Brief Summary

Company Law — Interim relief — Minority shareholders seeking to interdict sale of shares process — Allegations of oppressive and unfairly prejudicial conduct under section 163 of the Companies Act 71 of 2008 — Requirements for interim interdict not met — Majority shareholders acting in best interests of the company and all shareholders — Application for interdict refused.

Comprehensive Summary

Summary of Judgment

1. Introduction

The proceedings were motion proceedings brought on a semi-urgent basis in the Gauteng Local Division, Johannesburg. The applicants sought interim interdictory relief (Part A) pending the later determination of final relief (Part B). The interim relief was aimed at preventing the implementation or progression of a competitive sales process contemplated in the second respondent’s Memorandum of Incorporation (MOI).

The applicants were Kewco Proprietary Limited (first applicant), Gregory David Senior (second applicant), Lewis Golden N.O. (third applicant), and Andrea Senior N.O. (fourth applicant). They were minority shareholders in Lodestone Brands Proprietary Limited (the second respondent) and complained of conduct allegedly falling within section 163(1)(a) of the Companies Act 71 of 2008, namely conduct that was said to be oppressive, unfairly prejudicial, or which unfairly disregarded their interests.

The respondents included Second Chapter Investments Proprietary Limited (first respondent), Lodestone Brands Proprietary Limited (second respondent), Mayfair Holdings Proprietary Limited (third respondent), Mayfair Speculators Proprietary Limited (fourth respondent), The Standard Bank of South Africa Limited (fifth respondent), and further individual respondents. The application was opposed by the first to fourth respondents.

The dispute concerned whether the majority shareholders (through the contractual mechanism in clause 16 of the MOI) could proceed with a competitive sale process that could culminate in a sale of shares (and thus affect minority shareholdings), and whether the initiation and progression of that process was susceptible to restraint on the basis that it was oppressive or unfairly prejudicial under section 163.

2. Material Facts

The second respondent, Lodestone Brands Proprietary Limited, was a company founded around 2009 and operated a fast-moving consumer goods business through three divisions (Confectionary, Beverages, and Personal and Baby Care). Its shareholding structure (as described by the court) was that the first respondent held 74% of the total issued share capital in the second respondent, while Mayfair Holdings Proprietary Limited (the third respondent) held 78.37% of the shares in the first respondent and also held 10.77% of the shares in the second respondent directly. The applicants, collectively, held 19.84% of the issued share capital in the second respondent and were therefore minority shareholders.

It was common cause that the second respondent’s shareholders adopted the MOI on or about 22 April 2014 (effective 13 June 2014) after it was lodged with the Companies and Intellectual Property Commission. The adoption of the MOI was connected to a broader framework arrangement concluded around June 2014 involving, among others, the second respondent and certain applicant-linked entities.

A central, undisputed feature of the MOI was clause 16, which created a contractual procedure allowing an “initiating shareholder” (being specified shareholders or shareholders holding, in aggregate, 50.1% of shares and claims) to serve a sale notice after 30 September 2017, requiring the board to conduct a Competitive Sale Process through a “Relevant Investment Bank”. The mechanism contemplated that, if the initiating shareholder accepted a binding bid within the stipulated period, all shareholders would be deemed to have accepted and would proceed to implement the sale, subject to regulatory approvals and lapse provisions.

The trigger for the events leading to the dispute was the public announcement on 6 December 2017 by Steinhoff International Holdings NV of accounting irregularities and the resignation of its CEO. The court recorded that Steinhoff shares fell sharply between 5 and 7 December 2017. In mid-December 2017, at a Lodestone board meeting and dinner, concerns were raised that, given the difficulties around Steinhoff and risks arising from the third respondent’s association with it, it would be in Lodestone’s interests to sever ties with the third respondent. A board sub-committee was formed to investigate and deal with the contemplated separation.

At the 14 December 2017 board meeting, the second applicant raised the possibility of a management buy-out and indicated that a sale to a trade buyer should not be contemplated; other directors did not agree that any class of buyer should be excluded. As part of the process of considering options and valuation, Standard Bank (the fifth respondent) was appointed to advise the sub-committee and to conduct a valuation. The applicants questioned the appointment and involvement of Standard Bank; the respondents refuted the concerns.

Following interactions and correspondence between the parties, the first respondent invoked clause 16 on 28 February 2018 by serving a sale notice on the second respondent and the other shareholders, thereby requiring the board to conduct a competitive sale process. The parties thereafter engaged extensively, with the applicants objecting that the clause 16 process should be withdrawn and alleging oppression, and the respondents maintaining that the clause 16 process was an available contractual right and not oppressive. The applicants were repeatedly invited to participate in the process as bidders, but maintained their opposition.

