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[2019] ZASCA 53
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CDH Invest NV v Petrotank South Africa (Pty) Ltd and Others (483/2018) [2019] ZASCA 53; 2019 (4) SA 436 (SCA) (1 April 2019)

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THE
SUPREME COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT
Reportable
Case
no: 483/2018
In
the matter between:
CDH
INVEST
NV                                                                                              APPELLANT
and
PETROTANK
SOUTH AFRICA (PTY) LTD                                       FIRST

RESPONDENT
AMABUBESI
INVESTMENTS (PTY) LTD                                    SECOND

RESPONDENT
COMPANIES
& INTELLECTUAL PROPERTY COMMISSION        THIRD
RESPONDENT
MINISTER
OF TRADE &
INDUSTRY                                           FOURTH

RESPONDENT
Neutral
citation:
CDH Invest NV v Petrotank
South Africa (Pty) Ltd & others
(483/2018)
[2019] ZASCA 53
(1 April 2019)
Bench:
Ponnan and Saldulker JJA and Davis,
Carelse and Rogers AJJA
Heard:
1 March 2019
Delivered:
1 April 2019
Summary:
Validity of directors resolution in
terms of s 74 of
Companies Act 71 of 2008
– the powers of
directors when increasing the authorised shares of a company in terms
of
s 36(2)
(b)
and
(3) of the Act.
ORDER
On
appeal from
:
Gauteng
Division of the High Court, Johannesburg (Van der Linde J sitting as
court of first instance):
The
appeal is dismissed with costs, such costs to include the costs of
two counsel.
JUDGMENT
Carelse
AJA (Ponnan and Saldulker JJA and Davis and Rogers AJJA concurring):
[1]
This appeal concerns a decision adopted by written consent of the
majority of the directors in terms of
s 74
of the
Companies Act
71 of
2008 (the Act).
[1]
[2]
The appellant (CDH) and the second respondent (Amabubesi) hold all
the issued shares in the first respondent (Petrotank) in
a 60/40
ratio. There are 100 000 issued shares. This accorded/was in
accordance with a shareholders agreement (styled a MOI
– MOU)
concluded between the parties in January 2013. However Petrotank’s
memorandum of incorporation (MOI) of February
2013 mistakenly
recorded the number of authorised shares as 1000. CDH sought an order
in terms of s 61(12) of the Act directing
the board of Petrotank to
convene a shareholders meeting in terms of s 61(3) of the Act for the
purpose of considering and passing
five resolutions: (1) the removal
of a director; (2) the election of a substitute director; (3)
instructing the board to demand
that the minority shareholder,
Amabubesi, pay Petrotank R1 million; (4) instructing the board
to sue Amabubesi for this amount;
and (5) instructing the board to
consider a pro rata rights offer of 98 835 ordinary no par value
shares.
[3]
Amabubesi consented to the first two resolutions. Although the court
a quo (Van der Linde J) dismissed the application in respect
of the
three remaining resolutions, the appeal to this court only concerns
the dismissal of the application in respect of the fifth

resolution.
[2]
Van der
Linde J also upheld a counter–application by Amabubesi to
invalidate a director’s round robin resolution of
Petrotank
passed on 31 March 2014 that purported to amend its MOI by increasing
the number of authorised shares from 1000 to 1
000 000. The
declaration of invalidity of the increase of the authorised shares to
1 000 000 shares had the consequence
that there were no
additional authorised shares that could be utilised to conduct a
rights offer.
The Facts
[4]
In 2013 CDH, a Belgium company, and Amabubesi, an empowerment
company, caused Petrotank, a partnership vehicle, to be incorporated.

