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[2014] ZAWCHC 95
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Visser Sitrus (Pty) Ltd v Goede Hoop Sitrus (Pty) Ltd and Others (15854/2013) [2014] ZAWCHC 95; 2014 (5) SA 179 (WCC) (19 June 2014)
THE HIGH COURT OF
SOUTH AFRICA
(WESTERN CAPE
DIVISION, CAPE TOWN)
Case
No: 15854/2013
DATE:
19 JUNE 2014
In the matter
between:
VISSER SITRUS
(PTY)
LTD
.....................................................................................
APPLICANT
And
GOEDE HOOP SITRUS
(PTY)
LTD
........................................................
FIRST
RESPONDENT
MOUTON
SITRUS
..............................................................................
SECOND
RESPONDENT
COMPANIES AND
INTELLECTUAL
PROPERTY
COMMISSION
(CIPC)
.....................................................
THIRD
RESPONDENT
Coram: ROGERS J
Heard: 28 MAY
2014
Delivered: 19
JUNE 2014
JUDGMENT
ROGERS J:
Introduction
[1] This application
concerns the refusal by the board of the first respondent (‘GHS’)
to approve a transfer by the
applicant (‘VC’) to the
second respondent (‘MC’) of the shares held by VC in GHS.
VC seeks to compel GHS
to register the transfer by way of relief in
terms of
s 163
of the
Companies Act 71 of 2008
. VC also seeks an
order that the clause in GHS’ Memorandum of Incorporation
(‘MOI’) restricting the transferability
of its shares be
amended.
[2] VC seeks final
relief on motion. The facts must thus be adjudicated in accordance
with the Plascon-Evans rule. Mr A Ferreira
appeared for VC and Mr J
Newdigate SC for GHS.
[3] Although MC was
cited as the second respondent and presumably wishes the transfer of
shares to be approved, it has played no
part in the proceedings. It
did not file affidavits in support of VC’s case or in response
to the allegations made by GHS
in support of the board’s
decision to refuse approval for the transfer.
The facts
Goede Hoop Sitrus
[4] Some years ago
(the MOI indicates with effect from 1 March 2000) GHS was converted
from a cooperative to a public company. By
way of a special
resolution passed by shareholders on 16 November 2012 it was
converted to a private company. GHS’ primary
functions are to
receive citrus from producers and to grade, store, pack, market, sell
and deliver the fruit on an agency basis.
Producers may elect to
acquire all or only some of GHS’ services.
[5] In terms of the
MOI, GHS’s shareholders have preference in the conclusion of
contracts for the supply by GHS of packing
and marketing services. If
GHS has sufficient capacity after shareholders have made their
elections, GHS may provide its services
to other producers. At the
present time GHS has no contracts with producers who are not also
shareholders. Not all shareholders,
however, pack and market their
citrus through GHS. There are 88 shareholders of whom 66 pack and
market their fruit through GHS.
[6] A producer may
elect to contract with GHS on a short-term basis (a one-year cycle)
or a long-term basis (a three-year cycle).
There are currently 42
producers who have elected to contract on a long-term basis.
According to GHS’ board, the business
strategy and vision of
the company and the majority of its shareholders are that there
should be long-term contracts and that producers
should acquire the
full range of services, because this facilitates planning, capital
investment and the appointment and retention
of qualified staff.
[7] GHS’ MOI
from the outset contained restrictions on the transferability of its
shares, even as a public company. However,
the events in the present
case concern the position after it became a private company. Clauses
6.1.7.1 and 6.1.7.3 read as follows:
‘6.1.7.1 No
shareholder may transfer the registered or beneficial ownership of
any Ordinary Shares in the Company to any
other party without first –
6.1.7.1.1 complying
with the requirements for transfer as set out in the Act and in this
MOI; and
6.1.7.1.2 obtaining
the approval of the board for such transfer.
6.1.7.2 ….
6.1.7.3 The board
may, at any time, decline to register any transfer of Ordinary Shares
in the securities register of the Company
without giving any reason
therefore and the directors shall be deemed to have so declined until
they have resolved to register
the transfer.
[8] As will appear,
MC’s shareholding in GHS will, if the disputed transfer is
registered, increase above 10%. The following
provisions of the MOI
in regard to this threshold may be noted. In terms of clause 9.3 the
right of shareholders to requisition
a meeting, as set out in
s 61(3)
of the Act, may be exercised by the holders of at least 10% of the
voting rights. In terms of clause 9.7.1 the quorum for a
shareholders’
meeting to begin or for a matter to be considered
is 10% in substitution of the 25% set out in
s 64(1)
of the Act.
[9] A shareholder in
GHS has one vote for every ordinary share up to a maximum of 4
million shares (clause 6.1.1.2.2.2 of the MOI).
Thereafter there is
only one vote for every 1 million shares in excess of 4 million
shares (0,0001% per share). GHS currently has
31 249 515 issued
shares. MC holds 2 653 811 (8,5%), which will increase by 1 066 571
to 3 720 382 (11,9%) if the disputed transfer
is registered. MC’s
voting interest will thus increase in the same proportion (from 8,5%
to 11,9%). If MC were in future
to acquire further shares taking its
total to 4 million, its voting interest would increase to 12,8%.
Share acquisitions above
4 million would add very little to the
number of MC’s votes though every share acquired by MC in
excess of 4 million would
remove a full vote from the hands of other
shareholders. So if, for example, MC were eventually to hold 10
million shares, it would
have only six more votes (4 000 006 in
total) but its voting interest would increase from 12,8% to 15,8%
because there would now
be only 21 249 515 shares in the hands of
other shareholders. (These percentages assume that there will be no
other shareholder
with a holding in excess of 4 million shares.
Theoretically, if there was one shareholder with 27 249514 shares and
one other shareholder
with 4 million shares, the voting interest
conferred by the 4 million shares would be a fraction under 50%.)
Mouton Citrus
[10] MC, the
proposed transferee, has held shares in GHS for some years (probably
from the date of conversion to a company). As
at 2008 MC held 778 875
of GHS’ 24 249 515 issued shares (3,2%). During 2008 MC
acquired a further 675 815 shares from seven
sellers, increasing its
tally to 1 454 690 (6%). In 2009 it acquired a further 518 713 shares
from three sellers and in May 2011
a further 680 408 shares from
another three sellers, bringing its total shareholding to 2 653 811
(10,9%).
[11] At an
unspecified date after May 2011 the number of GHS’ issued
shares increased to 31 249 515, which had the effect
of diluting MC’s
holding to 8,5%. (This may have been in the context of the BEE
transaction mentioned in the papers.) If
MC were to obtain transfer
from VC of the latter’
s 1
066
571
shares, MC’s total
shareholding would increase to 3 720 382 (11,9%).
[12] GHS’
board approved the various transfers to MC mentioned above (ie up to
and including May 2011). However, the minute
of the GHS board meeting
of 24 May 2011 indicated some disquiet in relation to the transaction
of May 2011 which took MC from 6%
to 10,9%. The minute approving the
transfer recorded the following (I provide my own translation from
the Afrikaans):
‘The above
transactions [ie MC’s acquisition of a further 680 408 shares
from three sellers] will result in MC holding
an interest of 10,9% in
GHS which will make it the largest single shareholder after the GHC
Empowerment Trust. The second largest
producer [the empowerment trust
was not a producer] holds about 5,4% of the shares. After an in-depth
discussion, the directors
were unanimously of the opinion that there
was growing unease among producers over the influence of MC within
GHS, taking into
account MC’s strategy of doing its own
marketing and doing contract packing on a short-term basis. GHS’
strategy of
long-term discretionary packing does not suit MC and
impedes its own growth strategy by way of purchasing farms and
leasing land,
because the land of producers is also bound to the
long-term agreements with GHS. The board is of the opinion that a
further increase
of MC’s interest [ie in GHS] is going to
discourage some producers in the future from concluding long-term
discretionary
contracts with GHS.
The board has the
power in terms of the MOI to refuse approval for transfers without
giving reasons, but strategically it is not
the right time to refuse
the transfers. MC has still committed its total volume to GHS for
packing in the 2011 season.’
