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[2014] ZAWCHC 12
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Bavasah v Stirton and Another (A342/12) [2014] ZAWCHC 12; [2014] 2 All SA 51 (WCC) (12 February 2014)
IN
THE HIGH COURT OF SOUTH AFRICA
(WESTERN
CAPE DIVISION, CAPE TOWN)
Case
No: A342/12
Reportable
In
the matter between:
SOHRAB
BAVASAH Appellant
and
JAMES
STIRTON
First
Respondent
SHOUT
DIGITAL MEDIA (PTY)
LTD Second
Respondent
Court:
HENNEY J et BOQWANA J
Heard
on: 22 November 2013
Delivered
on: 12 February 2014
JUDGMENT
BOQWANA,
J
Introduction
[1]
This is an appeal against the
judgment of the Wynberg Magistrates Court dated 15 March 2012 which
was granted in favour of the respondents
with costs. The magistrate
found that the appellant (‘Bavasah’) was not the
shareholder and registered owner of the
shares in the second
respondent (‘the company’) due to formalities prescribed
in the company’s Articles of Association
(‘Articles’)
and the Companies Act, 61 of 1973 (‘the Act’) not having
been complied with, in respect of
the allotment and issuing of the
shares, and Bavasah’s name not having been entered into the
register of members as required
by the Articles and the Act.
Background
facts
[2]
The brief facts relevant to
this matter begin with the formation of a company known as Quickvest
417 (Pty) Ltd (‘Quickvest’)
in 2006 which belonged to one
Karen Oosthuizen. In 2007 all the shares in Quickvest were purchased
by an entity known as Grapevine
Interactive (Pty) Ltd (‘Grapevine’).
Nicholas Orton (‘Orton’) was the sole director of
Grapevine. During
that period the first respondent (‘Stirton’)
was the owner of a digital media close corporation business known as
Shout
Outdoor CC. During the course of 2007 Quickvest changed its
name to Grapevine Shout Digital Media (Pty) Ltd (‘GSDM’)
which entity later became known as Shout Digital Media (Pty) Ltd
(‘the second respondent in these proceedings’).
[3]
On 19 November 2007, Bavasah,
Stirton, Grapevine and GSDM entered into a Memorandum of
Understanding (‘the MOU’) with
effect from 01 September
2007. GSDM was at 01 September 2007 wholly owned by Grapevine, whilst
Shout CC was 100% owned by the Stirton.
GSDM had prior to the
effective date of 01 September 2007 issued 1000 shares in favour of
Grapevine. Grapevine also loaned to GSDM
approximately R500 000
for the purposes of developing its business. Shout CC sold its assets
at 01 September 2007 to the company
for a net purchase price of
R335 360. Shout CC’s assets included its goodwill,
intellectual property, notice and display
boards, schools and media
contracts, debtors, cash and any work in progress in respect of these
boards. The company’s business
would be:
‘
...sourcing
of media and display rights in locations such as schools, clubs and
other points of assembly (known as “affiliates”)
by way
of long-term contracts, and the corresponding packaging and sale of
these rights to third party advertisers or media wholesalers
and
matters ancillary. The capture and onsale of these advertising
display rights is enabled through the delivery of “display
technology” to the Affiliates. ’
[4]
In terms of the MOU, Bavasah
would apply his management skills in the digital media space and thus
was desirous of becoming a shareholder
and being employed by the
company. It was envisaged by the MOU that Long Form Agreements
could be drawn up and executed between
the parties within 10 weeks of
the effective date, i.e. 10 weeks from 1 September 2007. In the
absence of the said Long Form Agreements
the MOU would ‘
govern
the relationships between the parties and all matters pursuant
thereto’
.
[5]
The Long Form Agreements
would include a Share Subscription Agreement between GSDM, Grapevine,
Stirton and Bavasah in which
Bavasah and Stirton would
subscribe for shares in GSDM (a company 100% owned by Grapevine at
inception) on terms set out in the
MOU and a Shareholders Agreement
between the three parties. The Share Subscription Headline Items
would be as follows:
‘
Transaction
GSDM
will issue 2
fresh shares
at par to Grapevine;
GSDM
will issue 658
fresh
shares
at par to Stirton;
GSDM
will issue 340
fresh
shares
at par to Bavasah;
all
within thirty days of the execution of the Long Form Sale of Business
Agreement
.
All
Shareholders will execute the Shareholder’s Agreement
coincident with the issue of the shares contemplated above.’
Terms
All
shares contemplated in this transaction are to be issued at par.’
(Own
emphasis)
[6]
Effectively, in terms of the
above, 1000 fresh shares were to be issued. It must be borne in mind
that 1000 shares had already been
issued in Grapevine’s favour
prior to 01 September 2007 as mentioned earlier. The total shares
issued in GSDM would then
be 2000 shares.
