Brief Summary

Companies — Derivative actions — Urgent application for leave to institute derivative action on behalf of a company — Applicants, minority shareholders in Neighbiz Holdings (Pty) Ltd, sought to interdict majority shareholders from launching a competing application and infringing copyright — Court found material disputes of fact existed, necessitating a trial for resolution — Applicants granted leave to proceed with derivative action under s. 165(5) of the Companies Act 71 of 2008, with the Court exercising discretion in their favor due to shown good faith and exceptional circumstances.

Comprehensive Summary

Summary of Judgment

1. Introduction

This was an urgent application in the High Court of South Africa (Gauteng Division, Pretoria), before Fabricius J, in which the applicants sought, primarily, (i) leave to institute derivative proceedings in the name and on behalf of Neighbiz Holdings (Pty) Ltd in terms of section 165(5) of the Companies Act 71 of 2008, together with condonation for non-compliance with the statutory demand/notice requirements insofar as necessary, and (ii) interim interdictory relief to prevent the launch of the NEIGHBIZ App and alleged infringement of copyright pending contemplated action proceedings.

The applicants comprised three trustees acting nomine officii for the FCFC Herps Trust, together with several individuals who were shareholders. The respondents included Jennifer Ann Ward (first respondent), additional individual respondents, and two corporate entities, namely Neighbiz Holdings (Pty) Ltd (the fifth respondent, referred to as “Holdings” or “the Company” in the judgment) and Neighbiz SA (Pty) Ltd (the sixth respondent).

The matter was initially set down for hearing on 20 February 2019 on the urgent roll, but was ultimately heard on 27 February 2019. The first respondent delivered a conditional counter-application seeking a declaratory order that she owned the relevant copyright (at least in part). However, after the court indicated at roll call that material disputes of fact appeared to arise on the papers, the first respondent withdrew the counter-application and tendered the costs relating to it.

The general subject-matter of the dispute concerned the proprietorship of copyright in the NEIGHBIZ application and whether, pending trial proceedings, the majority shareholders/controllers could launch the app through another entity and thereby deprive the company (and minority shareholders, via the company) of the benefit of the intellectual property developed for exploitation through Holdings.

2. Material Facts

It was common cause that copyright subsisted in the works relating to the NEIGHBIZ application. The court identified the only issue for purposes of the interim relief as determining, prima facie, who the proprietor of that copyright was, in circumstances where the factual disputes were too extensive to be finally resolved on affidavit.

On the shareholding structure, the applicants were minority shareholders, holding approximately 22% of the shareholding in the fifth respondent (Holdings). The first to fourth respondents were majority shareholders holding approximately 71%, with the first respondent personally holding approximately 61%. The fifth respondent was the investment vehicle through which the applicants and other minority shareholders invested for the commercial exploitation of the NEIGHBIZ application.

Chronologically, the NEIGHBIZ application had been in development for at least seven years. The first respondent had incorporated Holdings to commercialise the app and sold shareholdings to finance development. During 2018, discussions occurred about why the app had not launched and about the intellectual property position. The applicants alleged they were told the launch was imminent.

On 28 January 2019, the majority respondent shareholders launched an application in the same court to wind up Holdings on the basis that it was just and equitable. In close temporal proximity, and said to be on professional advice, the first respondent withdrew approximately R2 million from Holdings’ bank account prior to launching that winding-up application. In that winding-up application, the first respondent made statements to the effect that the intellectual property in the NEIGHBIZ application belonged to her personally and that Holdings was merely a licensee.

On 1 February 2019, the applicants became aware (through information from a shareholder in the sixth respondent) that the respondent shareholders were arranging for the NEIGHBIZ application to be launched in the name of a different legal entity and/or by a third party. On 7 February 2019, the applicants’ attorneys addressed correspondence asserting that the copyright vested in Holdings, seeking undertakings to prevent launch elsewhere, and warning of urgent proceedings if undertakings were refused. The respondents’ attorneys refused undertakings and maintained that the first respondent owned all intellectual property and could launch the app personally or in any entity.

