McMillan NO v Pott and Others

• Jurisdiction: South Africa
• Judge: Binns-Ward AJ
• Judgment Date: 28 July 2009
• Citation: 2011 (1) SA 511 (WCC)
• Counsel: R Goodman SC (with RAJ Acton) for the applicant. JG Dickerson SC (with A du Toit) for the respondents.
• Docket Number: 11125/2008
• Court: Western Cape High Court, Cape Town

McMillan NO v Pott and Others
2011 (1) SA 511 (WCC)

2011 (1) SA p511

Citation	2011 (1) SA 511 (WCC)
Case No	11125/2008
Court	Western Cape High Court, Cape Town
Judge	Binns-Ward AJ
Heard	May 27, 2009; May 28, 2009; June 18, 2009
Judgment	July 28, 2009
Counsel	R Goodman SC (with RAJ Acton) for the applicant.; JG Dickerson SC (with A du Toit) for the respondents.

Flynote : Sleutelwoorde E

Company — Shares and shareholders — Shareholders — Oppression — What F constitutes — Not sufficient that relationship between parties having broken down irretrievably — No right of unilateral withdrawal when trust and confidence between shareholders no longer existing — But different if breakdown in relations causes majority to exclude minority shareholder from management of company, or otherwise to cause him prejudice as shareholder — Useful test is to ask whether exercise of power or rights by majority would involve breach of agreement or understanding between G parties — Companies Act 61 of 1973, s 252.

Company — Shares and shareholders — Shareholders — Oppression — What constitutes — Removal of director by majority — Effect of fault on part of removed member — Oppression in casu not lying in justifiable exclusion of affected member, but in effect thereof on such member who had become H member on understanding that he would have actively participative role amounting to employment — Issue of fault generally not negating right to relief from oppression in such circumstances — Semble: Fault on part of excluded member may in exceptional circumstances be so gross that member's exclusion without offer of redemption of capital not oppressive — Companies Act 61 of 1973, s 252.

Company — Shares and shareholders — Shareholders — Oppression — Relief — I Application — Who may apply — Sole trustee of trust with 30 percent shareholding in company — M, in terms of understanding between joint venturers in acquisition of shares of company, appointed managing director of company and in executive control of company — Consequent on disputes between M and other joint venturers, M removed as managing J

2011 (1) SA p512

A director of company — Exclusion of M from business as relevant to trust's position qua member of company as it would have been had M been member in personal capacity — M entitled to apply for relief — Companies Act 61 of 1973, s 252.

Company — Shares and shareholders — Shareholders — Oppression — Relief — B Court making order providing for compulsory purchase of shares of affected member by majority shareholder — 'Fair value' of shares — No reason in principle why acquiring party should obtain excluded party's shares at discount to pro rated value of all issued shares in company — Such the practice of English courts and such practice commending itself to South African practice — Companies Act 61 of 1973, s 252.