[7]
In terms of the MOU the
Shareholders Agreement Headline Items would reflect Shareholding
Proportions as follows:
‘
Assuming
no further sale of shares or issuance of new shares except as
contemplated in this MOU, and assuming that the Parties
have
fulfilled the conditions of this MOU, then the shares of the
GSDM company
would
be owned
in the following proportions:
Grapevine
50%
Stirton
32.9%
Bavasah
17.0%’
(Own
emphasis)
[8]
According to the MOU parties
agreed that GSDM would provide an option to one Tim Allsop (‘Allsop’)
to purchase 10% of
the issued shares of GSDM, which option would
expire two months after signature date of the MOU. Should the option
be exercised
the shareholding at GSDM would then be:
‘
Stirton
30.9%
Bavasah
16%
Allsop
10%
Grapevine
43.1%’
[9]
From my calculations this
means that from the 2000 shares issued, Stirton would hold an amount
of 618 shares, Bavasah, 320 shares,
Allsop, 200 shares and Grapevine,
862 shares. It is common cause that Long Form Agreements were never
entered into between the
parties.
[10]
The MOU stipulated that
Stirton and Bavasah would be responsible for the day to day
management of GSDM employed as Sales and Managing
Directors
respectively. Stirton would be paid a gross management fee of
R40 000.00 per month, reviewable on achievement of
milestones,
capital permitting. Bavasah would also be paid a gross management fee
of R40 000 per month, reviewable on the
achievement of
milestones, capital permitting; he would further ‘
allow
50% of his gross monthly fee to be allocated to loan account until
such time as the company achieves breakeven or until further
equity
capital is raised’
.
[11]
Stirton and Bavasah began
working together as contemplated by the MOU. It is evident that as
early as February 2008, Stirton was
unhappy with the way things were
going in the business and particularly with his relationship with
Bavasah which was getting strenuous.
Again in April 2008, Stirton
expressed his concerns about the business model followed by the
company and the actual breakeven not
being achieved. Stirton began
talks of ‘unwinding of the deal’ between him and Orton.
What is also clear from the correspondence
is that by that time, all
the parties in the MOU were referred to as ‘shareholders’
by both Orton and Stirton. Parties
resolved to call a shareholder’s
meeting to resolve differences Stirton had with Bavasah.
[12]
On 3 April 2008, Stirton
enquired from Orton about the Long Form Agreements which had to be
drawn up by 21 December 2007. In this
email he stated as follows:
‘
[I]
(sic)
presume that the shares have not been
issued, as the MOU states that this will be done after compilation of
the longform? I need
to be able to tell Allsop, as well as my
bank.’
[13]
Orton responded the following
day by stating that he had a draft which he committed to circulate at
the end of the following week.
He further mentioned that the ‘issue’
of shares was not with him anymore as the share certificates were
issued by CIPRO
on application from the company secretary and this
was applied for some time ago.
[14]
On 5 May 2008, Stirton again
enquired from Orton about the status of the Longform Agreements which
were required to have been drawn
up in order to formalise the MOU.
Orton responded by saying: ‘
Yes,
as mentioned the shares are issued anyway. Hows (sic) the business
plan coming’
[15]
Stirton sought further
clarity as to what ‘yes’ referred to and wanted to know
who registered the shares as he had learnt
from Dorian Esau (‘Esau’)
(this was one of the individuals who was asked by Orton to assist
with the issuing of the
shares to Stirton, Bavasah and Allsop) that
they did not have any share transactions in process or any pending.
Orton did not address
the concern raised by Stirton in his email
response but rather asked, in a visibly irritated manner, for a
business plan from Stirton.
[16]
Grapevine resolved to exit
GSDM and on 26 May 2008, an agreement was concluded between
Grapevine, Stirton and GSDM. Stirton paid
R550 000 to Grapevine
for the transfer of shares that Grapevine held in the company. What
is significant from this agreement
are the shareholding amounts held
by the various parties, which amounts are different to those set out
in the MOU. Paragraph 2.1
of the agreement states as follows:
‘
The
entire issued share capital in GSDM is held and beneficially
owned as follows, by virtue of a Memorandum of Understanding
executed between GSDM , Stirton, GVI and Bavasah, attached as
Annexure 1 hereto, and by virtue of a Sale of Shares MOU
executed
between GSDM and Allsop, attached as Annexure 2 hereto:
Stirton
86 shares
Bavasah
45 shares
GVI
120 shares
Allsop
28 shares’
[17]
The total of the shares
issued above is 279. 45 shares are allocated to Bavasah and that
indeed translates to 16% of the issued
share capital. This
change in shareholder apportionment apparently came as a result of a
suggestion made by one Juanita Koster
(‘Koster’) on 06
May 2008, who was also tasked with documentation pertaining to the
issuing of the shares. Koster intimated
that increasing shares would
entail a lot of paper work. She then suggested authorised shares be
utilised in such a way that they
would come close to the percentages
allocated (in the MOU). According to Koster GSDM had 1000 authorised
shares of which 120 were
apparently issued to Grapevine. This issue
is important as it illustrates the difference between what was
intended in the MOU regarding
the issuing of the shares and what was
recorded in the sale of shares agreement between Grapevine and
Stirton on 26 May 2008. The
MOU envisaged issuing of fresh
shares which was an increase in a share capital whilst Koster
suggested utilisation of authorised
share capital.