[13] After the
approval of the above transfer but prior to the transaction between
VC and MC, the latter attempted to purchase a
further 41 250 shares
from the John van Wyk Family Trust. On 14 November 2011 GHS’s
board resolved to refuse the transfer
without furnishing reasons.
[14] In early 2012
MC, in its negotiations with GHS, insisted that it would only
conclude a short-term contract and that it required
terms which
differed from the standard terms on which GHS contracted. MC’s
attitude and its implications for GHS were considered
at a GHS board
meeting on 26 February 2012. The minute reflects the following (again
my translation):
‘Pursuant to
discussions with producers, it is clear that the vision, growth
strategy and demands of MC put GHS at risk in
regard to the retention
and maintenance of service levels to GHS’ other shareholders
and producers. The latter producers
are concerned in particular about
the availability of capacity in the future and the maintenance of
service levels. Other packers
undertake little or no contract packing
for producers where they do not have control over or a say in the
marketing of the fruit,
primarily because of the impact on service
levels and the risk of bad debt. In particular, the short-term nature
of the delivery
contracts which MC wants increases the risk.
If MC should
withdraw, GHS will need to adapt to the reduced volumes so that it
can still render a market-related packing service
to the remaining
producers, which is indeed possible.’
[15] Following this
meeting, GHS’ managing director, Mr G van Eeden, had further
negotiations with MC but found himself unable
to meet the latter’s
requirements. He reported back to the board on 16 April 2012. The
minutes of the meeting record a unanimous
decision by the directors.
This was to the following effect: [i] GHS’ first choice was to
conclude a standard long-term packing
contract with MC but with
certain special terms which offered some concessions to MC in return
for guaranteed minimum volumes.
[ii] GHS would not do contract
packing for other producers through the agency of MC. MC was to
respect GHS’ agreements with
other producers. (I understand
this part of the minute to mean that MC should not extend the
benefits of its special terms to other
citrus producers by taking
their fruit as an agent and delivering it to GHS for packing.) [iii]
The amendments which MC was demanding
in respect of GHS’ MOI
and board were not negotiable. (What these demands were does not
appear.) [iv] Share transfer instructions
received from MC would be
considered upon the conclusion of a long-term contract.
[16] GHS’
management was given a mandate to negotiate further with MC along
these lines. However, Van Eeden could not achieve
an outcome which
complied in all respects with the board’s requirements. At a
board meeting on 22 May 2012 the directors
approved the terms of a
short-term contract with MC for the 2012 season. It was recorded that
MC had committed itself to a strategic
process with a view to
establishing a workable long-term relationship with GHS. This
required both parties to appoint representatives
for the discussions.
The board mandated Messrs le Roux and Jacobs as its representatives.
In the ensuing discussions, it became
apparent to those gentlemen
that MC had a vision for unbundling GHS and establishing a separate
packing company. The state of play
was considered at a further GHS
board meeting on 18 September 2012, where a mandate for further
discussions was given. However,
by October 2012 it became apparent to
GHS’ representatives that the two companies would be unable to
come to terms on the
long-term relationship, though according to a
board minute of 13 November 2012 MC had committed to packing its
fruit with GHS in
the 2013 season.
[17] MC is the
largest single source of citrus deliveries received by GHS for
packing. Over the period 2008-2013 MC’s deliveries
to GHS
comprised an annual average of 29,5% of GHS’ total fruit
received. The figure was 39% for the most recent year, 2013.
However,
and from inception in 2000, MC has chosen largely to do its own
marketing. Furthermore, according to GHS’ deponent
it came to
the board’s knowledge during 2011 that MC was not delivering
all its produce to GHS; on the contrary, MC was giving
preference to
entities who were in competition with GHS.
Visser Citrus
[18] The controllers
of VC are Mr and Mrs Visser. For some years Mr Visser, a citrus
producer, had an indirect shareholding in GHS
through a 50%
shareholding in a company called Hexrivier (Pty) Ltd (‘Hexrivier’).
During December 2010 Hexrivier was
unbundled, as a result of which 1
066 571 GHS shares previously held by Hexrivier were transferred to
VC. After the dilution already
mentioned, this constituted a 3,4%
shareholding in GHS.
[19] On 20 April
2011 GHS’ board approved the transfer of the 1 066 571 shares
to VC. The minute reflects that VC requested
the board to hold over
the registration pending further instructions. The reason for this
does not appear from the papers. In the
event, though, the
instruction to effect the registration was given and implemented in
May 2013.
[20] VC previously
used the packing and marketing services of GHS. However, and as from
the 2011 season, VC has had no business
dealings with GHS. In
November 2012 VC decided, in view of the cessation of its dealings
with GHS, to dispose of its shares. VC
also wanted to raise funds for
planting new varieties of citrus. In February 2013 the Vissers
approached MC. A verbal agreement
was struck for the sale of shares
at one rand per share. MC’s controller, Mr Johan Mouton,
stipulated, as a condition, that
GHS’ board should approve the
registration of transfer of the shares. He informed the Vissers that
the board had on prior
occasions refused to approve transfers without
giving reasons and he feared the same would happen on this occasion.
[21] VC alleged in
its founding affidavit that, at the time the deal was struck, GHS’
shares ‘appeared to be trading’
at between R1,34 and
R4,00 per share, the latter being the price at which GHS’
shares were sold as part of a BEE transaction.
VC says that it took
the view that the market price for the shares was between R1,00 and
R1,34.
[22] During April
and May 2013 Mrs Visser attempt to sound out GHS’ financial
director, Mr Venter, who referred her to Van
Eeden. There is a
factual dispute as to precisely what was said during the meeting with
Van Eeden. It is common cause, though,
that he told Mrs Visser that
the decision lay with the board and that VC should prepare a written
motivation in support of the
transfer. It is also common cause that
Mrs Visser enquired whether GHS would buy back VC’s shares.
According to Mrs Visser,
Van Eeden refused, saying that the company
had a policy against share buy-backs and did not wish to set a
precedent. Van Eeden
denied that this had been his response; he
averred that he told Mrs Visser that in all likelihood the company
would not buy back
the shares because it was not in the interests of
the company to do so.
[23] Mr Visser met
later during May 2013 with GHS’ non-executive chairman, Mr
Cobus de Witt, and apprised him of the fact
that VC would be
submitting a written motivation. De Witt confirmed that the matter
would be placed on the agenda for the board
meeting scheduled to be
held on 28 May 2013.
[24] On 26 May 2013
VC emailed its written motivation to Van Eeden. In the letter the
Vissers dealt with various matters which had
been raised in the
preceding discussions or which they thought might be an obstacle to
approval of the transfer. These points were
the following:
[a] VC had offered
to sell the shares to GHS but Messrs van Eeden and Venter had
indicated that the company did not wish to buy
back the shares.
[b] Although
transfers of shares were subject to board approval, the directors had
not in the past had problems with approving transfers
among
producers, as had been confirmed by the recent registration of the
transfer of shares from Hexrivier to VC.
[c] GHS’
concern that MC was in direct competition with GHS was unfounded.
Rather, it was the seller, VC, which was a direct
competitor, because
VC was now packing its own produce whereas MC was one of GHS’
most loyal supporters. MC expected no more
than a professional
packing service at competitive tariffs. MC would not erect its own
substantial packing facilities for so long
as it could have its fruit
successfully packed by a single service provider. MC’s
willingness to buy the shares was rather
an indication that it viewed
GHS’ successful continuation in business as being in MC’s
strategic interests.
[d] The concern that
MC’s enhanced voting rights would be a threat to GHS was
incorrect in the light of the cap on voting
rights contained in the
MOI.
[e] The ‘extra’
voting rights which arose upon the unbundling of Hexrivier would
disappear with the exit of VC. (I do
not understand this point and it
was not elaborated upon in argument.)
[25] Having dealt
with these concerns, the Vissers gave their reasons for wanting to
transfer VC’s shares. They did so under
a heading (my
translation), ‘Conflicting vision for the future of GHS.’
Under this heading they said the following
(again my translation):
‘For some time
the decisions of GHS’ board have been contrary to those of VC’s
vision for the company. For that
reason we have often voted against
such decisions. The decisions were, however, carried out because they
procured majority support
and VC is a minority shareholder.