On 15 March 2018, the second respondent convened a board meeting to implement the clause 16 process by appointing the Relevant Investment Bank. Standard Bank was proposed and, according to the court’s description, a resolution to appoint Standard Bank as the Relevant Investment Bank was adopted by all directors present except the first and second applicants. The applicants disputed the appointment, including on the basis of alleged conflicts.

The present application was launched on 23 March 2018. The interim relief sought in Part A was to interdict the first to fifth respondents from taking steps to implement or progress the clause 16 competitive sale process (or to conclude or implement any sale agreement pursuant to it) pending Part B.

3. Legal Issues

The central legal question was whether the applicants established the requirements for an interim interdict restraining the implementation of the clause 16 competitive sale process pending the determination of Part B.

This required the court to determine whether the applicants had shown a prima facie right (even if open to some doubt) grounded principally in section 163(1)(a) of the Companies Act 71 of 2008, namely a right to relief from conduct that was oppressive, unfairly prejudicial, or which unfairly disregarded their interests as minority shareholders.

A further issue (raised by the respondents) was whether the relief sought was in substance final rather than interim, which would affect the applicable standard. Although the court indicated that it was compelled to examine both interim and final interdict principles, it ultimately decided the matter on the basis that the requirements for interim relief were not met.

The dispute predominantly concerned the application of law to fact and involved evaluative judgments about (i) whether the clause 16 process and related steps could properly be characterised as oppressive or unfairly prejudicial, (ii) the applicants’ prospects of success under section 163, (iii) the balance of convenience, and (iv) whether there was an absence of alternative satisfactory remedies.

4. Court’s Reasoning

The court approached the matter through the settled principles governing interim interdicts, requiring an applicant to establish a prima facie right (though open to some doubt), infringement or a well-grounded apprehension of infringement, irreparable harm, absence of adequate alternative remedy, and that the balance of convenience favours relief. It emphasised that these elements are not treated in isolation but feed into the court’s discretion, including consideration of prospects of success and whether ordinary remedies (including damages) could protect the applicant.

Applying these principles, the court held that the applicants had not established a prima facie right. Their reliance on section 163 was described as dubious and highly questionable at the interim stage, with the court considering the applicants’ prospects under Part B to be bleak. The court cited authority for the proposition that courts are slow to interfere in company management and that a shareholder undertakes to be bound by majority decisions reached lawfully, even if those decisions adversely affect the shareholder’s interests. The court treated this majority rule principle as particularly relevant where the contested conduct consists of exercising an expressly agreed contractual power under a company’s constitutional documents.

A key component of the court’s reasoning was that clause 16 of the MOI expressly created the mechanism the applicants sought to restrain. The applicants’ suggestion that the continued presence of clause 16 was an “oversight” or “administrative error” was rejected as meritless. The court regarded the applicants as sophisticated businesspeople who had consciously consented to the MOI’s provisions, including clause 16. In this context, the court did not find a basis to characterise the majority’s invocation of clause 16 as oppressive or unfairly prejudicial merely because it could compel the minority to sell pursuant to the MOI mechanism.

The court also considered whether there was evidence that the respondents were acting mala fide or pursuing an illegitimate purpose. It found no evidence supporting mala fides or conduct contrary to the interests of the company and all shareholders. On the contrary, it considered that the applicants appeared to be seeking to protect not an interest in fair treatment, but an interest in acquiring others’ shares at the lowest price, and it did not accept that the competitive sale process, as contemplated by the MOI, inherently entailed oppression or unfair prejudice.

On the issue of balance of convenience, the court held that the applicants had not shown that it favoured interim relief. It accepted that restraining the clause 16 process could impede the majority shareholders’ ability to comply with obligations under a scheme of arrangement (under section 155 of the Companies Act 71 of 2008) with defined timelines, and that delay pending Part B (with uncertain finalisation) would likely prejudice the respondents. Conversely, it saw no probable harm to the applicants because they could either receive a competitive price for their shares or participate as bidders to acquire the other shares.

The court also dealt with alternative remedies. It reasoned that the applicants had alternatives available, including participation in the competitive process (they had been invited to bid), potential later claims for damages if harm were established, and reliance on the court’s wide remedial discretion under section 163 in Part B should it later find oppressive or prejudicial conduct. Additionally, the court noted that the MOI contained an arbitration clause (clause 18.3) for disputes arising out of or in connection with the MOI, and the applicants had declined to pursue that mechanism. While the court did not make definitive findings on the scope of arbitration versus section 163 relief, it treated the existence and availability of the dispute resolution mechanism as further indication that interim interdict relief was not justified on the papers.

In the result, and considering the requirements cumulatively, the court concluded that the application for interim relief under Part A could not succeed.

5. Outcome and Relief

The court dismissed the application for the interim relief sought in Part A of the notice of motion. It ordered the applicants to pay the respondents’ costs, including the costs occasioned by the employment of two counsel.

Cases Cited

Olympic Passenger Service (Pty) Ltd v Ramlagan 1957 (2) SA 384 (W).