[18]
Koster drafted a backdated
resolution for a meeting of directors that should have been held on
01 May 2008. A meeting adopting such
a resolution never occurred and
the resolution was never adopted and it remained unsigned.
Koster further suggested that share
certificates be issued which was duly done. Orton testified
that he had given an instruction
to Koster to issue shares by January
2008 already. This is evidenced by an email dated 21 January 2008
sent by Orton to Esau requesting
him to assist Koster with
documentation pertaining to, amongst others, issuance of the shares.
This was followed up by another
email to Koster dated 28 February
2008 seeking to know about where things were regarding the issuing of
the shares. Koster stated
that she could not recall why the changes
did not take place in January 2008 but alleged that subsequent to
being copied on the
February 2008 correspondence by Orton, the next
email she received from Orton was on 06 May 2008. In this email
Orton advised
Koster that: ‘..
something
may have slipped through the cracks, i.e. the issue of fresh shares
to the shareholders so that the shareholders are in
the correct
proportions.
’ He further attached
a spreadsheet detailing shareholding as per the MOU. That is when
Koster suggested that issuing new
shares will entail a lot of
paperwork and suggested that already existing authorised shares be
utilised. Orton agreed to this.
Stirton and Bavasah were however not
made aware of these developments by either Koster or Orton. Orton
conceded during cross examination
that he neither informed Bavasah
nor
Stirton of the administrative ‘glitches’ he had unearthed
and they assumed that everything was ‘hunky dory’.
[19]
Due to the fact that the
issuing of shares was overdue, Koster was requested to issue those as
at 01 December 2007. A CM 15
allotment was prepared for
additional 159 shares in the company but was never lodged with CIPRO.
Share Certificates were printed
and issued to the respective Stirton,
Bavasah and Allsop. Koster stated that although the minute
(resolution) dated 01 May 2008
was not signed, the email sent to her
in January 2008 by Orton with the shareholding showed the intent of
the then 100% shareholder
Grapevine, represented by Orton, to issue
in December 2007 the additional 159 shares as detailed above. Koster
acknowledged that
an error was committed in failing to sign the
minute and submit the CM 15 to CIPRO and that she had committed an
oversight in failing
to ensure this was done.
[20]
On 16 May 2008 Orton resigned
as a director of the company. Bavasah and Stirton were not copied on
correspondence between Orton
and Koster relating to the issuing of
the shares. It appears that Stirton and Bavasah were appointed
as directors of the
company on 1 April 2008. Bavasah resigned
as a director in May 2008. A security transfer form transferring 120
shares from
Grapevine to Stirton was signed on 2 July 2008.
[21]
During May 2008, Stirton and
Bavasah had entered into their own discussions to sever their
relationship. Various correspondences
ensued between them outlining
their differences. With the help of Neil McDonald (‘Mc
Donald’), a director at Grapevine,
a deal was brokered between
the two parties, culminating in the signing of a handwritten
agreement on 27 May 2008, which is a subject
matter of these
proceedings. The agreement stated as follows:
‘
(1)
James the [first respondent] to pay R200 000 cash
for Sohrab’s [the appellant] 16 % of Shout
Media
(‘the second respondent’).
(2) Shout
Media to pay Sohrab R10 000 a month for 12 months from 1 June
2008. and then R17 000 a month
for 6 months from 1
June 2009.
(3) In
the event of a sale of Shout Media at anytime in the 18 months period
from 1 June 2008 the balance of the outstanding
payments will be made
in one lump sum to Sohrab before any other payments.
(4) The
balance of the 18 month payments will rank before
all
other
liabilities in the business. i.e. in the event of Shout defaulting on
any of these payments Sohrab has the right to liquidate
the company
(5) Clause (1)
executed by close of business tomorrow 28
Th
May 2008
Signed today 27 May
2008.’
[22]
Terms of payment were later
amended to state that the remaining R100 000 would be paid by
Stirton to Bavasah over a period
of 10 months.