Petrotank’s business included the manufacture of steel and
petroleum storage tanks. The MOU provided that there would be
five
directors, three appointed by CDH and two by Amabubesi. At all
material times the directors appointed by CDH were Messrs D’Hondt,

Mabale and Stadler as managing director. The directors appointed by
Amabubesi were Messrs Moyo and Ntsaluba. Petrotank appointed
Lucro
Auditing as its auditors.
[5]
Due to an error on the part of the person responsible for the
incorporation of Petrotank, its MOI recorded that it had authorised

shares of 1 000 ordinary no par value shares rather than 100 000.
At the time CDH and Amabubesi were unaware of this error.
[6]
On Tuesday, 25 March 2014, Moyo, of Amabubesi met with Stadler and
Mabale, to discuss the business of Petrotank.  On Wednesday,
26
March 2014, Moyo sent an email to Stadler and Mabale confirming what
was discussed at the meeting.
[7]
On Friday 28 March 2014 at 15h49 Stadler sent a detailed email to his
fellow Petrotank directors in which he dealt extensively
with the
meeting of 25 March 2014. The email concluded:
‘
.
. . Please also note that it came to my attention that Petrotank is
in breach of the
Companies Act, in
that more shares are in issue than
have been authorised. In order to rectify this position, I attach
hereto various documents (including
a directors’ resolution
aimed at putting the Company on the “right side of the
Companies Act.”
Therefore
please tend [sic] to signature and return of the attached resolution,
in order for us to rectify the situation.’
There
is no explanation as to how, when or why this breach came to his
attention.
[8]
Attached to this email was a directors round robin resolution in
terms of
s 74
of the Act. The relevant portion of the resolution
reads:
‘
Whereas
the Company is, via it[s] Memorandum of Incorporation, authorised to
issue no more than 1 000 (one thousand ordinary) no par
value
shares; and
Whereas
the current
shareholders of the Company have agreed that 100 000 (one hundred
thousand) shares will be issued amongst them (in a
60 000/
40 000 split); and
Whereas
it
is a legal requirement, to ensure compliance with the Act as relates
to authorised and issued shares that the Company’s
number of
authorised shares be increased and the Company’s Memorandum of
Incorporation be subsequently and accordingly amended;
Now
therefore be it resolved that
,
in terms of
sections 36(2)(b)
and
36
(3) of the Act, the board
herewith increases the Company’s number of authorised shares to
such an extent that the Company
is authorised to issue no more than
1 000 000 (one million) ordinary no par value shares; and
Be
it further resolved that
,
in terms of
section 16(1)
(b) of the Act, the Company’s
Memorandum of Incorporation be amended so as to delete and replace
the current wording of clause
2.1(1) (but specifically excluding its
sub-clauses (a) to (c) which remain) of the Memorandum of
Incorporation with the following
wording: “
The
Company is authorised to issue no more than 1 000 000 (one
million) ordinary no par value shares, and each such issued
share
entitles the holder to - ”. . . .’
[9]
On the same day at 22h05, Ntsaluba
sent an email to all the directors stating that: ‘In my
capacity as a director, I will
propose an investigation on this
before I sign the documents. All my rights are reserved’.
On Monday 31 March 2014,
notwithstanding Ntsaluba’s objection,
the three CDH directors signed the round robin resolution. On Friday
4 April 2014,
Mr Sontshaka, a legal advisor to Amabubesi, sent an
email to Stadler that was copied to Moyo and Ntsaluba stating that:
‘The
current resolution requiring that the authorised shares be
increased to 1 000 000 is incorrect and needs to be amended

accordingly’. From the rest of the email it is apparent that
the asserted error in the resolution was the fact that it increased

the number of authorised shares to 1 000 000 instead of to
100 000 as agreed in the MOU. It is also apparent that

