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

• Jurisdiction: South Africa
• Citation: 2018 (3) SA 157 (GJ)

CDH Invest NV v Petrotank South Africa (Pty) Ltd and Another
2018 (3) SA 157 (GJ)

2018 (3) SA p157

Citation	2018 (3) SA 157 (GJ)
Case No	22312/2015
Court	Gauteng Local Division, Johannesburg
Judge	Van der Linde J
Heard	November 17, 2017
Judgment	November 17, 2017
Counsel	B Swart SC (with J Myburg) for the applicant.; S Kuny (with T Mamanyuha) for the second respondent.

Flynote : Sleutelwoorde

Company — Directors and officers — Director — Fiduciary duty — Ambit — Powers of directors to increase authorised shares, or to issue shares, subject to fiduciary duty to act bona fide, for proper purpose, and in best interests of company — Nature of test to be applied — Relevant considerations — Companies Act 71 of 2008, ss 36(3), 38(1) and 76(3). C

Company — Shares and shareholders — Shareholders — Meetings — Application to court in terms of s 61(12) for order requiring company to convene meeting — Court intervention not simply there for asking — Unless special circumstances requiring otherwise, court having to be satisfied that calling members' meeting bona fide intended, with legitimate purpose, and in best D interests of company — Companies Act, s 61(12).

Headnote : Kopnota

The applicant and the second respondent were, respectively, the majority and minority shareholders of the first respondent company (the company). In the High Court in terms of s 61(12) of the Companies Act 71 of E 2008 (the Act), the applicant sought an order directing the company to convene a shareholders' meeting — after the company had failed to so do in response to a demand in terms of s 61(3) — for the purpose of considering and passing specified resolutions, including one instructing the board to sue the second respondent for an amount R1 million allegedly owed by the latter; and another instructing the board to consider a pro rata rights offer of 98 835 authorised but unissued shares. F

The second respondent disputed the applicant's relief. It brought a counter-application asking for an order interdicting the applicant from calling a shareholders' meeting to consider the abovementioned resolutions. As to the passing of a resolution relating to the rights offer, the second respondent pointed to the company's memorandum of understanding (MOU) which G provided only for 100 000 authorised shares. As this amount had already been issued, it was argued, the proposed resolution offended the MOU's terms. Of particular relevance in the present matter was a prior board resolution amending the memorandum of incorporation (MOI) by increasing the number of authorised shares from 1000 to 1 000 000. The applicant relied on this as entitling the company to issue shares beyond the H 100 000 originally envisaged in the MOU. The second respondent argued that this board resolution was unlawful, seeking its setting-aside, in the following circumstances: (1) The resolution for the amendment was proposed by the applicant directors with the stated objective of merely correcting an error in the MOI that placed the company in breach of the Companies Act, ie the MOI only provided for 1000 authorised shares, where I it should have provided for 100 000 — the amount the shareholders had agreed to, and the MOU provided for. (2) The resolution was passed without the meeting of the shareholders or the full board of directors (in particular, the two out of the five directors who were nominees of the second respondent), despite the second respondent's having already indicated its understanding of the resolution: ie that it merely sought to increase J

2018 (3) SA p158

authorised A shares to 100 000, and that the reference to 1 000 000 shares had to be a mistake. (3) The resolution was in breach of the MOI and the Act.

Held

Whether the board resolution, increasing authorised shares from 1000 to 1 000 000, was lawful

The B power of directors to authorise (in terms of s 36(3)) further shares or issue shares (in terms of s 38(1)) was constrained by s 76(3) of the Companies Act. Affirming a director's common-law fiduciary duties, it provided that a director had to act in good faith and for a proper purpose, and in the best interests of the company. (See [46] and [47].)

The concept of bona fides did not have a wholly subjective content; there had to C be a rational basis for a director's belief that he or she was acting in good faith. As for whether a director had acted in the best interests of a company, or for a proper purpose, the test was an objective one. (See [46] – [67].)

Considering the present facts, the tenets of the parties' agreement in their pre-incorporation founding consensus was a significant consideration in judging fair dealing and probity, and the yardstick for measuring the D exercise of a power against the purpose for which it was given in the first place was objective. (See [67] and [76].)

In the manner the applicant directors had presented the resolution, they had misrepresented their true motive — to substantially increase the number of authorised shares, to enable the company to convert debt to equity. In doing so, they had acted mala fides. Further, it had not been shown that E the resolution was passed in the best interests of the company or with a proper purpose. In the circumstances, and applying the principles referred to above, the resolution had to be declared void ab initio and set aside. (It followed that there was no scope for the proposed rights offer.) (See [68] – [78].)

