Bayly and Others v Knowles

• Jurisdiction: South Africa
• Judge: Harms DP, Nugent JA, Heher JA, Leach JA and Seriti AJA
• Judgment Date: 18 March 2010
• Citation: 2010 (4) SA 548 (SCA)
• Docket Number: 174/09
• Hearing Date: 02 March 2010
• Counsel: SF Burger SC (with JW Steyn) for the appellants. J Blou SC for the respondent.
• Court: Supreme Court of Appeal

Heher JA:

B [1] This is an appeal with leave of the South Gauteng High Court (Horn J) against an order made in favour of the respondent under s 252(3) of the Companies Act 61 of 1973 directing and regulating the disposal of shares in a small proprietary company.

[2] During April 2004 Mr Knowles (the respondent) was invited by the C Norwegian holder of the rights to a vehicle-tracking system, Electronic Tracking Systems AS (ETS, the fourth appellant), to acquire 50 percent of the shares in South African Electronic Tracking Systems Ltd (the second appellant, hereafter referred to as 'the company'), which had been set up to market the system, for R2 million.

D [3] Unable to afford the whole price, Knowles introduced Bayly (the first appellant) to ETS as his co-investor. According to Knowles, the two of them reached a private agreement which the managing director of ETS, one Siqueland, afterwards confirmed, to offer to buy 51 percent of the shares, and to borrow the funds required for the purchase from certain E brothers (one of whom, Fred Martin, is the third appellant in these proceedings) on the understanding that Bayly would be employed by the company as its managing director, and Knowles as its sales and marketing director 'until we might decide otherwise'.

[4] On 20 December 2004 the negotiations were finalised. Bayly, F Knowles and ETS signed a shareholders' agreement and an agreement for the purchase and sale of shares.

[5] The relevant terms of the shareholders' agreement were, in summary, as follows:

(a)

G The company would operate a business for the development, supply, sale and support of products and solutions designed and manufactured by and for ETS.

(b)

The provisions of the agreement were to prevail in the event of a conflict between its terms and those of the memorandum and articles of the company. (The company statutes were not produced H or relied on in the proceedings. As will appear, other shareholders apparently bought into the company. One does not know whether they bound themselves to the terms of the agreement.)

(c)

The authorised and issued share capital of the company was R4000 divided into 4000 ordinary shares of R1 each.

(d)

I ETS was to own 49 percent of the shares and Bayly and Knowles 25,5 percent each.

(e)

The shareholders would be entitled to appoint a maximum of four directors between them, ETS two non-executive directors, and Bayly and Knowles two executive directors, of whom one would be the managing director. The executive directors would be responsible J for the day-to-day management of the company. Each director was

Heher JA

to have an equal vote. The shareholders were entitled to remove and A replace any director at any time.

(f)

The day-to-day affairs and activities of the company would be managed by Bayly in his capacity as managing director of the company.

(g)

No shareholder could alienate any shares unless first offered to the B other shareholders in proportion to their holdings existing at the date of the offer.

(h)

A deemed offer to the remaining shareholders would arise upon cessation of employment of any shareholder, unless otherwise agreed in writing.

(i)

The parties entered into the agreement on the basis of trust and they C recorded an intention to observe good faith in contracting and dealing with each other.

[6] The sale agreement provided that ETS sold 2040 shares (51 percent) to Bayly and Knowles in equal proportions for R2 million. D

[7] There can be no doubt that Bayly and Knowles had entered into this relationship on the understanding that both would participate equally in the management of the company.

[8] The company appears to have prospered. But the first seeds of E dissension between Bayly and Knowles were sown by early in 2006, when Bayly, in the face of resistance by Knowles, employed Fred Martin as a consultant. Although Knowles yielded the point, the matter continued to rankle with him. According to his founding affidavit this event initiated a marked change in the relationship between himself and Bayly, which gradually intensified. The deterioration was manifested in F a strategy allegedly adopted by Bayly to undermine communications between Knowles and the technical division, and in a reluctance to discuss the business, as well as the exclusion of Knowles from decision-making in the company.

[9] Bayly in his answering affidavit admitted that alienation developed, G but blamed other causes: a lack of attention to the interests of the company on the part of Knowles, and an inclination to develop and favour other business interests.

[10] Although these competing explanations were extensively canvassed H in evidence, the court a quo did not find it necessary to resolve the differences, and neither do I, for reasons which will appear.

[11] Whatever may have been simmering under the surface of their relationship, nothing that disclosed a problem occurred until 22 October 2007, when Bayly caused the cancellation of the petrol cards and credit I card issued to Knowles for use in his employment, without prior discussion or notice.

[12] On 1 November Bayly informed Knowles that he intended to make an offer for the purchase of the latter's entire interest in the company. On 9 November he submitted a draft offer in the form of a proposed J

Heher JA

A Amending Shareholders' Agreement (which purported to reflect both ETS and the company as parties to it). [1]

[13] The proposal provided for the resignation of Knowles as a director with effect from 1 November 2007, the sale of his shares (now 6333 in number) to Bayly for a price of R2 million, and further -

B '[to] the extent that the third shareholder [ie Knowles] is an employee of the company in any capacity, such employment relationship is by mutual consent terminated, against signature of this agreement'.

It contemplated Knowles's retention by the company as a distributor on a retainer of R40 000 per month for six months, and thereafter on the C basis of commissions and an annuity income. The proposal also included an undertaking by Knowles in restraint of trade in favour of the company.

[14] At the end of November the company withheld payment of the salary and medical-aid contributions due to Knowles. By this time, D according to his subsequent founding affidavit, the mutual trust and confidence between Bayly and himself had been destroyed beyond the possibility of restoration.

[15] On 12 December Mr Cyril Ziman, the attorney representing Knowles, sent a letter to Bayly setting out a counter-proposal involving E a procedure which included an independent enquiry and valuation of Bayly's shareholding by an accountant, a first option to purchase in favour of Knowles, and, on failure to exercise that...