On 12 February 2019, the applicants were informed that the app would be launched on 22 February 2019, prompting renewed requests for information and undertakings, which again were refused. After urgent proceedings were launched, the answering affidavit asserted that no launch date had been set, but later correspondence indicated an intended launch on 28 February 2019. During argument, the first respondent’s attorneys undertook not to launch the app until judgment was delivered.

The court treated it as significant, at least at the level of probability relevant to interim relief, that various documents generated in the course of the parties’ dealings appeared to reflect that the relevant rights were held by corporate entities rather than the first respondent personally. These included a March 2018 business plan and earlier shareholder communications, as well as a revised memorandum of understanding stating that the design and code would remain the property of “NEIGHBIZ (Pty) Ltd”. The first respondent’s answering papers were noted as containing no explanation for certain prior statements and documents that did not assert her personal ownership of intellectual property.

At the same time, the court expressly recognised that there were numerous material disputes of fact on the affidavits concerning the true ownership/proprietorship basis and the relationship between the first respondent and Holdings, such that final determination was more appropriate for a trial court.

3. Legal Issues

The central legal questions were, first, whether the applicants should be granted leave under section 165(5) of the Companies Act 71 of 2008 to institute proceedings in the name and on behalf of Holdings, including whether the statutory requirements for leave (and any condonation or dispensation from notice under section 165(6)) were satisfied on the papers.

Second, the court had to determine whether the requirements for an interim interdict were met, including whether there was a prima facie right (even if open to some doubt), a reasonable apprehension of irreparable harm, the balance of convenience, and the absence of an adequate alternative remedy, in the context of threatened launch and alleged infringement of copyright pending action.

Third, although not finally decidable on affidavit, the court identified that the underlying substantive dispute in the contemplated action would likely include whether the first respondent created the relevant works in the course of employment under a contract of service, engaging section 21(1)(d) of the Copyright Act 98 of 1978, and thereby whether copyright vested in the employer/company rather than in her personally.

The dispute thus involved a mixture of law (the statutory requirements and legal tests) and the application of law to contested facts, together with evaluative judgments inherent in urgency, “exceptional circumstances” under section 165(6), and the discretionary character of leave under section 165 and interim interdict relief.

4. Court’s Reasoning

The court first addressed urgency. Having regard to the sequence of communications, the shifting and withheld information concerning the intended launch date, and the threatened imminent launch of the application outside Holdings, the court held that the matter was urgent.

Turning to section 165 of the Companies Act 71 of 2008, the court characterised the proceedings as a statutory derivative action mechanism designed for circumstances where the company is the proper plaintiff but alleged wrongdoers are in control and will not enforce the company’s rights against themselves. Relying on Mbethe v United Manganese of Kalahari (Pty) Ltd 2017 (6) SA 409 (SCA), the court emphasised that leave under section 165 involves an overriding discretion and that the structure of the provision seeks both to protect minority members and to protect the administration of the company’s business.

Applying section 165(5), the court considered whether the applicants acted in good faith, whether the proposed proceedings raised a serious question of material consequence to the company, and whether it was in the best interests of the company that the applicants be granted leave. The court approached the affidavits holistically and concluded that the good faith requirement was satisfied.

The court then dealt with section 165(6), which permits proceedings without notice in exceptional circumstances. Without embarking on a detailed analysis of the voluminous papers (and expressly avoiding factual findings that could bind a trial court), the court held that exceptional circumstances existed, viewed against the statutory considerations in section 165(6)(a)(i), (ii), (b) and (c), and exercised its discretion in favour of permitting the matter to proceed without prior demand/notice.

In addressing the underlying copyright proprietorship issue at the interim stage, the court stressed that it could not finally resolve the matter on affidavit because material disputes of fact permeated the case. The court nonetheless considered that certain contemporaneous documents suggested, on a probabilistic basis, that Holdings’ claim to proprietorship was at least plausible and that the respondents’ position was not as clear-cut as contended. The court also observed, again only for interim purposes, that there were documents that could support an inference that the first respondent may have created impressions inconsistent with her later assertion of personal ownership; however, the court treated these observations as not amounting to final findings, given the interim nature of the relief.