Amabubesi’s nominees on Petrotank’s board were unaware at
this stage that CDH’s nominees had already signed the
impugned
resolution. Both emails were ignored.
[10]
Section 16
of the Act
[3]
provides
that an amendment to the MOI of a company only becomes effective when
it is filed with the Companies and Intellectual Property
Commission
(CIPC). Notwithstanding Amabubesi’s emails pointing out the
error, on 5 June 2014 D’Hondt, purporting to
be duly authorised
by Petrotank, applied to the CIPC to register the amendment to
Petrotank’s MOI to increase its authorised
shares to 1 000 000.
On 21 July 2014 the CIPC addressed a letter to Adendorff’s
Accounting, Tax & Secretarial
Services (Adendorff) informing them
that the amendment had been accepted and placed on file. It is not in
dispute that the services
of Lucro Auditing were not utilised to take
the necessary steps to effect the amendment to the MOI. CDH has
proffered no explanation
for using the services of Adendorff instead
of Lucro Auditing.
[11]
More significantly CDH offered no explanation for its failure to have
any regard to the objections raised by Amabubesi’s
directors to
the round robin resolution. Amabubesi was unaware of the passing and
registration of the resolution and thought the
matter had been
resolved.
[12]
For reasons that need not be dealt with, the relationship between the
parties had by April 2015 broken down. This was the month
in which
CDH delivered its demand that a shareholders meeting be convened to
consider the five resolutions previously mentioned.
The application
giving rise to the present appeal followed on 22 June 2015. In July
2015 Amabubesi delivered, together with its
opposing papers, the
counter–application to which I have already referred.
The
appeal
[13]
The court a quo found that the resolution of 31 March 2014 was
invalid because the three Petrotank directors who signed the

resolution (ie the CDH nominees on Petrotank’s board) had
violated their fiduciary duty. The learned Judge considered that

compliance with their fiduciary duty required that the power to
increase the authorised shares be exercised in good faith and in
the
best interests of the company (a subjective test impeachable only on
the limited grounds of irrationality) and for a proper
purpose (an
objective test). He considered that the CDH nominees’ conduct
failed on both legs. As to the first leg, the motivation
provided for
the impugned resolution was a devious misrepresentation because it
failed to offer any justification for increasing
the authorised
shares to 1 000 000. The resolution was in any event
irrational, having regard to the proclaimed purpose
of correcting the
error in the MOI. For similar reasons he found that objectively the
resolution was not proposed and passed for
a proper purpose. For the
reasons which follow, I am in essential agreement with the court a
quo though I believe a conclusion
that the resolution was invalid can
be reached on a somewhat narrower basis. It is thus unnecessary to
consider the court a quo’s
extensive survey of Commonwealth
authority.
[14]
Two issues were raised by CDH’s counsel on appeal: whether or
not the court a quo’s factual findings were based
on a case
that was never pleaded and whether or not there is any evidence that
CDH’s directors conducted themselves in a
misleading fashion
when they amended the MOI. For the first time in argument, CDH raised
the issue that Amabubesi did not initially
plead that the manner and
the conduct of CDH’s directors when it passed the resolution,
which had the effect of amending
the MOI, constituted a breach of
their fiduciary duties or a misrepresentation. In counsel’s
view, this failure denied CDH
the opportunity to deal with the
allegations of corporate fraud against its directors.
[15]
According to the appellant’s counsel these allegations were
made for the first time in reply when Amabubesi stated: ‘[t]he