If two parties’
priorities differ so drastically, it is better for them to part ways,
because it is impossible simultaneously
to act to the benefit of
both. At the same time, it is the fundamental right of any minority
shareholder, regardless of what is
contained in the company’s
MOI, to be protected. Because our priorities differ from those of
GHS, it is to our disadvantage
to remain as a shareholder of GHS. If
VC is permitted to deal in its shares, its right will be protected
and both parties will
be able to strive for their own goals without
any prejudice.’
[26] This motivation
was considered by GHS’ board on 28 May 2013. The minutes noted
that the Vissers’ account of discussions
with the directors
was inaccurate. The minutes record, further, that after discussion it
was decided to reject the application
as it was not in the company’s
interests. The minutes do not set out the reasons for this
conclusion. Van Eeden stated in
the answering papers that there had
been an in-depth debate. The transfer had been rejected because of
the concerns already reflected
in earlier minutes of the board. He
averred, further, that the board was informed at the meeting by one
of the directors that he
had learnt of MC’s intention to apply
for the rezoning of a part of its farm for purposes of erecting a
packing shed in direct
competition with GHS. The concern was that
existing long-term producers would not renew their contracts if MC
was allowed to obtain
a greater interest in the company and that this
would be catastrophic for GHS.
[27] On 30 May 2013
GHS notified VC of the refusal. Reasons were not provided. During
June and July 2013 the Vissers had numerous
communications with Van
Eeden in which they pressed for reasons and for the criteria by which
transfer applications were assessed.
Van Eeden expressed
understanding for their disappointment but said the board was
entitled to refuse an application without giving
reasons. The guiding
criterion was the best interests of the company, which was the test
applied by the board in relation to VC’s
request. Beyond this
Van Eeden was not prepared to go.
[28] On 24 July 2013
the verbal sale agreement between VC and MC was reduced to writing,
apparently on legal advice. Clause 2 stated
that it was a suspensive
condition that GHS’ board should approve the transaction. It
was recorded that GHS would be approached
for approval as soon as
possible after execution of the agreement.
[29] On the same day
VC’s attorneys wrote to GHS, attaching a copy of the sale
agreement and requesting the company to register
the transfer within
seven days. With reference to the earlier motivation and refusal, the
attorneys expressed the view that ‘any
refusal on the part of
[GHS’ board] to register the transfer of our client’s
ordinary shares in the securities register
of the company, without
any rational or cogent reason therefore, constitutes oppressive and
unfairly prejudicial conduct towards
our client’. GHS was
referred to
s 163(1)(a)
of the
Companies Act. The
attorneys recorded
their instructions to launch an application for relief if the
transfer application was not approved. The right
to claim damages was
also reserved.
[30] GHS did not
respond to this letter. Van Eeden said in the answering papers that
it was unnecessary to do so, given the earlier
decision.
The application
[31] The present
application was launched on 26 September 2013. GHS filed its
answering papers on 7 November 2013. Van Eeden stated
in the
affidavit that GHS had received legal advice that it was not obliged
to provide reasons but had chosen now to do so. He
proceeded to give
them.
[32] In VC’s
replying papers, filed on 19 December 2013, Mrs Visser traversed the
reasons offered by GHS. In support of VC’s
case that it was
suffering prejudice, she made the allegation that MC was the only
willing buyer so that VC was being prevented
from selling it shares.
(This allegation had not been made in the founding papers or in the
motivation to the board. No facts were
alleged in support of it.)
[33] Because VC had
not been given GHS’ reasons when it launched its application,
it was inevitable that it could only traverse
those reasons in its
replying papers. Had the reasons been given earlier, VC would have
been required to make its criticisms in
the founding papers. Given
this course of events, GHS took the view that it was entitled to
respond to the criticisms of its reasons
by way of a supplementary
answering affidavit, which it filed on 24 February 2014. It sought
condonation for the late filing. In
the supplementary answering
affidavit Van Eeden pointed out that Mrs Visser’s assertion in
the replying affidavit that MC
was the only willing buyer was a new
one and that it was unsupported by corroborative evidence.
[34] On 7 March 2014
and by agreement the application was enrolled for hearing on 28 May
2014.
[35] On 27 May 2014,
the day before the hearing, VC delivered a supplementary replying
affidavit in response to the supplementary
answering affidavit. In
amplification of the assertion that MC was the only willing buyer,
Mrs Visser said that Van Eeden knew
that ‘for many months’
prior to launching the application, and also thereafter, VC had tried
to sell the shares to
no avail. She expressed surprise at the
‘technical stance’ adopted by him in that regard. Mrs
Visser said that she
had recently ‘again’ tried to find
purchasers by way of an email to all known shareholders, a copy of
which she annexed.
She said she only received a response from three
members, who enquired that if she knew of a purchaser she should let
them know
(ie they also wished to sell their shares).
The supplementary
affidavits
[36] Mr Ferreira’s
position was that VC did not object to GHS’ supplementary
answering affidavit provided that VC’s
supplementary replying
affidavit was allowed in. Mr Newdigate submitted that the
supplementary answering affidavit should be received
while the
supplementary replying affidavit should not.
[37] I think that in
principle the filing of an additional set of papers –
supplementary answering and supplementary replying
papers – was
justified, given that GHS only provided reasons in its answering
papers. No time limit is specified in the rules
for the filing of a
supplementary set of papers. If one takes the time periods specified
for the usual set of papers as a guide,
GHS should have filed its
supplementary answering papers somewhat sooner. However, they were
filed more than three months before
the agreed date of hearing, which
was more than sufficient to allow time for the supplementary replying
papers. I thus rule that
the supplementary answering affidavits
should be received as part of the record.
[38] The
supplementary replying papers stand on a different footing, because
they were filed more than three months after the supplementary
answering papers and only one day before the hearing. The
supplementary replying papers deal with two matters, namely the
assertion
that MC was and is the only willing buyer of the shares;
and the alleged market value of the shares as being between R1,00 and
R1,34. I do not think that evidence on the second of these questions
will take the matter any further. As to the first, I consider
that
GHS would be prejudiced by the very late receipt of the evidence.
There is a personal attack made on Van Eeden to which he
has not had
the opportunity of reply. This material should have been contained in
the founding papers (it was not dependent on
the reasons furnished by
the board in their answering papers) or, by the latest, in the
initial replying papers. Had this been
done, GHS could have dealt
with the material in its answering or supplementary answering papers.
[39] I also think
the evidence is of dubious relevance, because Mrs Visser does not say
that, prior to applying to the board for
approval on 26 May 2013, VC
had unsuccessfully attempted to sell it shares to other members or
that the directors as a body knew
that this was so. VC’s
motivation to the board did not include the assertion that MC was the
only willing buyer. The act
of the directors which is in issue in
this case is the decision of 28 May 2013.
[40] For these
reasons, I refuse to condone the late filing of the supplementary
replying papers.
Clause 6.1.7.1 of
the MOI
[41] In VC’s
amended notice of motion filed on 19 November 2013 (to which there
was no objection), the relief sought by VC
in relation to the MOI was
that GHS be directed to remove the existing clause 6.1.7.3 (the terms
of which I have quoted previously)
and to replace it with the
following:
‘6.1.7.3 The
board may decline to register any transfer of the Ordinary Shares in
the securities register of the Company
if the transfer of such
Ordinary Shares does not comply with the provisions of this
Memorandum of Incorporation or the Act.’
[42] An amended
clause in this form would effectively deny the board a discretion in
regard to the transfer of shares. The function
of the board would be
relegated to determining technical compliance with the MOI and the
Act. The amended clause makes no reference
to the giving of reasons,
no doubt because the amended clause would not provide scope for the
board to exercise a value judgment
of the kind which could be the
subject of reasons.
[43] In written and
oral argument Mr Ferreira did not make submissions in support of such
a wide attack. He seems to have accepted
that the directors were
entitled to refuse to approve a transfer if they thought such refusal
to be in the best interests of the
company. His submissions were
directed, rather, at the proposition that in the modern era it is
objectionable for a company’s
board to be entitled to refuse a
transfer without giving reasons. The proposed amendment would thus be
one which required the board
to give reasons for a refusal.
