Hulett and Others v Hulett

• Jurisdiction: South Africa
• Citation: 1992 (4) SA 291 (A)

Hulett and Others v Hulett
1992 (4) SA 291 (A)

1992 (4) SA p291

Citation	1992 (4) SA 291 (A)
Court	Appellate Division
Judge	Hoexter JA, Van Heerden JA, Nestadt JA, Milne JA and Nicholas AJA
Heard	May 5, 1992
Judgment	June 2, 1992

Flynote : Sleutelwoorde B

Company — Shares — Shareholders — Relationship inter se — There is room in company law for recognition of fact that behind limited company, or amongst it, there are individuals with rights, expectations and obligations inter se which are not necessarily submerged in company C structure — In casu, evidence indicating that pre-existing bonds of mutual trust and confidence between principal shareholders in small limited company imported into and sustained within company — Within external structure of company, internal relationship between principal shareholders amounting to quasi-partnership — Such shareholders describing themselves as partners and appreciating that good faith D required from partner in dealings with fellow-partners — One shareholder fraudulently misrepresenting to fellow shareholders that, if they sold their shares to him, it was his intention to retain them in order to exercise control over company and to continue operating its business, for E which he expressed strong affection — Actual intention to sell all shares at more advantageous price to purchaser with whom he was already secretly negotiating — Court holding that, to achieve own ends, shareholder trading upon and abusing bonds of friendship and sentiment — Concluding that fair to infer that shareholder relied on fraudulent misrepresentation F to induce fellow-shareholders to sell their shares to him, and that such misrepresentation had induced them to sell their shares to him — Action for damages based on fraudulent misrepresentation accordingly succeeding.

Headnote : Kopnota

JH, the first appellant, T (the father of the second to fourth appellants) and the respondent had been very close friends for approximately 40 years G (JH and the respondent

1992 (4) SA p292

A were also second cousins): they all had started farming in the same area at about the same time; close ties had existed between them since their school-days; they participated in sport together; their respective families shared their vacations and they also travelled overseas together. A trust, of which the respondent was the trustee and a beneficiary, held all the shares in a company which owned a farm, in respect of which another company held a mining lease over the 25 ha of the farm on which there was a disused quarry. With a view to the further exploitation of the B quarry, the respondent during May/June 1984 suggested to JH and T that a consortium of 15-20 persons be formed to raise R500 000 in order to finance a company which would take over the lease and run the quarry. JH rejected the proposal, and his suggestion that, instead, participants be restricted to five or six persons resulted in a company with an issued share capital of 150 shares being registered. Thirty shares were registered in the name of each of four of the five directors, while in T's C case the 30 shares were divided equally between his daughters (the second to fourth appellants). T thereafter acted for and on behalf of his daughters in all matters and negotiations affecting their shares.

The respondent thereafter displayed great interest in the quarry, and involved himself in its day-to-day running. From time to time the directors informally discussed the sale of their shares should a purchaser 'with the right price' approach them. In May 1987 the respondent informed JH and T that a company, Blue Circle, had displayed an interest in D acquiring the quarry. In October/November of that year the respondent reported that Blue Circle had offered R1,5 million for all the shares in the company and the trio's loan accounts. The respondent then told JH that the offer had been too low and that he had declined it; that the practical implication of the offer had been that JH's shares and loan account 'would E only be worth about R200 000'; and that if JH was prepared to accept R200000 the respondent would buy out JH for R200 000. JH declined the offer. At that stage the number of shareholders had been reduced to four: JH, T and the respondent (the trio) each owned 56 shares, the remaining 18 shares being held by the quarry manager. The respondent later offered JH and T R270 000 each for their shares and loan accounts. This offer, too, was declined, JH indicating that he would accept R450 000.

