
[6] Clause 3.5.2 is the clause that was found by the
high court to make the put right conditional. It provided:
‘
Closing.
The closing for the purchase and sale of
Shares (the “Closing”) pursuant to an exercise of a Put
or Call under Section
3.2 hereof shall be within 60 days after the
exercise of the applicable Put or Call.
3.5.3
Deliveries at Closing
. At any Closing:
(i) Khumalo shall deliver a certificate or certificates representing
the Shares sold hereunder together with declaration for the
transfer
thereof in blank as to transferee, duly signed by the
Seller/registered holders on a date not being more than 14 . . .
days
before the date of delivery . . . together with his resignation as
Non-Executive Chairman of the Company.
(ii) Grey shall deliver the Purchase Price, and, if applicable, the
cancelled Promissory Note, to Khumalo.’
[7] The parties agreed also that their agreement would
be construed ‘under the laws of the Republic of South Africa’
and that it could be amended only by written agreement signed by the
shareholders.
[8] On 11 September 2008, Khumalo exercised the put
right by sending a written notice to Grey Global in accordance with
the provisions
of clause 3.2.3 of the shareholders’ agreement.
He undertook in the notice to lodge his share certificate in trust
with the
company’s auditors within 48 hours, as required by the
agreement.
[9] On 14 April 2009,
the chief
financial officer of Grey Global designated Mr A Graham to determine
the purchase price in terms of clause 3.4(f) of the
agreement. The
latter did so. Using the formula agreed,
Graham
determined that the price was zero and this was communicated to
Khumalo on 17 April 2009 by Grey Global’s attorneys.
[10] Khumalo contested the result and the application of
the formula. (This was not pursued in argument on appeal.) And on 28
April,
his attorneys responded with a letter stating that,
while Khumalo had ‘effectively’ exercised
his put right, he was not aware of any sale that had come into
existence.
The basis for this was that Grey Global had not complied
with the provisions of clause 3.5: no sale of shares agreement had
been
drawn up, and there was thus no obligation to sell the shares
nor to deliver the share certificate.
[11] The stance that Khumalo took was that the exercise
of the put right was conditional on closing taking place in terms of
clause
3.5. And that was the finding of the high court when it
dismissed the application by Grey Global for the delivery to it of
Khumalo’s
share certificate. The put right, it held, was
conditional on the delivery by Khumalo of the share certificate and a
share transfer
form, in the format prescribed; and on the payment by
Grey Global of the purchase price and, if applicable, the delivery of
the
cancelled promissory note. In other words, the put right was
conditional on closing within 60 days of the exercise of the put
right.
[12] The high court found that Grey Global bore the onus
of proving the existence of an unconditional purchase and sale
contract.
Since there was no delivery of the share certificate nor
payment of the price, the conditions had not been fulfilled and no
sale
had been concluded.
[13] Grey Global’s contention on appeal was that
clause 3.5 did not impose any conditions. Once Khumalo had exercised
his
right to sell the shares a binding contract of sale came into
existence. A put right is no more than an option. Once the right
holder exercises the right – accepting the offer to buy –
a sale is concluded. That is indeed the usual construction
of an
option: it is an irrevocable offer which, when accepted, becomes a
binding contract. Grey Global would not have been entitled
to revoke
its offer to buy the shares, just as Khumalo would not have been
entitled to revoke his offer to sell his shares –
the call
right. The principle that an option is binding on the offeror is
trite.
1
[14] The construction of the provisions of clause 3.5,
dealing with closing, as imposing conditions on the sale, is also
incorrect.
Again, it is trite that a condition in the true sense is
the occurrence (uncertain at the time of entering into the contract)
of
an event that is not entirely dependent on the will of any of the
parties. Clause 3.5 imposed obligations to perform on the exercise
of
the put or call rights. The seller was required to deliver the share
certificate and the buyer to pay the price. Whereas a condition
cannot be made to materialize by any of the parties, each has the
right to compel performance of an obligation imposed on the other.
Thus once the put right was exercised by Khumalo he had the right to
demand payment of the price (if it had not amounted to zero)
and Grey
Global had the right to compel delivery of the share certificate and
transfer form.
[15] Counsel for Khumalo placed some emphasis on the use
of the word ‘closing’ in clause 3.5, arguing that it
required
that performance take place before a contract could be
concluded. The shareholders’ agreement was drafted in America,
and
there is American authority on the meaning of the term (which is
not defined in the agreement). ‘Closing’, it is said,
according to
Black’s Law Dictionary
,
is the final meeting between the parties to a transaction at which
the transaction is consummated – a definition relied
on in
Benavidez v Benavidez.
2
But the case makes it plain that by consummation is
meant performance.
Benavidez
cited
also
McMillan Ltd v Warrior Drilling &
Eng’s Co
3
where the court said that the acceptance of an offer to
sell ‘real estate’ creates a binding obligation, and that
closing
is the fulfillment of the obligations created.
[16] Counsel for Khumalo did not point to any authority
that suggested that a sale is conditional on closing. And since the
contract
is governed by South African law, there is no doubt, in my
view, that clause 3.5 governed the mode of performance of the
parties’
respective obligations and did not make the sale
conditional.
[17] Khumalo raised various other issues in an attempt
to persuade the court that the put right had not been exercised. Two
were
argued on appeal. The first was that on 7 January 2009 Graham
had written an email to Khumalo stating that he assumed that Khumalo
was retaining his shareholding in Grey Group but that Graham was
discussing with others the possibility of their acquiring shares
too.
This, submitted Khumalo, meant that Grey Global had accepted that the
put right had not resulted in a binding sale. But Grey
Global’s
response was that the email was sent at a time when Khumalo and
Graham were negotiating about the determination
of the price, and
that the email was meant to convey only that Khumalo had not yet
accepted that the price was zero. No agreement
was ever reached in
this regard. In any event, once the put right had been exercised, it
was not open to either Graham or Khumalo
to reverse its effect. This
contention thus fails.
[18] Secondly, Khumalo argued that he continued to be
the non-executive chair of Grey Group after he had exercised the put
right
and that that too meant that there was a common understanding
that there had been no sale in place. Grey Global’s response
was that since Khumalo had not delivered the share certificate, he
retained his shareholding, and with that went his duty to chair
the
board. He was not asked to resign since Grey Global did not wish to
create a dispute in respect of this issue. In my view this
stance
could not have changed the legal position: a sale had occurred but
performance had not taken place and Grey Global was entitled
to
compel performance – delivery of the share certificate by
Khumalo. This argument too must fail.
[19] In the circumstances the appeal must be upheld. It
is ordered that:
1 The appeal is upheld with costs including those of two
counsel.
2 The order of the high court is set aside and replaced
with:
‘
The orders sought in prayers 1 and 2 of the
notice of motion are granted, with costs.’
____________
C H Lewis
Judge of Appeal
APPEARANCES:
APPELLANT:
L Harris SC (with him F Ismail)
Instructed
by Webber Wentzel, Johannesburg
Honey
& Partners, Bloemfontein
RESPONDENT:
D B Ntsebeza SC (with him M Sello)
Instructed
by Ramushu Mashile Twala Inc, Johannesburg,
Claude Reid Inc, Bloemfontein
1
R
H Christie
The Law of Contract in South Africa
5 ed (2006) at
53-54.
2
Benavidez
v Benavidez
Court of Appeals of New Mexico (2006) 145 P.3d 117.
3
McMillan
Ltd v Warrior Drilling & Eng’s Co
512 So 2d 14
, 23
(Ala 1986)
.