[23]
It is common cause that
Stirton paid the sum of R120 000 in respect of the purchase
price of the shares and two instalments
of R10 000 each on 1
July 2008 and 1 August 2008 respectively leaving a balance of R80 000
still to be paid.
[24]
In relation to its part of
the agreement, the company paid to Bavasah three instalments of
R10 000 each for the months of 1
June, 1 July 2008 and 1 August
2008, respectively. Although the agreement does not specify that
payment was in respect of a loan,
it is common cause that it was so.
The total agreed in terms of that agreement for the loan account
appears to be R222 0000. With
the payment of R30 000 already
effected the balance would be R192 000.
[25]
Bavasah instituted action
against the respondents to claim the balances outstanding in terms of
the agreement of 27 May 2008. The
respondents alleged that Bavasah
had certain obligations he needed to fulfil before further payments
could be made. The respondents
claimed further that Bavasah made
representations that were false with the intention of inducing the
respondents to act on them.
They averred that Stirton would not have
agreed to the R200 000 purchase price for the shares and the
company would
not have agreed to the repayment of a loan
account in the sum of R180 000 and the appreciation fee of
R42 000 had they
known the true state of affairs.
[26]
A considerable amount of
evidence was led at the trial about these alleged obligations as well
as misrepresentations. It however
transpired during the cross
examination of Orton that shares were never allotted, issued
and registered in accordance with
the Articles and the Act to
Bavasah. In particular, there was a failure to comply with section
221 of the Act in that
no resolution was passed in a general
meeting to authorise the directors to issue shares to Bavasah (and
others), which meant that
shares were never issued to Bavasah.
Furthermore, the company did not have a register of members and
therefore Bavasah’s
name was never entered into a share
register.
[27]
This led to the respondents
amending their plea and lodging a counterclaim against Bavasah. The
respondents alleged in the amended
plea that the agreement was
entered into on the basis of a number of assumptions: that the
shares had been duly allotted
and issued to Bavasah and in this
regard there had been full compliance with the formalities required
by the Act and the company’s
Articles; that Bavasah was the
registered proprietor and in full control of the shares; and that
Bavasah was a member of the company.
All these assumptions were said
to be vital to the conclusion of the agreement of 27 May 2008 by the
respondents. The respondents
submitted further that there was a
common mistake between the parties, in view of the above assumptions
being incorrect.
It averred that the agreement of 27 May 2008
was void and should be found to be so by the trial Court.
[28]
The magistrate found that
Bavasah could not have transferred or sold any shares to Stirton by
means of the agreement entered into
between the parties on 27 May
2008 because that agreement was reached on the basis of an incorrect
assumption held by both parties
that 16% shares were allotted and
issued to Bavasah, that Bavasah was the owner of those shares and
that he was the member of the
company. Due to those mistaken
assumptions the agreement was held to be void. The magistrate
accordingly ordered restitution of
the monies already paid by
Stirton and the company to Bavasah in respect of those shares and the
loan account, being R120 000
and R30 000 respectively.
These are the issues that form the subject matter of this appeal.
Discussion
[29]
The issue before this Court
is whether the magistrate was correct in finding that the agreement
dated 27 May 2008 was void. The
next issue to be determined is
whether that agreement is severable in regard to the aspects dealing
with the loan account.
[30]
Upon realising that the
shares may have not been issued, Bavasah took an about turn during
the trial by stating that he never transferred
his shareholding to
Stirton but his rights. This theme seems to be carried through by his
counsel, Mr Jethro, in his heads of argument.
Mr Jethro submitted
that Bavasah was selling his rights as set out in the MOU to the
respondents. He further submitted that
the parties had
unanimously and at all times referred to such rights or interest as
‘shareholding’ when the MOU was
discussed.
[31]
These submissions and new
allegations are clearly an attempt by Bavasah to avoid the technical
issue that arose during the trial.
Unlike the respondents who amended
their papers, Bavasah failed to amend his particulars of claim to
reflect the new alleged cause
of action (i.e. he transferred rights
to shares in terms of the MOU) and not his shares to
Stirton.
[32]
The magistrate was correct in
my view by finding that the subject matter before her was the sale of
shares as opposed to the sale
of rights to the shares created by the
MOU. The case relating to Bavasah’s contractual rights in
terms of the MOU was
not pleaded. Furthermore, the contract Bavasah
relied on in the particulars of claim was the sale of shares
agreement of 27 May
2008 and not the sale of the rights to the shares
he acquired in terms of the MOU. That in my view is a separate
issue altogether.
[33]
Returning to the issue of
whether Bavasah was a shareholder, the MOU is clear that the company
was to issue ‘fresh shares’.
