A ‘fair and reasonable proposal’ by the board may still amount to a breach of duty to exercise directors’ powers for a proper purpose

• Jurisdiction: South Africa
• Pages: 29-43
• Published date: 22 May 2020
• Author: Mangalo, T.H.
• Citation: (2019) 5(2) JCCL&P 29
• Date: 22 May 2020

29

A ‘FAIR AND REASONABLE

PROPOSAL’ BY THE BOARD MAY

STILL AMOUNT TO A BREACH OF

DUTY TO EXERCISE DIRECTORS’

POWERS FOR A PROPER PURPOSE

TSHEPO H MONGALO*

Associate Professor University of the Witwatersrand, Johannesburg

ABSTRACT

Following the welcome abandonment of the proposal by Africa’s

biggest retail chain, Shoprite Holdings Ltd, to buy out Christo

Wiese’s high-voting deferred shares at a cost of about R3.3 billion

because the proposal received more than 15 per cent of the minority

shareholders’ disapproval, the real possibility of breach of duty by

the company’s directors if the deal had proceeded has become moot.

Using a long-standing legal authority — in the form of the judicial

decision in the case of Howard Smith v Ampol Petroleum Ltd [1974] AC

821, and the more recent UK Supreme Court’s judgment in Eclairs

Group Ltd v JKX Oil & Gas PLC [2015] UKSC 71 — this article argues

that the directors would have found themselves in breach of their

fiduciary duty had the deal materialised. This is regardless of the

fact that the proposal had ‘allegedly’ been determined as ‘fair and

reasonable’ by the auditing and accounting firm of Ernst & Young.

Keywords: directors’ duties; proper purpose; fair and reasonable

proposal; collateral purpose; multiplicity of purpose; substantial

purpose; chairman’s influence

I BACKGROUND

According to the Business Report of 5 June 2019, Mr Christo Wiese,

the founder and major shareholder of Shoprite Holdings Ltd, was

* B Proc, LLB (Natal) LLM (Cambridge) PhD (Cape Town). I would like to thank

the Business Law B (BTS2201) students undertaking BBusSci degree studies at

IIE MSA in 2018 and 2019 (formerly Monash South Africa) for lively discussions

and valuable inputs made in class and tutorials on the subject. I would also

like to thank the University of the Witwatersrand interview panel that made

useful inputs in the earlier version of the paper. None of these persons bears any

responsibility for errors or misstatements contained herein.

(2019) 5(2) JCCL&P 29

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