CDH Invest NV v Petrotank South Africa (Pty) Ltd and Another

• Jurisdiction: South Africa
• Judge: Van der Linde J
• Judgment Date: 17 November 2017
• Docket Number: 22312/2015
• Hearing Date: 17 November 2017
• Counsel: B Swart SC (with J Myburg) for the applicant. S Kuny (with T Mamanyuha) for the second respondent.
• Court: Gauteng Local Division, Johannesburg

Van der Linde J:

Introduction

[1] F This is an application and counter-application in which the two protagonists are the only two shareholders in a private company. The application in convention is by the majority shareholder (60%) and the application in reconvention by the minority shareholder (40%).

[2] The majority shareholder asks for an order in terms of s 61(12) of the G Companies Act 71 of 2008 (the Act) directing the company and the board to convene a shareholders' meeting in terms of s 61(3) of the Act for the purpose of considering and passing five resolutions: the removal of a director; the election of a substitute director; instructing the board to demand that the minority shareholder pay the company R1 m; instructing the board to sue the minority shareholder for this money; and H instructing the board to consider a pro rata rights offer of 98 835 ordinary no par value shares.

[3] The minority shareholder consented to the first two resolutions — and I this led to a consent being granted in respect of these two — but disputes the last three. In turn, the minority shareholder counter-applies for an order — setting aside the demand by the applicant in terms of s 61(2)(c)(i) to convene the shareholders meeting; setting aside the board resolution of 31 March 2014 amending the memorandum of incorporation (MOI) by increasing the authorised shares from 1000 to J 1 000 000 ordinary no par value shares; interdicting the applicant from

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calling a shareholders meeting to vote resolutions 3, 4 and 5; and A directing the board to correct para 2.1(1) of its MOI by deleting 1000 and substituting for it 100 000.

[4] In essence then the disputed areas are threefold: whether or not the board should be directed by the court to call a members' meeting so that B the members can debate and decide whether to sue the second respondent; whether or not the authorised shares have been validly increased to 1 000 000 or should be only 100 000 as originally intended; and whether or not the board should be directed to approve a rights offer of 98 835 of the company's authorised but unissued ordinary shares; and of course costs. If the resolution to increase the authorised shares from 100 000 to C 1 000 000 is set aside, there would be no shares to offer in terms of the proposed rights offer.

[5] It is necessary to remark that the directors of the company were not formally joined, [1] although no one took the point and the applicant itself sought relief against the board and the company. Indeed, in the consent D order that was later made dealing with the substitution of directors, the parties formulated the relief against 'the first respondent and its board of directors'. [2] Since there are only five directors, three nominated by the applicant and two by the second respondent, it is safe to assume, as I do, that they are all fully aware of the application, and could have joined if they so desired. E

[6] The Companies and Intellectual Property Commission was not joined in convention, but in reconvention as third respondent, and the Minister of Trade and Industry as fourth respondent, by order of Van der Westhuizen AJ (then) on 20 March 2017. In what follows I deal, after F the background and relevant statutory provisions, first with the issues around the company's authorised shares, and then the others.

Background and essential statutory provisions

[7] The first respondent (the company) was constituted in terms of a G shareholders agreement called a 'Memorandum of Understanding' (the MOU) dated 31 January 2013 and the MOI. The MOI is binding between the company and each shareholder; and between the shareholders; and between the company and each director, officer and board committee member. [3]

[8] It also enjoys constitutive priority over the MOU, because although its H terms are binding between the members inter se, it must be consistent with the Act and the MOI; if any provision is inconsistent with the Act or MOI, that provision is void to the extent of that inconsistency. [4]

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[9] A The MOU provides for authorised shares of 100 000. [5] Although this conflicts with the MOI which provides for 1000 authorised shares, [6] the parties were agreed that the latter figure was an obvious typographical error and that it should have read 100 000. Of these shares, 60% (or 60 000) would be held by the applicant and 40% (or 40 000) by the B second respondent.