[44] The essence of
clauses 6.1.7.1 and 6.1.7.3, namely that GHS’ board has a
discretion whether or not to approve a registration
of transfer and
does not have to provide reasons for refusal, is a common restriction
on transfer of shares in the articles of
private companies. Company
legislation in South Africa, in keeping with Commonwealth corporate
legislation, has always required
a private company’s articles
of association to restrict the transfer of the company’s
shares. This requirement has
been retained in
s 8(2)(b)(ii)
of the
new
Companies Act. Although
the form and extent of the restriction is
a matter for the founding shareholders, a restriction of the kind
contained in GHS’
MOI is, as I have said, a common one. Indeed,
it was the standard restriction contained in clause 11 of the Table B
articles in
Schedule 1 of the Companies Act 26 of 1973 (and cf Smuts
v Booysens; Markplaas (Edms) Bpk & ʼn Ander v Booysens
2001
(4) SA 15
(SCA) para 15). The new Companies Act does not contain a
table of standard cl
auses for an MOI
though it does specify certain matters which must be dealt with. The
Act does not prohibit a restriction of the
kind which was widespread
immediately prior to the coming into force of the new legislation.
[45] As I have said,
the restriction is also typical in private companies established in
other Commonwealth jurisdictions. The validity
of such a clause has
never, to my knowledge, been challenged, and counsel informed me that
they had found no authority to that
effect. Of course, it has always
been held that a board’s discretion must be exercised in what
the directors bona fide consider
to be the best interests of the
company, not for an improper or collateral purpose. This need not be
expressly stated in the clause.
Indeed, I do not think it ever is; it
is simply inherent in the nature of a fiduciary power.
[46] Mr Ferreira
submitted that the cases which have cited and followed the leading
decision in Re Smith & Fawcett Ltd
[1942] 1 All ER 542
(CA),
where Lord Greene MR described the nature of the standard power to
refuse to approve a transfer of shares, have generally
been older
cases, out of step with modern notions. That is incorrect. Among the
more recent cases which have dealt with the standard
power and
confirmed its nature are (in England) Village Cay Marina Ltd v Acland
& Others
[1998] UKPC 11
(BVI) and Mactra Properties Ltd v
Morshead Mansions Ltd & Others
[2008] EWHC 2843
(Ch) para 7; (in
Ireland) Banfi Ltd v Moran & Others
[2006] IEHC 257
; (and in
Australia) Smolaret & Another v Liwszyc & Others
[2006] WASCA
50
paras 67-68. (In England, s 771(1)(b) of the 2006 Companies Act
introduced, with effect from 1 October 2007, an obligation on
directors
to furnish reasons for refusing a transfer of shares. Our
Act does not include such a provision.)
[47] There is no
general duty on a person holding a fiduciary position to give reasons
for his actions to those to whom their duties
are owed. The duty of a
fiduciary to render an account is a duty to disclose what he has done
in the course of his administration,
not why he has done it.
[48] I do not see
anything repugnant about a clause in an MOI stating that the board
does not need to give reasons for its decision
on a request to
register a share transfer. Many powers are typically entrusted by the
MOI to the directors. The administration
of corporations would become
unwieldy if directors were bound on request to provide reasons for
their decisions. In relation specifically
to share transfers, there
might be sound business reasons not to provide reasons. To do so
might jeopardise the company’s
business relations with third
parties. The directors might be reluctant publicly to state
reservations they have concerning the
character of the proposed
transferee. The giving of reasons might require the company to
disclose matters of strategy.
[49] Mr Ferreira
invoked, by way of ‘analogy’, the provisions of the
Promotion of Administrative Justice Act 3 of 2000
. I do not see how
VC can derive any assistance from the constitutional principles of
just administrative action. Those principles
apply to public bodies
exercising public power under legislation. They do not apply to the
administration of private companies.
[50] I thus reject
the contention that clause 6.1.7.3 is bad in principle. Whether GHS’
directors in the present case exercised
their discretionary power in
what they bona fide considered to be the best interests of the
company is a different matter. If they
failed to do so, the
appropriate remedy would be directed at that specific outcome and not
an amendment of the MOI.
The contentious
share transfer
The law
[51]
Section 163(1)
entitles a shareholder or a director of a company to apply for relief
under the section if any of the following prerequisites are
met:
‘(a) any act
or omission of the company, or a related person, has had a result
that is oppressive or unfairly prejudicial
to, or that unfairly
disregards the interests of, the applicant;
(b) the business of
the company, or a related person, is being or has been carried on or
conducted in a manner that is oppressive
or unfairly prejudicial to,
or that unfairly disregards the interests of, the applicant; or
(c) the powers of a
director or prescribed officer of the company, or a person related to
the company, are being or have been exercised
in a manner that is
oppressive or unfairly prejudicial to, or that unfairly disregards
the interests of, the applicant.’
[52] Some of the
submissions made by counsel on the
s 163
claim related to the
question whether GHS’ directors breached their fiduciary duties
in refusing to register the transfer.
In the discussion which
follows, I thus consider, among other issues, the inter-relationship
between
s 163
and breach of duty by directors.
[53] The antecedent
of
s 163
was s 252 of the 1973 Act. In some respects the new
provision is wider. Under the old provision only a member could
petition for
relief; now a director may also do so. The old provision
was directed at a particular act or omission of the company or the
manner
in which the affairs of the company were being conducted; the
new provision includes acts or omissions of a related person or the
manner in which the business of a related person is being conducted.
The new provision also expressly includes the manner in which
the
powers of a director or prescribed officer are being or have been
exercised. However, in most if not all cases the exercise
by a
director or prescribed officer of a corporate power will also be an
act of the company. To that extent, paragraph (c) may
not add much to
paragraphs (a) and (b).
[54] The old Act
referred to conduct that was ‘unfairly prejudicial, unjust or
inequitable’. The new Act refers to conduct
which is
‘oppressive or unfairly prejudicial to, or that unfairly
disregards the interests of’ the applicant. I doubt
whether
this materially alters the character of the conduct which was held to
fall within the scope of s 252 of the old Act. The
test focuses on
the effect of the conduct complained of. Section 252 did not use the
word ‘oppressive’ except in its
heading. That expression,
which now appears in paragraph (a) of s 163(1), appears to cover
conduct of a more egregious kind than
conduct which is ‘unfairly
prejudicial to’ or that ‘unfairly disregards the
interests of’ the applicant.
In Aspek Pipe Co (Pty) Ltd v
Mauerberger
1968 (1) SA 517
(C) Tebbutt AJ (as he then was) said that
the word ‘oppressive’, as then used in the comparable
provision in the English
Companies Act, had been defined as ‘unjust
or harsh or tyrannical’ or ‘burdensome, harsh and
wrongful’
or which involves ‘at least an element of lack
of probity or fair dealing’ or ‘a visible departure from
the standards
of fair dealing’ (at 525H-526E; see also Grancy
Property Ltd v Manala & Others
[2013] 3 All SA 111
(SCA) paras
22-23). I find it difficult to conceive of cases where the conduct
complained of would be found to be ‘oppressive’
or as
‘unfairly disregarding the interests of’ the applicant
without at the same time being ‘unfairly prejudicial
to’
the applicant. In Australia a similar collection of phrases has been
said to constitute ‘different aspects of the
essential
criterion, namely commercial unfairness’ (Morgan v 45 Flers
Avenue Pty Ltd
[1986] 5 ACLC 222
at 223). So on this specific aspect
I express my respectful disagreement with the observation of Moshidi
J in para 53.1 in Peel
& Others v J & C Hamon Engineering
(Pty) Ltd & Others
2013 (2) SA 331
(GSJ) to the effect that the
phrase ‘unfairly disregards the interests of’ the
applicant indicates ‘a far wider
basis upon which relief may be
sought’. The old s 252 remedy, in keeping with equivalent
provisions in Commonwealth jurisdictions,
was not confined to the
enforcement of ‘rights’ but covered ‘interests’
as well.