Headnote : Kopnota

C One M and certain of his business colleagues had in a joint venture purchased all the shares in a certain company. In terms of the underlying understanding between the joint venturers, 30 percent of the issued share capital in the company was to be allotted to M, with the remainder to be divided in smaller percentages between the other joint venturers, save that a 28 percent D holding was to be allotted to a black economic empowerment partner. The understanding between the joint venturers also contemplated that M would be engaged in executive control of the company as managing director, with each of the other envisaged shareholders being entitled to a representative on the board. It was also understood that M would be enabled, over time, to acquire from the other participants sufficient shares E to give him the majority interest in the company within five years. It seems clear to me that it was understood by all those involved in the acquisition of the company, that it was to provide M with not only a commercial investment, but also the primary means to earn his living in employment. M's shares were eventually registered in the name of the M Family Trust, of which M was the sole trustee. Consequent upon certain disagreements F and disputes between the joint venturers, M was at a shareholders' meeting of the company removed as a director of the company. M and his wife were later dismissed as employees of the company, following disciplinary proceedings against them. M, in his capacity as sole trustee of the trust, subsequently applied to a High Court for relief in terms of s 252 of the Companies Act 61 of 1973, on the ground that his removal as a director G constituted unfairly prejudicial, unjust or inequitable conduct towards the trust. The respondents contended that M (the applicant) had failed to demonstrate that any particular act or omission of the company, or any incidence of the conduct of its affairs, had been unfairly prejudicial, unjust or inequitable to the trust (as distinct from M personally). It was emphasised that it was the trust, and not M personally, that was the member of the H company; that seeking relief in terms of s 252 was a member's remedy; and that M could not treat himself effectively as the alter ego of the trust for the purposes of satisfying the requirements of s 252(1) of the Act. It was contended further that M's exclusion from the company did not prejudice the trust's proprietary interest; there was nothing to prevent it from nominating somebody other than M to represent its interests on the I company's board of directors. The applicant, however, contended that, having regard to the relationship between the interests of M and the trust, and the circumstances in which the trust had come to be a registered shareholder, it would be 'the height of technicality', and quite incongruous with the equity-based remedial objects of the statutory provision, to draw too nice a distinction between M and the trust. It was clear that the trust J held its shares in the company only on the basis that M had entered into the

2011 (1) SA p513

joint venture, namely the understanding that he would have managerial A control of the day-to-day running of the company's business, and would be employed by it in a capacity ordinarily designated as that of managing director. The court cited English company law authority to the effect that the interests of a member of a company were not necessarily limited to his strict legal rights under the constitution of the company, and that the B language of the English equivalent of s 252, in the use of words such as 'unfairly', 'just' and 'inequitable', enabled the court to have regard to wider considerations; that the jurisdiction under the section had an elastic quality which enabled courts to mould the concepts of unfair prejudice according to the circumstances of the case; that, in point of jurisdiction, the wide language of the section was not to be cut down; and that the requirement that prejudice had to be suffered as a member should not be too narrowly C or technically construed. The court accordingly held that the exclusion of M from the business is as relevant and pertinent to the trust's position qua member of the company, as it would have been had M himself, in his personal capacity, been the member. (Paragraphs [31] – [32] at 527C – 528B.)

As to what constitutes unfairly prejudicial, unjust or inequitable conduct towards D a member of a company, the court held, again citing English company law authority, that it was not enough merely to show that the relationship between the parties had irretrievably broken down. There was no right of unilateral withdrawal for a shareholder when trust and confidence between shareholders no longer existed. It was, however, different if that breakdown E in relations then caused the majority to exclude the member from the management of the company, or otherwise to cause him prejudice in his capacity as a shareholder. The court pointed out that, although it was impossible to provide an exhaustive definition of the circumstances in which the application of equitable principles would render it unjust for a party to insist on his strict legal rights, those principles were to be applied F according to settled and established equitable rules, and not by reference to some indefinite notion of fairness. A useful test was always to ask whether the exercise of the power or rights in question would involve a breach of an agreement or understanding between the parties which it would be unfair to allow a member to ignore. Such agreements did not have to be contractually binding in order to found the equity. (Paragraphs [33] – [34] at 528B – 530B, G paraphrased.)

A basis to claim relief in terms of s 252 can inure in certain circumstances, even if it is accepted that the applicant for relief had been wholly or in part to blame for his removal from the board of directors and dismissal from employment. The prejudicial unfairness or inequity lies not in the legally justifiable exclusion of the affected member from the company's management, H but in the effect of the exclusion on any such member — who had become a member only on the understanding that he or she would have an actively participative role amounting to employment by the company — if a reasonable basis is not offered in the circumstances for a withdrawal by the member of his or her capital. The issue of fault should, in general, not negate the right of a so-called quasi-partner member to relief under I s 252, when such member has been excluded by the other members from the direct participation in the management of the company contemplated when the member's investment in the company was made. Having regard to the equitable nature of the remedy, and the attendant wide ambit of the judicial discretion to grant or withhold it on terms appropriate to the peculiar characteristics of the given case...