After further negotiations, on 29 February 1988 Blue Circle formally offered T and JH R470 000 each for their shares and loan accounts, half F that amount to be paid upon signature of the requisite transfer documents, and the unpaid balance, with interest, to be paid on 28 February 1989. In response to the respondent's enquiry, Blue Circle indicated that they required an extra 10 ha of land around the quarry, for which they were prepared to pay R14 000 per hectare. The respondent's explanation to JH and T for his refusal to accept R14 000 per hectare and his demand for R50 000 per hectare (which Blue Circle had rejected) was that he wished to 'block' JH and T from selling their shares to Blue Circle; that he wished G to buy their shares because he wanted the controlling interest in the company for the reason that he enjoyed the quarry and had great plans for its expansion. Some days thereafter the respondent offered T and JH R350 000 each for their shares and loan accounts. Their explanation for having accepted the offer was that the offer had been far more realistic than the respondent's previous offers of R200 000 and R270 000; that the respondent was, after all, a friend (in the case of T) and a relative (in the case of JH); that the quarry was situated on his land; that he had always H indicated to them how much he liked the quarry; that he had convinced them that he wanted the quarry for himself; and, as far as they had known, no purchaser other than Blue Circle had displayed any interest in acquiring the business.

The fact that T and JH had decided to accept his offer of R350 000 to each was communicated to the respondent by JH, who reported the respondent as having said in response to the news: 'I am so pleased that you have taken this decision because you know how much the quarry means to me and now I I will get the control that I have been wanting.' During their negotiations for the purposes of shaping the agreement of sale, the respondent indicated that, although the bank would advance R700 000 to him, he could pay them only R400 000 then and R300 000 a year later because he required the R300 000 as working capital. He at first sought from T and JH an unsecured loan for R300 000 on the basis of their friendship; they in turn suggested that he pledge the shares to them until he finally made payment. The respondent rejected that suggestion, and agreed instead to provide a J bank

1992 (4) SA p293

A guarantee. JH stated that he had said, casually, to the respondent that if he (the respondent) were at that point negotiating to sell off the shares JH and T should know about it. It appeared that the respondent had not reacted to that remark. In the end the respondent paid the full purchase price in cash. A clause in the final contract, which was signed on 10 March 1988, stated that '(i)t is recorded and agreed that the purchaser is concluding this agreement with a view to obtaining control of the company and its operation . . .'.

B Unbeknown to T and JH, and while negotiations with Blue Circle were taking place, another company, Bay Stone, had also expressed an interest in acquiring the quarry company and had, in fact, offered R2 million for all the shares and loan accounts in the company. Discussions took place between Bay Stone and the respondent only. On 3 March 1988 the chairman of Bay Stone telephoned the respondent's bank manager, from whom the respondent had sought to raise a loan of R500 000, to inform him that Bay C Stone had in principle agreed to purchase the quarry company for R2 million. Shortly after the conclusion of the contract for the sale of their shares and loan accounts by JH and T, in a series of transactions, the first of which was concluded on 19 April 1988 and the last of which was concluded in May 1988, the respondent sold the company to Bay Stone for R2 million.

In an action for damages against the respondent in a Provincial Division, the appellants alleged that they had been induced to enter into the D contract for the sale of their shares and loan accounts to the respondent by his fraudulent deception. Their claims rested upon (1) fraudulent misrepresentation, and (2) fraudulent non-disclosure. The trial Court ordered absolution from the instance, after concluding that (a) the appellants had failed to prove that any possible fraudulent misrepresentation made by the respondent had materially influenced JH or T in making their decision to sell; (b) that the appellants had failed to establish a duty on the part of the respondent to disclose to them the Bay E Stone interest and offer; and (c) that in any case there had been insufficient evidence to provide a basis for calculating damages. In an appeal,

Held (per Hoexter JA; Van Heerden JA, Nestadt JA, Milne JA and Nicholas AJA concurring), that a central feature of the case had been the nature of the relationship between the trio, which was important in any consideration of the issue of both fraudulent non-disclosure and of F positive misrepresentation.

Held, further, that the evidence adduced on behalf of the appellants showed that the pre-existing personal bonds of mutual trust and confidence between the members of the trio had been imported into and sustained within the company they had formed as a vehicle for their joint venture.

Held...