[55] What is
important to emphasise, however, is that it is not enough for an
applicant to show that the conduct of which he complains
is
‘prejudicial’ to him or that it ‘disregards’
his interests. The applicant must show that the prejudice
or
disregard has occurred ‘unfairly’. ‘Oppression’
likewise connotes an element at least of unfairness
if not something
worse.
[56] Where the
impugned conduct is unlawful, and the conduct has a consequence that
is prejudicial to the applicant, the prejudice
to or disregard of the
interests of the applicant is likely to be, perhaps invariably will
be, ‘unfair’ within the
meaning of s 163. That section,
like its forerunner, is thus available as a remedy for unlawful
corporate conduct. There might
be other remedies but s 163(2)
provides the court with a wide array of equitable options, some of
which would not otherwise be
available.
[57] Matters become
more difficult where the conduct complained of is lawful, ie within
the powers of the relevant organ of the
company (the general meeting
or the board as the case may be) or within the power of the relevant
official. Such cases potentially
bring the invocation of the
unfair-prejudice remedy into conflict with other principles of
company law, such as majority rule and
that the constitutional
documents of the company are the compact between shareholders and the
company by which they are all bound.
[58] The exercise of
corporate powers are often subject to express or implied
qualifications. In the case of directors, for example,
it has always
been the position under our law that they occupy a fiduciary position
and must thus exercise any power conferred
on them in what they bona
fide consider to be the best interests of the company, for the
purpose for which the power was conferred,
and within any limits
which may be imposed for the exercise of the power. There are other
duties flowing from the fiduciary character
of the office and there
is, besides, a duty to act with care, skill and diligence. With the
coming into force of the 2008 Companies
Act, the duties of directors
have been codified at a fairly high level by s 76.
[59] If the
directors exercise a power conferred on them by the company’s
constitution (now styled the Memorandum of Incorporation),
and in so
doing meet the standard imposed by s 76, they act lawfully. Can a
shareholder who is prejudiced by the decision then
complain that the
decision is ‘unfairly’ prejudicial to him? Mr Newdigate
was inclined to concede that in theory this
was possible but
submitted that the circumstances must be rare in which board action
could be regarded as producing ‘unfair’
prejudice where
the directors have exercised their powers in good faith, for a proper
purpose, in the best interests of the company
and so forth.
[60] There is an
illuminating discussion by the learned authors of Gower & Davies
Principles of Modern Company Law 9th Ed on
the evolution of the
statutory and judicial position in England (paras 20.5 – 20.25
at pp 721-734). Originally (from 1948
to 1980) the relevant
legislative remedy (s 210 of the 1948 Companies Act) was aimed at
‘oppression’. They were judicial
pronouncements
suggesting that oppression was characterised by an element of
illegality (see Scottish Co-Operative Wholesale Society
Ltd v Meyer &
Another
[1958] 3 All ER 66
(HL) at 71E-F: ‘burdensome, harsh
and wrongful’; see also Re Saul D Harrison
[1995] 1 BCLC 14
(CA) at 17 per Hoffmann LJ and at 28-29 per Neill LJ). Based on the
principle of majority rule and the binding nature of the company’s
constitutional documents, the remedy for oppression was generally not
available to address decisions taken by the general meeting
or the
board within their respective powers. With the introduction of an
unfair-prejudice remedy in s 75 of the 1980 Companies
Act (succeeded
by s 459 of the 1985 Act and s 994 of the 2006 Act), it was plainly
acknowledged that the remedy could extend beyond
unlawful conduct, ie
‘independent illegality’ no longer needed to be proved.
The new remedy ‘cuts across the
distinction between acts which
do or do not infringe the rights attached to the shares by the
constitution of the company’
(Re A Company (No 8699 of 1985)
[1986] BCLC 382
(Ch) at 387 per Hoffmann J as he then was).
[61] On the other
hand, the English courts have been anxious to ensure that the remedy
should not, as Lord Hoffmann (as he had by
then become) said, be used
as ‘a licence to do whatever the individual judge happens to
think fair’ and that well-established
principles should not be
abandoned ‘in favour of some wholly indefinite notion of
fairness’ (O’Neill v Phillips
[1999] UKHL 24
;
[1999] 2 All ER 961
(HL) at
966g-h and 968a-b)). The principles of majority rule and the binding
nature of the company’s constitution remain
applicable. As
Hoffmann LJ said in Saul D Harrison supra, ‘keeping promises
and honouring agreements is probably the most
important element of
commercial fairness’ (at 18) The English courts have thus been
cautious in extending the remedy beyond
cases of illegality.
[62] The learned
authors of Gower & Davies say that the only clear category which
has emerged in England of unfair conduct which
is not also illegal
(though the jurisdiction is not in law limited to this category) is
the case of ‘legitimate expectation’
or ‘equitable
consideration’ arising from an informal arrangement or
understanding among shareholders not contained
in the company’s
constitution (O’Neill at 967b-968a and 969b-970c; see also Saul
D Harrison supra 19-20 per Hoffmann
LJ and point 10 at 31 per Neill
LJ; Re Guidezone Ltd
[2000] 2 BCLC 321
para 175; for a detailed
Australian discussion, see Fexuto Pty Ltd v Bosnjack Holdings Pty Ltd
& Others
[2001] NSWCA 97
paras 322-324 and 409-423). This might
be an arrangement or understanding regarding participation in
management or concerning dividend
policy or remuneration. The
arrangement or understanding must be proved as a fact. This makes it
difficult to establish a legitimate
expectation in cases other than
those involving small private companies. The starting point remains
the company’s articles
of association. In the absence of
‘something more’, there is no legitimate expectation that
the general meeting and
the board will not exercise whatever powers
they are given by the articles of association (Re Saul D Harrison
supra at 19).
[63] Similarly, in
Canada it has been said that the shareholder expectations that are to
be considered in an unfair-prejudice claim
are not those ‘that
a shareholder has as his own individual “wish list”’;
the expectations are those ‘which
could be said to have been
(or ought to have been considered as) part of the compact of the
shareholders’ (820099 Ontario
Inc v Harold E Ballard Ltd [1991]
3 BLR (2d) 113 at 85-186).
[64] It is not
necessary in this case to attempt to state with precision the
parameters for judicial intervention under s 163. However,
and as in
England, a South African court should in my opinion take the
principle of majority rule and the binding nature of the
company’s
constitution as its starting point. In Sammel & Others v
President Brand Gold Mining Co Ltd
1969 (3) SA 629
(A) Trollip JA
said that the ‘principle of the supremacy of the majority is
essential to the proper functioning of companies’
(at 678H; see
also Louw & Others v Nel
2011 (2) SA 172
(SCA) 185 para 22;
Grancy Property Ltd supra para 32). Where matters are left by the
constitution to the judgment of the general
meeting or the directors,
and the shareholders or directors as the case may be have exercised
the power within the parameters of
any express or implied
limitations, a court should be wary of substituting its own business
judgment for that of the persons entrusted
with that decision by the
corporate constitution.
[65] Framing the
proposition specifically with reference to board decisions, the
circumstances of a case would, I think, have to
be exceptional before
one could find that a board decision, taken in accordance with the
standard set by s 76, has caused a shareholder
prejudice which can
properly be described as ‘unfair’ within the meaning of s
163.
[66] I can see that
the court might more readily intervene in the case of conduct of
shareholders because they are not subject to
the same fiduciary
constraints as directors, and minority shareholders thus do not have
the same safeguards. (Despite scattered
statements in case law to the
effect that shareholders must vote in what they bona fide consider to
be the best interests of the
company, shareholders may generally
consult their own interests. They are not subject to the fiduciary
duties of directors. See
Gower & Davies op cit paras 19-9 –
19.10 at pp 691-692; Henochsberg on the
Companies Act 71 of 2008
p
169 and cases there cited.) Furthermore, it is at the level of
shareholders that one finds the informal arrangements or
understandings
the breach of which has typically been regarded as
‘unfair’ though not unlawful (even though the
shareholders in question
might, in the respects complained of, have
acted through their control of the board). This was the
quasi-partnership setting of
cases such as Louw v Nel supra and Bayly
& Others v Knowles
2010 (4) SA 548
(SCA), though in both cases
the unfair-prejudice claims failed, and in McMillan NO v Pott &
Others
2011 (1) SA 511
(WCC), where the claim succeeded. Indeed, this
is the standard setting for unfair-prejudice cases. In Grancy
Property Ltd supra,
where a
s 163
claim succeeded, the company was a
small special-purpose vehicle. The majority shareholders had refused,
at the instance of a minority
shareholder, to allow independent
directors to be appointed in the face of abuse of power and the
pursuing of self-interest by
the majority’s former board
nominees.