For the interim interdict, the court applied the established requirements as set out in Olympic Passenger Services (Pty) Ltd v Ramlagan 1957 (2) SA 382 (D). On the papers, the court found the requirements satisfied. It considered indications that the launch date was deliberately withheld, the absence of undertakings, and the risk that launching outside Holdings could cause harm to the company’s rights. On irreparable harm and balance of convenience, the court held that the balance favoured granting interim relief pending action, particularly because the court considered there to be no other mechanism available to the applicants to obtain equivalent protection in the circumstances.

Overall, the court exercised its discretion under section 165 and in relation to interim interdictory relief in favour of the applicants, while expressly reserving the ultimate determination of the substantive disputes for trial proceedings.

5. Outcome and Relief

The court granted prayers 1 to 7 of the notice of motion. This included leave under section 165(5) to bring proceedings in the name and on behalf of Neighbiz Holdings (Pty) Ltd, condonation of non-compliance with section 165(2) insofar as necessary, interim interdicts preventing the first to fourth respondents from launching the NEIGHBIZ app and from infringing the identified copyrighted works pending action, an order that the copyrighted works be kept in escrow with an independent attorney (with a mechanism for appointment via the Legal Practice Council if agreement could not be reached), and an order compelling access for inspection of books under section 165(9)(e).

The court recorded that the first respondent withdrew her conditional counter-application and tendered the costs relating to it.

The court further stated that the order would not operate as a bar to any claim the respondents might have for damages, nor would it operate as a defence to any such damages claim.

Cases Cited

Mbethe v United Manganese of Kalahari (Pty) Ltd 2017 (6) SA 409 (SCA).

Olympic Passenger Services (Pty) Ltd v Ramlagan 1957 (2) SA 382 (D).

Legislation Cited

Companies Act 71 of 2008, section 165(2), section 165(5), section 165(6), and section 165(9)(e).

Rules of Court Cited

No rules of court were cited in the judgment.

Held

The court held that the application was urgent in light of the threatened launch of the NEIGHBIZ application outside the company structure, the refusal of undertakings, and the manner in which the intended launch date emerged and changed in correspondence and papers.

It held that the applicants satisfied the statutory requirements for leave to bring a derivative action under section 165(5) of the Companies Act 71 of 2008, including good faith, and that the proposed proceedings raised a serious question of material consequence to the company and were in the company’s interests.

It further held that exceptional circumstances justified proceeding without the usual notice requirements contemplated by section 165, and that the requirements for an interim interdict were met on the papers. Given the substantial disputes of fact, the court avoided final determinations on copyright ownership, indicating that such issues were better resolved by a trial court, but found sufficient basis for interim protection pending action.

LEGAL PRINCIPLES

The judgment applied the principle that section 165 of the Companies Act 71 of 2008 creates a statutory derivative action enabling enforcement of a company’s rights where those in control of the company will not cause the company to sue alleged wrongdoers. The grant of leave is not automatic; the court retains an overriding discretion and must be satisfied, among other things, that the applicant acts in good faith, that the proposed proceedings raise a serious question of material consequence to the company, and that granting leave is in the best interests of the company, as reinforced by Mbethe v United Manganese of Kalahari (Pty) Ltd 2017 (6) SA 409 (SCA).

The judgment also applied the statutory principle that exceptional circumstances may justify proceeding without the usual prior notice or demand mechanism contemplated by the derivative action framework (in this judgment, under section 165(6)), with the court exercising a discretionary evaluative judgment on the facts presented.

Finally, in relation to interim relief, the judgment applied the established requirements for an interim interdict as set out in Olympic Passenger Services (Pty) Ltd v Ramlagan 1957 (2) SA 382 (D), and emphasised that where material disputes of fact prevent final determination on affidavit, a court may nonetheless grant interim protection if the prima facie right and the remaining interdict requirements are sufficiently established on the papers, pending resolution of the disputes in action proceedings.

Herps NO and Others v Ward and Others (10711/19) [2019] ZAGPPHC 64 (7 March 2019)