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

• Jurisdiction: South Africa
• Citation: 2019 (4) SA 436 (SCA)

CDH Invest NV v Petrotank South Africa (Pty) Ltd and Others
2019 (4) SA 436 (SCA)

2019 (4) SA p436

Citation	2019 (4) SA 436 (SCA)
Case No	483/2018; [2019] ZASCA 53
Court	Supreme Court of Appeal
Judge	Ponnan JA, Saldulker JA, Davis AJA, Carelse AJA and Rogers AJA
Heard	April 1, 2019
Judgment	APril 1, 2019
Counsel	BH Swart SC (with JL Mÿburgh) for the appellant.; S Kuny SC (with T Mamanyuha) for the respondents.

Flynote : Sleutelwoorde

Company G — Directors and officers — Board of directors — Resolutions — Round robin resolution — Validity — Board passing resolution contrary to its stated purpose — Amounting to misrepresentation and breach of directors' duty of good faith — Resolution nullified — Companies Act 71 of 2008, s 74, s 76(3)(a).

Company H — Shares and shareholders — Shares — Authorisation for shares in memorandum of association — Change — Round robin decision by board — Notice to directors — Companies Act 71 of 2008, s 36(2)(b) and (3), s 74.

Headnote : Kopnota

Section 36(2)(b) and (3) of the Companies Act 71 of 2008 states that the I number of authorised shares provided for in a company's memorandum of association may be 'changed only by . . . special resolution of the shareholders . . . or the board . . . [which may] . . . increase or decrease the number of authorised shares in any class of shares'. Section 74 of the Act enables 'a majority of directors' to pass what is known as a round robin resolution in order to avoid a formal meeting, provided that 'each director J has received notice of the matter to be decided'.

2019 (4) SA p437

In 2013 the appellant, CDH, and the second respondent, Amabubesi, caused A Petrotank to be incorporated. A memorandum of understanding (MOU) concluded between the parties provided that Petrotank would have five directors — three appointed by CDH (the majority directors) and two by Amabubesi (the minority directors). In terms of the MOU the 100 000 issued shares in Petrotank would be held by CDH and Amabubesi in a 60/40 ratio. But, due to an error on the part of the person responsible for the B incorporation, Petrotank's memorandum of incorporation (MOI) recorded the number of authorised shares as 1000 rather than 100 000. Neither CDH nor Amabubesi was at this point aware of the error.

On 28 March 2014 one of the directors appointed by CDH sent an email to his fellow directors in which he pointed out that Petrotank was in breach of the C Companies Act because it had issued more shares than authorised by its MOI. He asked them to rectify the situation by signing an attached round robin resolution to increase the number of authorised shares to one million. The majority directors passed the resolution over the objections of the minority, who pointed out that the one million figure was wrong and needed to be changed to 100 000. But they were ignored. CDH offered no explanation for the failure to have regard to the objections nor justification D for the increase.

A subsequent breakdown in the relationship between the parties resulted in litigation in the Johannesburg High Court, [*1] which set aside the resolution on various grounds, including bad faith on the part of the directors and because it was not in the interests of the company. In an appeal the Supreme Court of Appeal — E

Held

Section 36(2)(b) read with s 36(3) of the Act constituted a radical departure from the old Companies Act 61 of 1973, under which a company could only increase its share capital by means of a special resolution (s 75) and after approval by the company at a general meeting (s 221) (see [18]). F The notice required by s 74 was to intended to inform directors not only of the existence of the decision to be made, but also of its purpose (see [21).

CDH's directors knew that the round robin resolution on which they had been called upon to vote was contrary not only to the proclaimed purpose of the resolution but also to the MOU (see [22]). The only inference to be drawn from their conduct was that they had misrepresented the matter to be decided (see [23]). G The misrepresentation, which was at the very least designed to obfuscate the real purpose behind the resolution, did not comport to the standards of good faith in s 76(3) of the Act [*2] required of directors' conduct and, as such, raised the question as to whether they exercised their powers for a proper purpose (see [24]). The round robin resolution was accordingly invalid, and the appeal would be dismissed (see [25]). H

Cases cited

African Organic Fertilizers and Associated Industries Ltd v Premier Fertilizers Ltd 1948 (3) SA 233 (N): dictum at 240 applied

CDH Invest NV v Petrotank South Africa (Pty) Ltd and Another 2018 (3) SA 157 (GJ) ([2018] 1 All SA 450): confirmed on appeal I

2019 (4) SA p438

Majola Investments (Pty) Ltd v Uitzigt Properties (Pty) Ltd A 1961 (4) SA 705 (T): dictum at 710F – 711A applied.

Legislation cited

The Companies Act 71 of 2008, s 36(2)(b) and (3), s 74, s 76(3)(a): see Juta's Statutes of South Africa 2017/18 vol 2 at 1-411, 1-429 and 1-430.

Case Information

BH Swart SC B (with JL Mÿburgh) for the appellant.

S Kuny SC (with T Mamanyuha) for the respondents.

An appeal against a decision in the Johannesburg High Court (Van der Linde J). The decision was confirmed by the Supreme Court of Appeal.

Judgment

Carelse AJA C (Ponnan JA, Saldulker JA, Davis AJA and Rogers AJA concurring):

[1] This appeal concerns a decision adopted by written consent of the majority of the directors in terms of s 74 of the Companies Act 71 of 2008 D (the Act). [1]

[2] The appellant (CDH) and the second respondent (Amabubesi) hold all the issued shares in the first respondent (Petrotank) in a 60/40 ratio. There are 100 000 issued shares. This was in accordance with a shareholders' agreement (styled a MOI – MOU) concluded between the E parties in January 2013. However, Petrotank's memorandum of incorporation (MOI) of February 2013 mistakenly recorded the number of authorised shares as 1000. CDH sought an order in terms of s 61(12) of the Act directing the board of Petrotank to convene a shareholders' meeting in terms of s 61(3) of the Act for the purpose of considering and F passing five resolutions: (1) the removal of a director; (2) the election of a substitute director; (3) instructing the board to demand that the minority shareholder, Amabubesi, pay Petrotank R1 million; (4) instructing the board to sue Amabubesi for this amount; and (5) instructing the board to consider a pro rata rights offer of 98 835 ordinary no par value shares.

[3] G Amabubesi consented to the first two resolutions. Although the court a quo (Van der Linde J) dismissed the application in respect of the three remaining resolutions, the appeal to this court only concerns the dismissal of the application in respect of the fifth resolution. [2] Van der Linde J also upheld a counter-application by Amabubesi to invalidate a director's round robin resolution of Petrotank passed on 31 March 2014 H that purported to amend its MOI by increasing the number of

2019 (4) SA p439

Carelse AJA (Ponnan JA, Saldulker JA, Davis AJA and Rogers AJA concurring)

authorised shares from 1000 to 1 000 000. The declaration of invalidity A of the increase of the authorised shares to 1 000 000 shares had the consequence that there were no additional authorised shares that could be utilised to conduct a rights offer.

The facts B

[4] In 2013 CDH, a Belgian company, and Amabubesi, an...