[67] The leading
English cases were likewise decided in relation to small
quasi-partnership companies: see, eg Scottish Co-Operative
Wholesale
Society Ltd v Meyer & Another
[1958] 3 All ER 66
(HL) (a
violation of the duty of the utmost good faith between the
constituent members of the company: at 84 in fine per Lord
Keith);
O’Neill supra (though there the claim failed, because the
petitioner did not establish an informal agreement contrary
to which
Mr Phillips supposedly acted); see also Ebrahimi v Westbourne
Galleries Ltd & Others
[1972] 2 All ER 492
(HL) (regarding the
supplementary expectations and interests that may arise in relation
to quasi-partnership companies in the context
of liquidation on just
and equitable grounds). The reported judgments reflect a dearth of
successful claims in respect of lawful
shareholder decisions of
widely-held companies, and I was not referred to any case in which a
decision taken by independent directors
in accordance with their
fiduciary duties gave rise to unfair-prejudice relief
[68] I do not rule
out the possibility that such cases might notionally exist. In
Catalano & Others v Managing Australia Destinations
Pty Ltd &
Others (No 2)
[2013] FCA 672
Flick J referred, in his general
introductory remarks on the law, to two earlier cases as authority
for the proposition that even
a decision made by directors in what
they bona fide considered to be the best interests of the company and
for a purpose within
the power might be found to be oppressive.
Catalano itself did not turn on this proposition; it was a standard
quasi-partnership
case of oppression by one group of shareholders
against another.
[69] One of the two
cases mentioned by Flick J was the decision of the High Court of
Australia in Wayde & Another v New South
Wales Rugby League Ltd
[1985] HCA 68
;
(1985) 180 CLR 453.
There the claim was directed at an
honest decision by the board. The claim failed. The articles of the
respondent company permitted
its board to determine how many teams
should be permitted to compete in a rugby competition each year. The
company’s board
determined that for the 1985 season there would
be 12 teams. A company called Wests, which was a member of the
respondent and owned
a team not included in the 12, complained of
oppression. Flick J in Catalano referred to the judgment of Brennan J
in Wayde. Although
Brennan J concurred in the result, the main
judgment was by Mason ACJ and three others. The court observed that
the power to determine
the number of teams to compete inherently
involved prejudice to any team excluded; the existence of such
prejudice was insufficient
to invoke the remedy. In dismissing the
claim, the majority said the following (para 16):
‘Given the
special expertise and experience of the Board, the bona fide and
proper exercise of the power in pursuit of the
purpose for which it
was conferred and the caution which a Court must exercise in
determining an application under
s.320
of the Code in order to avoid
an unwarranted assumption of the responsibility for management of the
company, the appellants faced
a difficult task in seeking to prove
that the decisions in question were unfairly prejudicial to Wests and
therefore not in the
overall interests of the members as a whole. It
has not been shown that those decisions of the Board were such that
no Board acting
reasonably could have made them. The effect of those
decisions on Wests was harsh indeed. It has not, however, been shown
that
they were oppressive or unfairly prejudicial or discriminatory
or that their effect was such as to warrant the conclusion that the
affairs of the League were or are being conducted in a manner that
was or is oppressive or unfairly prejudicial.’
[70] Brennan J,
after making the general observations referred to by Flick J in
Catalano, expressed his concurring conclusion thus
(para 7):
‘The question
here is whether the resolutions which were manifestly prejudicial to
and discriminatory against Wests, were
also unfair - that is, so
unfair that reasonable directors who considered the disability the
decision placed on Wests would not
have thought it fair to impose it.
The decision by the League's directors to reduce the number of
competitors to 12 and to exclude
Wests was in fact taken with full
knowledge of the disability that that decision would place on Wests.
But the directors also knew
that the larger competition was
burdensome to, and perhaps dangerous for, players and that a shorter
season was conducive to better
organization of the Premiership
Competition. The directors had to make a difficult decision in which
it was necessary to draw upon
the skills, knowledge and understanding
of experienced administrators of the game of rugby league. The Court,
in determining whether
the decision was unfair, is bound to have
regard to the fact that the decision was admittedly made by
experienced administrators
to further the interests of the game.
There is nothing to suggest unfairness save the inevitable prejudice
to and discrimination
against Wests, but that is insufficient by
itself to show that reasonable directors with the special qualities
possessed by experienced
administrators would have decided that it
was unfair to exercise their power in the way the League's directors
did.’
[71] The other case
mentioned by Flick J was Cassegrain & Co Pty Ltd v Cassegrain
[2011] NSWSC 1156.
That was not an oppression case but a derivative
action, and the director whose conduct was impugned was found to have
acted fraudulently
and in breach of his fiduciary duties. The
observation that a director’s decision, taken bona fide in the
best interests
of the company, might nevertheless be oppressive was
made with reference to a question of res judicata arising from
earlier proceedings.
Did GHS’
directors comply with their fiduciary duties?
[72] We are
concerned in this case with a matter entrusted by the MOI to the
board of directors. The duties of the directors in
exercising that
power are codified in
s 76.
The power must be exercised
‘(a) in good
faith and for a proper purpose;
(b) in the best
interests of the company; and
(c) with the degree
of care, skill and diligence that may reasonably be expected of a
person -
(i) carrying out the
same functions in relation to the company as those carried out by the
directors; and
(ii) having the
general knowledge, skill and experience of that director’.
[73]
Section
76(4)(a)
sets out circumstances in which the obligations imposed by
paragraphs (b) and (c) of
s 76(3)
will be satisfied by a director.
The director will have satisfied those obligations if:
‘(i) the
director has taken reasonably diligent steps to become informed about
the matter;
(ii) either –
(aa) the director
has no material personal financial interest in the subject matter of
the decision, and had no reasonable basis
to know that any related
person had a personal financial interest in the matter; or
(bb) the director
complied with the requirements of
section 75
with respect to any
interest contemplated in subparagraph (aa); and
(iii) the director
made a decision, or supported the decision of a committee or the
board, with regard to that matter, and the director
had a rational
basis for believing, and did believe, that the decision was in the
best interests of the company;…’
[74]
Section 76(4)
makes clear that the duty imposed by
s 76(3)(b)
to act in the best
interests of the company is not an objective one, in the sense of
entitling a court, if a board decision is
challenged, to determine
what is objectively speaking in the best interests of the company.
What is required is that the directors,
having taken reasonably
diligent steps to become informed, should subjectively have believed
that their decision was in the best
interests of the company and this
belief must have had ‘a rational basis’. The subjective
test accords with the conventional
approach to directors’
duties, which (in relation to share transfers) was stated thus by
Lord Greene MR in Re Smith &
Fawcett Ltd supra:
‘The
principles to be applied in cases where the articles of association
of a company confer a discretion on directors with
regard to the
acceptance of transfers of shares are, for present purposes, free
from doubt. They must exercise their discretion
bona fide in what
they consider – not what a court may consider – to be in
the interests of the company, and not for
any collateral purpose.