In terms of the Articles:
‘
5.
The company
may
in general meeting
,
without prejudice to any special rights previously conferred on the
holders of existing shares,
issue,
or
authorise the directors to issue
subject
to section 221 of the Act
,
the
unissued shares
,
in such amounts and to such persons and at such process
as
the resolution shall prescribe
.’
(Own
emphasis)
[34]
In regard to the issuance of
fresh or new shares the Articles provide as follows:
‘
the
company may,
by
special resolution:
22.1
increase the share capital by such sum divided into shares of such
amount, or may increase the number of its shares of no par
value to
such number,
the
resolution shall prescribe.
..’
(Own
emphasis)
[35]
It is therefore clear that
where issuing of unissued shares is contemplated a resolution
prescribing such must be passed and most
importantly where an
increase in shares is envisaged, a special resolution is
required.
[36]
Section 221 of the Act states
that:
‘
Notwithstanding
anything contained in its memorandum of articles, the directors of a
company
shall
not have the power to allot or issue shares of the company without
the prior approval of the company in general meeting
.’
(Own
emphasis)
[37]
It is common cause that no
formal general meeting was held at which a resolution was passed to
authorise the directors of the company
to allot or issue the
‘unissued shares’, nor was any special resolution passed
to increase shares.
[38]
Allotment of shares entails
offer and acceptance for subscription of shares. It was submitted by
Mr Jethro on behalf of Bavasah
that shares were allotted in terms of
the MOU. Allotment in itself does not result in an applicant becoming
a shareholder, this
only occurs on shares being issued to the
applicant.
[1]
Even if it would be accepted that the MOU represented allotment of
shares, that in itself was not enough to make Bavasah a shareholder.
Shares still had to be issued.
[39]
Issuing refers to an act
which completes the title of the applicant to whom shares have
already been allotted.
[2]
In
Ambrose Lake Tin and Copper CO
(Clarke’s case)
[3]
it was held that:
‘
in
as much as the term ‘issue’ is used, it must be taken as
meaning something distinct from allotment, as importing
that some
subsequent act has been done whereby the title of the allottee
becomes complete, either by the holder of the shares receiving
some
certificate (in the case of certificated securities) or being placed
on the register of shareholders, or by some other step
by which the
title derived from the allotment may be made entire or complete.’
[40]
The authors in
LAWSA
[4]
and
Henochsberg on the Companies Act Act
71 of 1973
[5]
seem to suggest that before a share can be considered issued there
must at least be the placement of the subscriber on the share
register and the mere issue of the certificates is insufficient.
[41]
Mr Jethro referred us to the
decisions of
Moosa v Lalloo and Another
1957 (4) SA 207
(N)
and
Moosa
v
Lalloo 1956 (2) 237 (D & CLD)
where the Court held that the
procedural defects did not invalidate the sale of shares. The Court
held as follows in the former
at 219A-C:
‘
The
answers to these aspects of the matter appear to me to stem from the
fact that an allotment, by which shares are acquired from
a company,
is a contract. Although a share is created and comes into
existence upon its original issue by the company,
and not before
issue (with the consequence that he who subscribes for it does not
purchase it from the company), the right to it
springs from offer and
acceptance. No ceremonious ritual, nor any magic formula, is required
for the process of allotting the share.
It may be effected by way of
offer on the part of the company to the allottee, accepted by him,
or, as is more usual, by way of
offer (an application for shares) by
him, accepted on behalf of the company; a contract of allotment may
be effected in any manner
in which a contract may be concluded, even
by implication from conduct..’
[42]
The Court held further that:
‘
That
he, Mohideen and Naicker met and decided upon the issue of shares to
him and Mohideen cannot it seems to me, be denied; indeed,
the share
certificates were actually issued bearing the three signatures of the
three of them, and this in the circumstances, is
evidence of the
contract to take and to allot shares
.
Even though there may have been some absence of formality, it is
clear to me that the plaintiff, on the one hand, and the Company,
represented by Mohideen and Naicker, on the other hand, agreed
upon the creation of 2,500 shares to be issued to the plaintiff,
and
this was put into effect.
There certainly was a de facto allotment (cf. Ex Parte Liquidator
Curlewis Citrus Growers’ Co-operative Co. Ltd.,
1933 T.P.D.
389)
,
and
the Company acted upon it, functioned with the aid of the plaintiff’s
capital and treated him as a shareholder and as
a director.’
(
Own
emphasis
)
[43]
A key feature in the
Moosa
case is that ‘a statutory
meeting’ was held. It seems that parties in that case met and
decided on the issuing of the
shares. That in my view could be a
distinguishing factor which is material. Apart from the signing of
the MOU no further meeting
was held to issue shares in the present
matter. Be that as it may, it does not seem like a special resolution
was an issue in the
Moosa
case.