Whether company should be ordered to consider resolutions instructing F board to sue second respondent, and whether counter-application should be granted

Beyond asserting that a demand had been made, in vain, on the board to call a shareholders' meeting, the applicant had in its founding affidavit failed to state any facts or circumstances that ought to move the court in deciding G whether or not to grant the relief claimed in terms of s 61(12). However, court intervention in terms of s 61(12) was not there simply for the asking. Conferring upon the court the power in terms of s 61(12) to direct that the board call a meeting, was company-law contra-intuitive, because courts generally declined interference in the management of company affairs. It could hardly have been intended, in those circumstances, that the court should act as a mere rubber stamp of technical compliance by means of a H prior statutory demand. A court would generally, unless special circumstances required otherwise, have first to be satisfied that calling a members' meeting was bona fide intended, with a legitimate purpose, and in the best interests of the company. Here the applicant had failed to put facts before the court that would justify the inference that that threshold had been met. I Accordingly, the main application had to fail. (See [81] – [83].)

However, the court's disinclination to accede to the request to direct that a shareholders' meeting be called did not have the automatic corollary that the company and its board should be interdicted from convening such a meeting. In fact, the very considerations that persuaded a court to keep its distance from a company's internal management also applied against J granting the interdict sought by the second respondent. (See [84].)

2018 (3) SA p159

Cases cited

Southern Africa A

Comwezi Security Services (Pty) Ltd v Cape Empowerment Trust Ltd [2014] ZASCA 22: dictum in para [12] applied

De Sousa v Technology Corporate Management (Pty) Ltd and Others 2017 (5) SA 577 (GJ): referred to B

Plascon-Evans Paints Ltd v Van Riebeeck Paints (Pty) Ltd 1984 (3) SA 623 (A) ([1984] 2 All SA 366; [1984] ZASCA 51): referred to

Rosebank Mall (Pty) Ltd and Another v Cradock Heights (Pty) Ltd 2004 (2) SA 353 (W) ([2003] 4 All SA 471): referred to

Sammel and Others v President Brand Gold Mining Co Ltd 1969 (3) SA 629 (A): dictum at 673H applied. C

Australia

Westpac Banking Corporation v Bell Group Ltd (in Liq) (No 3) [2012] WASCA 157: compared.

Canada

Martin v Gibson (1907) 15 OLR 623: referred to D

Otawara Co Ltd v Masuda 1992 CanLII 947 (BC SC): compared

Smith v Hanson Tire Co Ltd [1927] CanLII 162 (SK CA): referred to

Teck Corporation Ltd v Millar 1972 CanLII 950 (BC SC): compared

England

Hogg v Cramphorn Ltd [1967] Ch 254 ([1966] 3 WLR 995; [1966] 3 All ER 420): E referred to

Punt v Symons & Co Ltd [1903] 2 Ch 506 (72 LJCh 768): referred to.

Legislation cited

Statutes

The Companies Act 71 of 2008, ss 36(3), 38(1), 61(12) and 76(3): see Juta's Statutes of South Africa 2016/17 vol 2 at 1-341 – 1-342, 1-352 and F 1-360.

Case Information

B Swart SC (with J Myburg) for the applicant.

S Kuny (with T Mamanyuha) for the second respondent.

An application in terms of s 61(12) of the Companies Act 71 of G 2008 directing a company to convene a shareholders' meeting to consider certain resolutions; and a counter-application for an interdict prohibiting the company from holding a shareholders' meeting to consider said resolutions, and for further relief.

Order H

(a)

The application in convention is dismissed.

(b)

No order as to costs is made on the application in convention.

(c)

No order as to costs is made in respect of the costs that were reserved by Van Oosten J on 20 March 2017.

(d)

Paragraphs 3.3, 3.4 and 3.5, and paras 4.3, 4.4 and 4.5, of the I demand dated 24 April 2015, addressed to the first respondent and its directors (annexure CDH5 to the applicant's founding affidavit), are hereby set aside.

(e)

The resolution purportedly passed by the board of directors of the first respondent on 31 March 2014, purporting to amend the first respondent's memorandum of incorporation so as to increase the J

2018 (3) SA p160

first A respondent's authorised shares to 1 000 000 (one million) ordinary no par value shares, is declared invalid and...