[10] Amending the company's authorised shares requires an amendment of the MOI, as well as a special resolution of the shareholders. [7] This resonates with the provisions of the MOU, which requires the affirmative vote of at least 75% of the parties — not the votes — in a shareholders' C meeting to alter the MOI. [8] The board may propose such a resolution. [9] 'For a special resolution to be approved by shareholders, it must be supported by at least 75% of the voting rights exercised on the resolution.' [10]

[11] D But there is another method of amending a company's number of authorised shares. It is that the board itself may do so except to the extent that the MOI provides otherwise. [11] Here the MOI has no provision limiting the power of the board to increase or decrease the company's authorised shares, and so the board's power remains intact.

[12] E I am not persuaded in this regard that, as the second respondent contended, clause 8(iv) of the MOU is consistent with the Act. That clause has already been alluded to; it provides that the MOI may only be amended by the affirmative vote of at least 75% of a shareholders' or board meeting. But s 16(1)(b) expressly provides that the MOI may be amended in the manner provided in s 36(3), which affords the board the F power to increase the number of authorised shares. Thus, the MOU is in this respect inconsistent with the Act and clause 8 – 3(iv) is not valid.

[13] The applicant's case founds on s 61 of the Act. Section 61(3) provides that the board 'must' call a shareholders' meeting if the G appropriate demand for one is made, as was done here. The countervailing provision is s 61(5), whereby a shareholder may apply to court to set aside such a demand — 'on the grounds that the demand is frivolous, calls for a meeting for no other purpose than to reconsider a matter that has already been decided by the shareholders, or is otherwise vexatious'. H Section 61(12) remedially provides then that if the company (not 'the board') fails to convene a meeting of shareholders, 'a shareholder may apply to court for an order requiring the company to convene a meeting'.

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The applicant's case A

[14] The applicant's case is then that as a shareholder it has made a demand on the board to call a shareholders' meeting; that demand was not complied with; neither the company nor the second respondent applied to court under s 61(5) to set aside the demand; and thus it follows that it is entitled to apply to court for an order requiring the B company to convene a meeting.

[15] The founding affidavit does not assert facts or circumstances that ought to move the court in deciding whether or not to grant the relief claimed, and it seems to have been assumed that the right to apply to court for relief under s 61(12) provides of itself sufficient cause for the court to C grant such an order. If this is so, then it confuses locus standi with the substantive merits of such an application, an issue to which I return below.

The second respondent's case

[16] The second respondent says that it and the applicant formed the D first respondent as a corporate partnership to conduct the business of manufacturing steel petroleum-storage tanks. The second respondent is an empowerment company, and the approach was initiated by the applicant, a Belgian company, for that reason. Venture capital of about R25 m would be put up by the two corporate partners. Additional funding would be sourced from institutions. E

[17] In time, the company was incorporated. It set up a factory, plant and equipment on leased premises in Gauteng. The lease ran from 1 April 2013 to 1 April 2018, renewable for five years. The second respondent says that it acquired an option to purchase the property during the currency of the lease; however, that must be a typographical F error in the affidavit. It is the company, the first respondent, that acquired the option. The applicant lent R15 m and the second respondent R9,2 m to the company.

[18] Subsequently, the second respondent established that the applicant had surreptitiously purchased the property through the intercession of G another company. This led to the second respondent applying urgently for an order declaring D'Hondt and Stadler, two of the applicant's directors on the company's board, as delinquent directors in terms of s 162(5)(c)(i), (ii), (iii) and (iv), read with s 162(6)(b) of the Act. In the course of that application the second respondent alleged that D'Hondt and Stadler had acted mala fide. An interim order was agreed to, but the H substance of that application pends.

[19] Thus far by way of background. Concerning the resolutions that the applicant wants passed at the intended shareholders meeting, the second respondent recorded that it did not object to proposed resolutions 1 and 2, being respectively the removal of Mr Mabale as director and the I substitution for him of Mr Thiers.

[20] The second respondent naturally opposes the passing of resolutions 3 and 4, those relating to the company demanding R1 m of the second respondent and suing it upon non-payment. Its opposition is based on the argument that the company has no cause of action against the second J

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respondent A for payment of R1 m. The agreement to provide seed capital was one between shareholders, not between the company and shareholders, contends the...