Furthermore, in the
Moosa case
it
seems parties were all aware of the transaction. In this case at one
point fresh shares of a different number were to be issued
in terms
of the MOU, but that changed in May 2008 with Koster suggesting
authorised shares to be used, leading to amounts that
differed from
what was stated in the MOU, even though an attempt was made to stick
to the same percentages. Clearly, Stirton and
Bavasah could not be
said to have been aware of the transaction as it changed on 06 May
2008 or to have unanimously consented to
it as they were informed
that shares were issued already by then. In my view the
Moosa
decision is distinguishable from this case on many fronts. In
Moosa
directors met and decided. This did not
happen in this case.
[44]
The Court in
Moosa’s
case observed that a share only comes into existence upon its
original issue by the company and not before its issue.
[6]
Lack of membership in the
Moosa
case was not relevant as the Court had found that the shares were
allotted and issued. Therefore
Moosa
had become a shareholder. In this instance, the fact that there is a
shareholder’s certificate issued did not in itself make
Bavasah
a shareholder.
[45]
The fact that there was no
register of members and Bavasah’s name was not in the register
of membership did not impact on
the validity of the sale of shares
agreement either. That is, in my view, the kind of defect that could
be condoned.
[46]
Mr Jethro argues that Orton,
who was the sole director of the company after the signing of the
MOU, unilaterally made a decision
to issue the shares informally so
to speak. That argument is supported by Koster’s statement that
the email she received
from Orton in January 2008 in fact showed the
intent of the sole shareholder Grapevine as represented by Orton was
that shares
were to be issued as at 1 December 2007. Whilst the
intent was there to issue, issuing did not take place. If one reads
correspondence
from Orton, it is clear that shares had not been
issued even by May 2008. His email to Koster dated 06 May 2008
clearly shows that
Orton’s understanding was that shares had
still not been issued.
[47]
Even if it were to be
accepted that Orton’s instructions to Koster and others in
January 2008 showed a decision had been taken
by Orton, as sole
Director of Grapevine, in a meeting called by himself the difficulty
is that since the MOU contemplated issuing
of fresh shares, a special
resolution had to be passed authorising such. By virtue of sections
200 and 202 of the Act a special
resolution is not effective unless
it has been registered by the Registrar of Companies within a month
of its passing.
[48]
Mr Jethro argued that
the Court ought to consider the ‘substance over form’
principle of unanimous assent. In
LAWSA
[7]
,
the authors observe as follows:
‘
Although
generally company decisions are arrived at by means of formal
resolutions taken at properly constituted meetings of the
company,
the courts have recognised that the unanimous assent of all the
members,
when
fully aware of what is being done
,
is an alternative method of passing valid company resolutions –
despite the fact that the procedures prescribed by the articles
have
not been observed.’
(Own
emphasis)
[49]
In
Gohlke
& Schneider and Another v Westies Minerale Beperk and Another
[8]
the Court said the following:
‘
After
all, the holding of a general meeting is only the formal machinery
for securing the assent of members or the required majority
of them,
and,
if
the assent of all the members is otherwise obtained
,
why
should that not be just as effective
?”
At 694 E:
“
Because
the principle, as applied in those cases, is a sound one, giving
effect to the substance rather than the mere form of the
members'
assent, I think that we should accept it as being settled law.
Consequently, the assent of all the members and Sarusas,
as evinced
by the agreement of 28th January, 1965, rendered clause 8 binding on
all of them just as if they had approved it by
ordinary resolution in
general meeting.’
(Own
emphasis)
[50]
In
Levy
and Others v Zaltrust Investment (Pty) Ltd
[9]
the Court said:
‘
I
am hence of the opinion that the
unanimous
consent
of the shareholders of a company
to
a specific transaction
has the same effect and validity as the approval of such transaction
by a general meeting of the company.’
(Own
emphasis)
[51]
The difficulty that Bavasah
has in this case is that the MOU sought the issuing of fresh shares
which did not just require a general
meeting to occur but a special
resolution to be passed. Had it only been a general meeting that was
required I would have had no
hesitation in finding that Orton’s
instructions that shares be issued indicated that he was authorised
as a director to issue
or order issuing of the shares even though no
general meeting passing a formal resolution was held. In this regard,
I disagree
with the magistrate’s finding that Orton was not
‘
fully aware of what was being
done
’ by virtue of his being
unaware of the formalities required by Articles. Being ‘fully
aware’ for the purposes
of unanimous assent does not
necessarily mean being aware of the formalities required in the
Articles as the magistrate found,
but it means being aware that
shares had to be issued to the relevant parties and acting on such
awareness.