Knox D’Arcy Ltd and Others v Jamieson and Others 1995 (2) SA 579 (W).

Hix Networking Technologies v System Publishers (Pty) Ltd and Another [1996] ZASCA 107; 1997 (1) SA 391 (SCA).

Setlogelo 1914 (D) 221.

Beecham Group Ltd v B-M Group (Pty) Ltd [1977] 1 All SA 267 (T).

Transvaal Property and Investment Co Ltd and Reinhold and Company v SA Township Mining and Finance Corporation Ltd 1938 TPD 512.

Cape Tax Engineering Works (Pty) Ltd v SAB Lines (Pty) Ltd 1968 (2) SA 528 (C).

Simon NO v Air Operations of Europe AB and Others [1998] ZASCA 79; 1999 (1) SA 217 (SCA).

Godbold v Thomson 1970 (1) SA 61 (D).

Molteno Brothers and Others v South African Railways and Others 1936 AD 321.

Johannesburg Municipality v African Reality Trust Ltd 1927 AD 163.

De Sousa and Another v Technology Corporate Management (Pty) Ltd 2017 (5) SA 577 (GJ).

Sammel and Others v President Brand Gold Mining Co Ltd 1969 (3) SA 629 (A).

Garden Province Investment and Others v Aleph (Pty) Ltd and Others 1979 (2) SA 525 (D).

Levin v Felt and Tweeds Ltd 1951 (2) SA 401 (AD).

Bayly v Knowles 2010 (4) SA 548 (SCA).

Plettenberg Bay Entertainment (Pty) Ltd v Minister van Wet en Orde en ’n Ander 1993 (2) SA 396 (C).

Harnischefeger Corporation and Another v Appleton and Another 1993 (4) SA 479.

Re Five Minute Car Wash Ltd [1966] 1 All ER 242 (Ch).

Carlisle v Adcorp Holdings Ltd 2000 CLR 261 (W).

Peel and Others v Hamon J&C Engineering (Pty) Ltd and Others 2013 (2) SA 321 (GSJ).

MacMillan NO v Pott and Others 2011 (1) SA 511 (WCC).

The Wilds Homeowners Association v Van Eeden JDR 0743 (GNP).

De Villiers and Kopela Holdings (Pty) Ltd 2015 JDR 1942 (GSJ).

Legislation Cited

Companies Act 71 of 2008, including sections 16(4), 155, 162, 163, and 131(4)(a).

Companies Act 61 of 1973, including sections 252(1) and 252(3).

Rules of Court Cited

No specific rules of court were cited in the judgment.

Held

The court held that the applicants failed to satisfy the requirements for an interim interdict restraining the clause 16 MOI competitive sale process. In particular, they did not establish a prima facie right grounded in section 163 of the Companies Act 71 of 2008 on the papers before the court, nor did they show that the balance of convenience favoured relief or that there was an absence of alternative remedies. The invocation and implementation of clause 16 was treated as an exercise of an agreed contractual mechanism, and no mala fides or cognisable oppressive or unfairly prejudicial conduct warranting interim restraint was shown. The application for interim relief was dismissed with costs, including the costs of two counsel.

LEGAL PRINCIPLES

The judgment applied the settled requirements for an interim interdict, namely the need for a prima facie right (even if open to doubt), infringement or reasonable apprehension of infringement, irreparable harm, absence of an adequate alternative remedy, and that the balance of convenience favours the grant of relief. These elements inform a judicial discretion in which prospects of success and the practical consequences for both parties are weighed together.

In assessing alleged oppression or unfair prejudice, the judgment applied the principle that courts are generally slow to interfere in the management of companies, and that shareholders, by becoming shareholders, undertake to be bound by the decisions of the majority when made in accordance with the law and the company’s governing instruments. Mere dissatisfaction with corporate decisions, resentment at being outvoted, or loss of confidence in management does not, without more, constitute the kind of unfairness contemplated by minority protection provisions.

The judgment further applied the principle that directors’ and corporate powers must be exercised for the benefit of the company as a whole, and that “shareholder expectations” relevant to fairness are not simply an individual shareholder’s preferred outcomes. Where a disputed course of conduct is expressly authorised by the company’s constitutional framework (here, clause 16 of the MOI), the invocation of that mechanism by majority shareholders was treated as difficult to characterise as oppressive absent proof of improper purpose or bad faith.

Finally, the judgment emphasised that the availability of alternative remedies (including mechanisms provided in the MOI and the breadth of remedial powers available under section 163 at the final stage) is relevant to whether extraordinary interim relief should be granted, and that where no prima facie right is shown, an interim interdict cannot be granted.

Kewco Proprietary Limited and Others v Second Chapter Investments Proprietary Limited and Others (12058/2018) [2018] ZAGPJHC 530 (7 September 2018)