They must have regard to those considerations, and those
considerations only, which the articles upon their
true construction
permit them to take into consideration. In construing the relevant
provisions in the articles, it is to be borne
in mind that one of the
normal rights of a shareholder is the right to deal freely with his
property and to transfer it to whomsoever
he pleases. When it is
said, as it has been said more than once, that regard must be had to
this last consideration, it means,
I apprehend, nothing more than
this: that the shareholder has such a prima facie right, and that
right is not to be cut down by
unc
ertain language or
doubtful implications. The right, if it is to be cut down, must be
cut down with satisfactory clarity. It certainly
does not mean that
articles, if appropriately framed, cannot be allowed to cut down the
right of transfer to any extent which the
articles on the true
construction permit…
There is nothing, in
my opinion, in principle or in authority to make it impossible to
draft such a wide and comprehensive power
to directors to refuse to
transfer as to enable them to take into account any matter which they
conceive to be in the interests
of the company… [T]he
question, therefore, is simply whether, on the true construction of
the particular article, the directors
are limited by anything except
their bona fide view as to the interests of the company. In the
present case the article is drafted
in the widest possible terms, and
I decline to read into that clear language any limitation other than
a limitation which is implicit
by law, that a fiduciary power of this
kind must be exercised bona fide in the interests of the company.
Subject to that qualification,
an article in this form appears to me
to give the directors what it says, namely, an absolute and
uncontrolled discretion.’
This statement of
the law has been frequently cited with approval (see inter alia
Charles Forte Investments Ltd v Amanda
[1964] 2All ER 240
(CA) at
945G-946H; Village Cay Marina supra para12; Mactra Properties Ltd v
Morstead Mansion Ltd
[2008] EWHC 2843
(Ch);
[2009] 1 BCLC 179
para 7
Richter NO v Riverside Estates (Pty) Ltd
1946 OPD 209
at 226-227; see
also Estate Milne v Donohoe Investments (Pty) Ltd & Others
1967
(2) SA 359
(A) at 370F-G.)
[75]
Section 76
requires the bona fide assessment of the directors to have a rational
underpinning. This requirement has been articulated less
frequently
in the conventional statement of directors’ duties but is not
necessarily an innovation. For example, in Mactra
Properties supra
the court upheld the board’s refusal to register a transfer
because the board had adopted a ‘rational
approach’. In
Charterbridge Corporation Ltd v Lloyds Bank Ltd & Another
[1969]
2 All ER 1185
(Ch) the court enquired whether a reasonable person
could have believed that the act was one performed in the interests
of the
company (at 1194E-F). A rationality test is also inherent in
the following formulation of the duty by Isaacs J in an early leading
Australian case, The Manning River Cooperative Dairy Co Ltd v
Shoesmith & Another
[1915] HCA 32
;
[1915] 19 CLR 714
(HC) at 723:
‘It is no
answer to an exercise of discretion under such a power, to say that
the ground on which they [the directors] have
proceeded is outside
any express prohibition in the articles. As I have pointed out,
discretion is not wanted for that. But if,
outside any express
provision, the directors as business men, and with a faithful desire
to protect the interests of the Company,
determine under such a
power, upon some ground on which fair-minded men in such a situation
might reasonably consider registration
detrimental to the interests
of the Company, that a particular transfer should not be registered,
their decision cannot be questioned
or overruled in a Court of law.
Shareholders who have agreed to abide by the honest discretion of
directors for the common welfare,
cannot ask a Judge to overrule it.’
On the other hand,
the learned authors of Palmer’s Company Law say that the ‘no
reasonable director’ test is merely
an aid in answering the
ultimate factual question, which is whether the directors were acting
in what they bona fide believed to
be the best interests of the
company (para 8.2609).
[76] The rationality
criterion as aid down in
s 76
is an objective one but its threshold
is quite different from, and more easily met than, a determination as
to whether the decision
was objectively in the best interests of the
company. In the context of the legality principle applicable to the
exercise of public
power, Chaskalson P said the following in
Pharmaceutical Manufacturers Association of SA & Another: In re
Ex parte President
of the Republic of South Africa & Others
[2000] ZACC 1
;
2000
(2) SA 674
(CC) (para 90):
‘… The
setting of this standard [rationality] does not mean that the Courts
can or should substitute their own opinions
as to what is appropriate
for the opinions of those in whom the power has been vested. As long
as the purpose sought to be achieved
by the exercise of public power
is within the authority of the functionary, and as long as the
functionary’s decision, viewed
objectively, is rational, a
Court cannot interfere with the decision simply because it disagrees
with it or considers that the
power was exercised inappropriately. A
decision that is objectively irrational is likely to be made only
rarely but, if this does
occur, a Court has the power to intervene
and set aside the irrational decision. …’
[77] Again in the
context of the exercise of public power, the requirement of
rationality has been held to concern the relationship
between the
decision and purpose for which the power was given. Was the decision
or the means employed rationally related to the
purpose for which the
power was given? (See, for example, Association of Regional
Magistrates of Southern Africa v President of
the Republic of South
Africa & Others
[2013] ZACC 13
;
2013 (7) BCLR 762
(CC) paras
49-50; Minister of Defence and Military Veterans v Motau & Others
[2014] ZACC 18
para 69.)
[78] These
principles relating to rationality in the exercise of public power
can, I think, be applied with appropriate modifications
to the
rationality requirement for the proper exercise by directors of their
powers.
[79] In the present
case VC does not allege an absence of good faith on the part of GHS’
directors (cf
s 76(3)(a)).
[80] As to proper
purpose
(s 76(3)(a))
, the test is objective, in the sense that, once
one has ascertained the actual purpose for which the power was
exercised, one must
determine whether the actual purpose falls within
the purpose for which the power was conferred, the latter being a
matter of interpretation
of the empowering provision in the context
of the instrument as a whole. In the context of decisions by
directors, there will often
be, in my view, a close relationship
between the requirement that the power should be exercised for a
proper purpose and the requirement
that the directors should act in
what they consider to be the best interests of the company. Put
differently, the overarching purpose
for which directors must
exercise their powers is the purpose of promoting the best interests
of the company.
[81] The power to
refuse to register a transfer of shares must thus be exercised in
what the directors consider to be the best interests
of the company.
More specifically, the clause conferring the power has in mind that
there may be circumstances in which a company’s
best interests
would be served by not having the proposed transferee as the holder
of the shares in question. The board might consider
that it would be
preferable, in the best interests of the company, that the proposed
transferee should not become a shareholder
at all or that he should
not acquire a greater stake than he already has. The exercise of the
power will often, by its very nature,
result in prejudice to the
parties to the proposed transfer (at least one of whom – the
transferor – would be an existing
shareholder).
[82] In the present
case, GHS’ directors were bona fide of the opinion that the
best interests of the company would be served
by not allowing MC to
increase its shareholding from 2 653 811 (8,5%) to 3 720 382 (11,9%).
The unease at MC’s growing influence
was articulated in the
minutes of 24 May 2011 and 26 February 2012. Those concerns were
fortified when the board was informed,
on 28 May 2013, that MC
intended to apply for the rezoning of a part of its farm for purposes
of erecting a packing shed in direct
competition with GHS. At bottom,
the directors considered that MC had a vision and ambitions which
were adverse to GHS’ interests
and that existing long-term
producers might not renew their contracts if MC were allowed to
obtain a greater interest in GHS.
[83] It was not
suggested that these were not the actual reasons for which GHS’
board refused the request to transfer. No
ulterior motive was alleged
or suggests itself. In particular, there is no suggestion that one or
more of the directors was abusing
the power for personal advantage.
[84] In my view, the
actual purpose for which GHS’ board exercised the power to
refuse the proposed transfer fell within one
of the intended purposes
of the empowering provision, namely to enable the board to prevent a
person from acquiring an increased
shareholding in the company where
the obtaining of the increased shareholding was regarded as being
contrary to the best interests
of the company.
[85] VC alleged that
the board exercised the power for an improper purpose because the
directors were using the power as leverage
to force MC to conclude a
long-term contract, even though the MOI permitted short-term
contracts. Even if that had been the board’s
purpose, I am not
convinced that it would have been an improper one. Although the MOI
makes it lawful for GHS to conclude short-term
contracts, the
directors might nevertheless consider that the company’s best
interests would be served by encouraging long-term
contracts. Be that
as it may, I do not think that the complaint is factually correct.
There is no doubt that GHS’ board was
made uneasy by MC’s
refusal to conclude long-term contracts and to accept the full
bouquet of GHS’ services but by
the time of the impugned
decision of 28 May 2013 negotiations with MC had failed. I do not
think the board was under any illusions
that a refusal of the
transfer would cause MC to change its mind. It would be more accurate
to say that MC’s refusal, in
the negotiations over the period
2011 and 2012, to conclude a long-term contract fortified the board
in its view that MC’s
vision and ambition for GHS differed from
the board’s.