[52]
There seems to be a strongly
held view that unlike normal resolutions, special resolutions cannot
be informally obtained by way
of unanimous assent.
[10]
In
Quadrangle Investments (Pty) Ltd v
Witind Holdings Ltd
[11]
the Court held that in requiring a
special resolution:
‘
the
Legislature also bore the wider interest of the general public in
mind in prescribing those formalities. A purported alteration
by the
unanimous assent of the shareholders, which can occur informally,
even by conduct, would therefore not serve those purposes.
A special
resolution must therefore be regarded as being essential. (See on
this aspect, too, the well-reasoned and useful article,
"The
Principle of Unanimous Assent," by Professor Beuthin, in 91
(1974) S.A.L.J. at pp. 11-15).’
[53]
The difference in this
instance though is that a special resolution is prescribed by the
articles and not by statute, which might
be a differentiating factor.
The difficulty here though is that apart from the fact that the
resolution was never passed, many
other formalities were not complied
with. There was also no attempt to comply with the required
formalities.
[54]
A further indicator that
shares were not issued was that on 06 May 2008, Koster suggested that
all the 1000 authorised shares of
the company be used rather than new
shares being issued. Orton was no longer the sole director on
or after 06 May 2008. No
general
or
informal meeting of the Company was
held to issue the shares to the new shareholders during the tenure of
the new directors and
even the belated resolution remained unsigned.
In fact the change in circumstances was not directly communicated to
Bavasah and
Stirton by Koster or Orton. Orton did not see the
point of doing so. He was in direct communication with Koster. Both
Bavasah
and Stirton assumed that Orton would comply with all the
necessary formalities and left everything in his hands.
[55]
What seems to be clear from
the evidence is that both Stirton and Bavasah would have learnt about
the new individual shareholding
amounts when they were issued with
their share certificates after 06 May 2008 but before 27 May 2008.
The question is whether the
doctrine of unanimous assent finds
application during the period of 06 May 2008 to 27 May 2008.
[56]
Although the unanimous assent
principle would ordinarily be applicable in circumstances such as
these, at least during the May 2008
period, where no special
resolution was required, the shareholders and directors could not
have unanimously assented to the allotment
and issuing of the shares
to the new shareholders in this case as they could not have been
‘
fully aware of what was being
done
’. Furthermore, Orton had
stated already on 05 May 2008 that ‘
shares
had been issued anyway’,
knowing
this not to be the case as evidenced by his email to Koster on 06 May
2008. No discussions took place between the directors
regarding the
allocation, allotment or issuing of the shares to Bavasah, Stirton
and others. It would not be enough for Orton to
suggest that he
called a meeting with himself in these circumstances. Section
221 of the Act read with the Articles
was clearly not complied with
and the doctrine of unanimous assent could not come to Bavasah’s
rescue in these circumstances.
[57]
Mr Jethro also referred to
the decision of
Botha v Flick and
Others
[12]
where the Court found that
provided that the parties had the
required intention (consensus)
, cession
of the share is complete without delivery of the share certificate
and a signed transfer form, and regardless of whether
or not the
company knows of the cession.
[13]
[58]
It cannot be said in this
case that the parties had the requisite intention to pass transfer of
45 shares to Bavasah and others
as suggested by Koster, as no company
meeting took place and both Bavasah and Stirton only became aware
that 45 shares were allocated
to him after 06 May 2008, or upon being
issued with share certificates sometime before 26 May 2008. I do
accept that the percentages
remained unchanged, but those percentages
in the MOU were based on different amounts of fresh shares that were
to be issued and
not based on already authorised shares. It does not
seem that Bavasah and Stirton were part of the decision to issue the
amount
of shares that was suggested by Koster on 06 May 2008.
[59]
The decision of
Botha
v Fick
seems to suggest that the
obligation to deliver share certificates and sign documents necessary
to effect transfer does not affect
the rights to the shares
inter
partes
. It is required merely to enable
the company to perform its statutory regulatory obligation to
register the transfer of the shares
in the name of Bavasah.
[14]
The hurdle that Bavasah must still overcome in this instance is that
there was no issuance of shares. The wording used in
section
221 of the Act is also peremptory, stipulating
that directors have no authority to allot
or issue shares without prior approval at the general meeting.
[60]
It is common cause that the
company did not have a register of members as contemplated by section
103 (2) of the Act. Section 103(2)
provided that: ‘Every other
person who agrees to become a member of a company and whose name is
entered in its register of
members shall be a member of the company.’
It follows from this provision that Bavasah was not a member of
the company.
The Articles further provide that ‘Every person
whose name is entered as a member in the register of members shall be
entitled
to one certificate of all shares registered in his name...’