resolution was sent to the directors on 28 March 2014 and Stadler’s
email that accompanied it was deviously couched in a
misleading
fashion’ and ‘[t]he proposed round robin resolution and
accompanying emails was misleading’. CDH’s
counsel
contended that what was not raised by Amabubesi in the court a quo
was a case based on a breach of fiduciary duties or
a
misrepresentation in regard to the round robin resolution. Leave to
appeal was not sought or granted on this issue.
[16]
It is not correct that Amabubesi had only dealt with this issue in
reply. In his answering affidavit, on behalf of Amabubesi,
Moyo
(whose affidavit also served as the founding affidavit to the
counter–application) stated clearly that the demand relating
to
the rights issue was intended to harass, bully, oppress and unfairly
prejudice Amabubesi and that CDH’s directors were
acting in
‘gross bad faith’.
[17]
It is common cause that the authorised shares would have had to be
increased to 1 000 000 before the rights issue
of 98 835
could be considered and it must be accepted that the issue of bad
faith was pleaded in relation to the rights issue.
As noted above,
the two events were clearly linked and could not be separated as
CDH’s counsel sought to argue. In these
circumstances, it
cannot be suggested that Amabubesi sought to make out a case that was
not raised in its founding affidavit to
the counter–application.
[18]
I now turn to deal with the question of misrepresentation by CDH.
Section 36(2)
(b)
read
with subsection (3) of the Act
[4]
contains a
radical departure from the Companies Act 61 of 1973 (the Old Act).
Whereas under ss 75 and 221 of the Old Act, a company
could only
increase its share capital by means of a special resolution and the
directors required the company’s prior approval
at a general
meeting before allotting or issuing shares, in terms of s 36(3) of
the Act a company’s shares can be increased
or decreased by the
board of a company, save to the extent that the MOI provides
otherwise.
[19]
In conducting the business of a company, directors can choose to do
so at a formal directors’ meeting where following
deliberation
they will pass a resolution that is immediately recorded. An
alternative and more convenient means of conducting a
company’s
business is by way of a round robin resolution as contemplated in s
74 of the Act. An important issue raised in
this case is whether a
director of a company is obliged to provide a justification when he
or she proposes an increase in the authorised
shares of a company by
way of a round robin resolution. Put differently, can a director
exercise this power without restraint and
without the need to explain
the basis of the decision in a justifiable manner?
[20]
Section 74 of the Act enables ‘a majority of the directors to
pass a round robin resolution in order to avoid a formal
meeting of
directors provided that, if this is to happen ‘each director
has received notice of the matter to be decided’.
[5]
The proviso
enables directors to make an informed decision on the subject matter
contained in the resolution. Mr Stadler, the managing
director of
Petrotank, decided to invoke the provisions of s 74 of the Act and in
the ‘notice’ he sent to all the directors
on 28 March
2014 stated that the problem was that ‘more shares are in issue
than have been authorised’. The ‘matter
to be decided’
was contained in the proposed resolution the terms of which I have
already quoted in full.
No reason
and in particular no motivation was given for an increase of the
authorised shares to 1 000 000. The justification
did not
rationally extend beyond an increase to 100 000 shares.
[21]
The proviso to s 74 requiring notice is to ensure that directors know
what is being decided. Our courts have emphasised the
importance of
giving notice to directors of a meeting so that the participants are
aware not only of the existence of a meeting
but of the nature of the
business.
[6]
The purpose
of the notice is not only to inform directors of the date of the
meeting but the reason therefore. There can surely
be no difference
between the importance of a notice where a board meeting is called in
terms of s 73 of the Act and a notice when
the provisions of s 74 of
the Act are invoked.
[22]
CDH’s directors knew on 28 March 2014 that the round robin
resolution upon which the directors were called to vote was
contrary
to the proclaimed purpose. They also knew that it was contrary to the
MOU. Nonetheless on 31 March 2014 they signed the
resolution. The
egregious conduct on the part of CDH’s directors was compounded
when, on 4 April 2014, CDH’s directors
were reminded that the
resolution was contrary to the express purpose as contained in the
preamble to the resolution. Mr Sontshaka
of Amabubesi wrote to
Stadler on 4 April 2014 in this connection:
‘
It
should be noted that there is no impediment in terms of the MOI
against employing the methods in s 36(2)(a) and (b) and s 36(3).

Therefore, the MOI can be amended by any one of the above methods,
but only to the extent that it reflects 100 000 (one hundred

thousand) authorised shares, which have already been issued, instead
of the current 1000 (one thousand) shares. The current resolution

requiring that the authorised share be increased to 1000 000 (one
million) is incorrect and needs to be amended accordingly.’
Notwithstanding
these objections, and significantly employing the services of a firm
other than Petrotank’s appointed auditors,
the majority
proceeded to give effect to the resolution by submitting the
resolution to the CIPC for filing.
[23]
What is surprising is that CDH never sought to explain the reason as
to why, in supposedly ‘correcting’ the patent
error in
the MOI, its nominees on Petrotank’s board resolved to pass a
resolution to increase the authorised shares to 1 000 000