[86] VC has not
alleged that the directors failed to take reasonably diligent steps
to inform themselves of the facts relevant to
their decision. Put
differently, it is not VC’s case that, although the board could
in principle have acted for the purpose
it did, the board did not
have sufficient information properly to make the decision. MC had
been a shareholder of the company for
some years. It is clear that
the executive management of GHS had extensive negotiations and
dealings with MC in the months and
years preceding the relevant board
meeting on 28 May 2013, of which the full board was kept informed. I
have no reason to doubt
that, as business people, they had sufficient
information to make a proper assessment.
[87] In regard to
s
76
, this leaves the question whether the directors’ genuine
belief that their decision was in the best interests of the company
was a belief which had a rational basis. As to the facts regarding
the vision and ambitions of MC, there has been no response,
in these
proceedings, from MC regarding the GHS board’s concerns. MC has
not stated that it does not harbour the ambitions
and vision which
have caused disquiet to GHS’ directors. As I have said, it is
not been shown that the directors lacked adequate
information to form
a view in that regard.
[88] Mr Ferreira
submitted that MC would not be seeking to get a larger interest in
GHS if its intentions were to harm GHS. However,
that submission
would be true of every case of a proposed transfer of shares, yet
clearly the empowering clause contemplates that
there may be cases
where it would be proper to refuse consent. There are several answers
to Mr Ferreira’s submission. The
first is that views may differ
as to what is in the best interests of the company. In the respects
relevant to this case, GHS’
MOI entrusts the judgment on that
question to the board, not to MC. The latter might genuinely think
that it has a better way forward
for GHS than the course which GHS’
board is charting but that does not mean that GHS’ board is
acting irrationally
by preferring its view to that of MC.
[89] Secondly, it is
fallacious to assume that a proposed transferee always acquires
shares with a view to advancing what he regards
as the best interests
of the target company. The transferee may have other business
interests which would be enhanced if the affairs
of the target
company were curtailed or conducted differently. Such an outcome
might be advantageous to himself but not to the
other shareholders.
[90] Mr Ferreira
submitted that the proposed transfer would in any event not give MC
any greater influence in the affairs of GHS
than it already has. It
is particularly in relation to this contention that one must bear in
mind that the court should not substitute
its own business judgment
for that of the directors. We are concerned with the threshold
requirement of rationality. The obtaining
of an increased
shareholding in the present case would be accompanied by an increase
in MC’s voting interest from 8,5% to
11,9%. If all shareholders
were to attend every meeting, MC’s increased voting interest
would fall well short of enabling
it to carry the day on an ordinary
resolution or to defeat a special resolution. But general meetings of
shareholders are not always
well attended. GHS has 88 shareholders.
MC’s prospects of obtaining decisive influence in alliance with
others will be enhanced.
Furthermore, and as mentioned previously,
the breaching of the 10% threshold has some significance because MC
will be entitled
to requisition general meetings and its shareholding
will constitute a quorum. Since an ordinary resolution can be carried
if supported
by the holders of more than 50% of the voting rights
exercised on the resolution (clause 9.10.1 of the MOI read with s
65(7) of
the Act), MC might well have decisive influence at a poorly
attended meeting.
[91] The history of
the matter shows that MC has set about increasing its holding in GHS.
MC held only 3,2% in 2008 but increased
its shareholding to 10,9% by
May 2011 (in the process, entering into purchase transactions with 13
sellers). Its shareholding having
been diluted to 8,5%, MC now seeks
to acquire additional shares which will boost its holding to 11,9%.
GHS’ board believes
that MC is seeking greater influence in the
company. MC has not denied this. It would have been an easy matter
for MC to file an
affidavit stating that it wishes to acquire the
shares simply for the financial benefits they will confer (whether by
growth in
value or dividends or both).
[92] Apart from any
actual influence which the increased shareholding might confer, the
approval of the acquisition could send a
message to other
shareholders that GHS’ board welcomes an increased influence in
its affairs by MC. My impression from the
board minutes of 24 May
2011 and 26 February 2012 and from the reasons offered by GHS in its
affidavits is that the board is genuinely
concerned about the signal
that an approval of the transfer might send to other producers.
[93] Mr Ferreira
pointed out that the board had approved earlier transfers to MC. That
is so, but the more recent transfers occasioned
disquiet and the
board refused on 14 November 2011 to approve a transfer by the John
van Wyk Family Trust to MC. The fact that
earlier transfers had been
permitted (though, at least in the case of the last approval in May
2011, with misgivings) tends to
support the bona fides of the board.
GHS’ directors evidently hoped that they could negotiate an
accord with MC. When this
failed, the board decided to draw a line in
the sand. They acted on this view on 14 November 2011 (in the case of
the John van
Wyk Family Trust) and again on 28 May 2013 (in VC’s
case). If the directors could rationally have refused to register a
single
transfer by which MC’s initial holding of 3,2% increased
to 11,9% (as I think they could), I do not believe it can be said
to
be irrational for the directors to refuse to approve a transfer from
8,5% to 11,9%, since otherwise a shareholder might by increments
achieve what he could not do in a single transaction.
[94] VC said, when
it wrote to the board seeking approval of the transfer, that if two
parties’ priorities differ drastically,
it is better for them
to part ways, ‘because it is impossible simultaneously to act
to the benefit of both’. VC itself
thus did not appear to
regard as irrational the notion that GHS would rather not have a
shareholder with a vision conflicting with
that of the board and the
majority of shareholders.
[95] I thus conclude
that the board, in refusing to approve the transfer, met the
standards set by s 76 of the Act and that their
refusal was a lawful
one.
Unfairness?
[96] This leaves the
question whether the refusal was nevertheless ‘unfairly’
prejudicial to VC. I have explained why
I consider that a court
should be wary of making such a finding where directors have complied
with their fiduciary duties. If there
could be exceptional cases
where, despite such compliance, a board decision might be found to be
‘unfairly’ prejudicial
to a particular shareholder, this
is not such a case. No informal arrangement or understanding was
established in terms whereof
a shareholder would invariably be
permitted to transfer its shares to another shareholder. As a fact,
GHS’ board refused
an earlier transfer to MC. There was no
legitimate expectation that the directors would not exercise the
power so plainly conferred
on them by the MOI, provided of course
they exercised that power in accordance with the usual fiduciary
constraints. Counsel were
unable to refer me to any case, here or
abroad, of a shareholder obtaining relief under an oppression or
unfair-prejudice remedy
in circumstances where the directors had
exercised their power to refuse a transfer in accordance with their
fiduciary duties.
[97] VC did not, in
its motivation to the board, say that it had tried to sell the shares
to other shareholders but been unable
to find another buyer. VC also
did not make such an allegation in the founding papers. A bald
statement to that effect was contained
in the replying affidavit and
an attempt was made to corroborate it in the late papers which I have
declined to receive. I express
no firm opinion on whether the outcome
of the case on the unfairness issue would have been different if the
board had refused the
transfer in the face of evidence from VC that
MC was the only person willing to buy VC’s shares at a
reasonable price. That
circumstance would increase one’s
natural sympathy for VC’s position, and for all I know GHS’
board will as a
fact take a more sympathetic view if those are the
facts. On the other hand, if the board in its honest and rational
opinion considers
that GHS’ best interests will be served by
not allowing MC to increase its influence in the company, it is not
self-evident
why a decision to that effect should be regarded as
‘unfairly’ prejudicing the applicant merely because
nobody else
(including the other 86 shareholders in the company)
wants to buy the shares.
Conclusions
[98] I make the
following order: The application is dismissed with costs.
ROGERS J
APPEARANCES
For Applicant:
Mr A Ferreira
Instructed by:
Mr C Assheton-Smith
Assheton-Smith Incorporated
2nd Floor Sedgwick House
24 Bloem Street
Cape
Town
For First
Respondent: Mr J Newdigate, SC
Instructed by:
Mr J Theron
Werksmans Attorneys
18th Floor, 1 Thibault Square
Cape Town