Therefore before a share certificate could be issued a person’s
name should have been entered in the register of members.
[61]
The magistrate held
that the agreement between Stirton and Bavasah was void due to a
common mistake shared by the parties. The
authorities
indicate that if such a supposition is "vital to the
transaction" in that neither party would have concluded
the
contract had they known the true facts, a court can hold the contract
to be void ab initio.
[15]
I am in agreement with the
magistrate’s finding that the parties were both under an
incorrect supposition that shares had
been issued and that Bavasah
was the holder of the shareholding in the company. The contract
entered into and signed on 27 May
2008 was therefore void.
[62]
That
brings me to the question of whether parts of the contract dealing
with the loan account were severable from those that dealt
with the
shareholding. Bavasah holds that they are, because the loan account
had to do with his employment and not his shareholding.
Therefore,
even though shares could not have passed on to him, he was still
entitled to repayment of the loan account. Once his
employment
terminated he was entitled to repayment of a loan account.
[63]
The
respondents’ view is that shareholding formed the heart of the
transaction and if one had regard to the intention of the
parties one
would find that the company would not have agreed to the payment of
the loan account if Bavasah was not a shareholder.
Mr Cooke who
appeared for the respondents argued that Bavasah’s entitlement
to shares was linked to his remuneration in that
he had to earn his
shareholding by working for 24-30 months.
[64]
Whilst
it is useful to look at the MOU and all the other instruments, the
important issue is the intention of the parties at the
time of
entering the contract. The question is what the parties had in mind
when they entered the agreement of 27 May 2008. The
first point is
that they wanted a deal that could make Bavasah ‘go- away’
as it were. It also seems to me the salary
sacrifice was made by
Bavasah on the basis that he was a shareholder. For that reason the
finding that he was not a shareholder
of the company invalidates the
whole contract.
[65]
Bavasah’s
claim was based on the agreement of 27 May 2008 and not on his
entitlement to be paid the loan account by virtue
of his employment
relationship with the company having been terminated. This
distinction is quite important as it may be
that Bavasah does have a
claim but his claim cannot be based on the agreement of 27 May 2008
alternatively on the pleadings as
they stand.
[66]
For
these reasons, I find no misdirection on the part of the magistrate
warranting this Court’s interference.
[67]
In the
circumstances, I would make an order dismissing the appeal with
costs.
___________________
N
P BOQWANA
Judge
of the High Court
I
agree, and it is so ordered
____________________
R
HENNEY
Judge
of the High Court
[1]
See Law of South Africa Vol 4(1) (Second Edition) Companies at
paragraph 157
[2]
See Law of South Africa Vol 4(1) (Second Edition) Companies at
paragraph 159
[3]
1878 8 Chd 635
(CA) at 638
[4]
At para [159].
[5]
At page 187
[6]
In this regard see paragraph 219B
[7]
Vol 4(2) First Reissue at paragraph 40
[8]
1970 (2) SA 685
(A) at 693 G
[9]
1986 (4) SA 479
(WLD) at 485F
[10]
See LAWSA
Vol
(2)
First
Reissue at
paragraph 40
.
The authors in LAWSA state that ‘...
the
unanimous assent of all the shareholders will not satisfy a
requirement that something be effected by a special resolution’
.
Also see
Hahlo’s
Company Law through the Cases – A Source Book – Sixth
Edition at page 237 – pg 239
which refer to
the opposing views on this issue.
[11]
1975 (1) SA 572
(A) at 581G-H.
[12]
1995 (2) SA 750 (A)
[13]
Also see
Barnard
v Carl Greaves Brokers (Pty) Ltd and Others
[2007] ZAWCHC 2
;
2008 (3) SA 663
(C)
which concerns the
principle that shares may be freely sold and assigned even though
the original registration remains unaltered.
They can pass from hand
to hand and form the subject of many transactions without the
original registration in the shares register
being disturbed. In
such instances, it is the mere naked registration that remains, and
the fact that the original holder may
still be in possession of the
script or share certificates, makes no difference as such original
holder no longer possesses any
beneficial interest in the shares, or
put differently, possesses no property in the rights of action which
the shares represent.
See
McGregor’s
Trustees v Silberbauer
[1891] 9 SC 36
at 38-9;
Randfontein
Estates Ltd v The Master
[1909] TS 978
at 981-2;
Botha
v Fick
supra
at 778
[14]
(at pa
ge
756).
[15]
Dickinson
Motors (Ptv) Ltd v Oberholzer 1952(1) SA 443 (A) at 450; and Van
Reenen Steel (Ptv) Ltd v Smith N.O. & Another 2002(4)
SA 264
(SCA) at 270-271).