rather than 100 000.  This clearly called for an
explanation on at least the two occasions when Amabubesi’s
directors
questioned the conduct of CDH’s directors.  The
only inference one can draw is that, in passing the resolution
contrary
to the stated purpose, CDH’s nominees on Petrotank’s
board  misrepresented ‘the matter to be decided’;
ie
the purpose they had in mind when introducing the resolution was
different from that which appeared in the preamble and in the
email
of Stadler of 28 March 2014. They failed to provide any reasons for
the actual resolution passed.
[24]
These actions of the directors of Petrotank, who were appointed by
CDH, amounted to a misrepresentation of the real purpose
behind the
introduction of the resolution. By their actions and their continued
refusal to provide a justification for the need
to increase the
authorised shares to 1 000 000, they committed a
misrepresentation, which at the very least was designed
to obfuscate
the real purpose behind the resolution. Their conduct did not comport
to the standard of good faith required of directors
in terms of s
76(3) of the Act
[7]
and thus
raises the question as to whether they exercised their powers as
directors for a proper purpose. Directors act beyond their
authority
when they act in breach of their duty to perform with good faith and
in the interests of the company (See M S Blackman
‘Directors’
Duties to Exercise their Powers for an Authorised Purpose’
(1990) 2
S
A Merc LJ
1 at 6-8).
[25]
I accordingly find that the round robin resolution signed on 31 March
2014 was invalid. It follows that the demand for a shareholders

meeting to consider a rights issue rested on the unsustainable
foundation of this resolution and that there was no basis to compel
a
shareholders meeting.  For these reasons the appeal must fail.
[26]
The following order is made:
The
appeal is dismissed with costs, such costs to include the costs of
two counsel.
______________________
Z Carelse
Acting Judge of Appeal
APPEARANCES:
For
Appellant: BH Swart SC (with him JL Mÿburgh)
Instructed
by:
Horn
Attorneys, Johannesburg
Honey
Attorneys, Bloemfontein
For
Respondents: S Kuny SC (with him T Mamanyuha)
Instructed
by:
Tshisevhe
Gwina Ratshimbilani Attorneys, Sandton
McIntyre
van der Post, Bloemfontein
[1]
Section 74
of the
Companies Act 71 of 2008
provides:
‘
Directors acting other than
at meeting –
(1) Except to the extent that the
Memorandum of Incorporation of a company provides otherwise, a
decision that could be voted
on at a meeting of the board of that
company may instead be adopted by written consent of a majority of
the directors, given
in person, or by electronic communication,
provided that each director has received notice of the matter to
be decided
.’ (My emphasis.)
[2]
CDH Invest NV v Petrotank
South Africa (Pty) Ltd & another
(22312/2015) [2017] ZAGPJHC 324;
[2018] 1 ALL SA 450
(GJ);
2018 (3)
SA 157
(GJ).
[3]
Section 16
provides:
‘
Amending Memorandum of
Incorporation
. - (1) A company’s Memorandum of
Incorporation may be amended -
(a)
. . .
(b)
In the manner
contemplated in
section 36
(3) and (4)’
Section
36(3)
provides -
‘
(3) Except to the extent that
a company’s Memorandum of Incorporation provides otherwise,
the company’s board may
–
(a)
increase or decrease the
number of authorised shares of any class of shares.’
Section
36(4)
provides:
‘
(4) If the board of a company
acts pursuant to its authority contemplated in subsection (3), the
company must file a Notice of
Amendment of its Memorandum of
Incorporation, setting out the changes effected by the board.’
[4]
Section 36(2)
(b)
provides
-
‘
(2) The authorisation and
classification of shares, the numbers of authorised shares of each
class … as set out in a company’s
Memorandum of
Incorporation, maybe changed only by-
(a) . . .
(b)
the board of the company,
in the manner contemplated in subsection (3), except to the extent
that the Memorandum of Incorporation
provides otherwise.’
[5]
See fn 1 above.
[6]
This principle is of long standing see
African
Organic Fertilizers and Associated Industries Limited v Premier
Fertilizers Ltd
1948 (3)
SA 233
at 240 (N);
Majola
Investments (Pty) Ltd v Uitzigt Properties
(Pty) Ltd1961 (4) SA 705 (T) at 710-711.
[7]
Section
76(3)
(a)
provides:
‘
Standards
of directors conduct
(3) Subject to subsections (4) and
(5), a director of a company, when acting in that capacity, must
exercise the powers and perform
the functions of director –
(a)
in good faith and
for a proper purpose.’