Omar v Inhouse Venue Technical Management (Pty) Ltd and Others

• Jurisdiction: South Africa
• Judge: Gamble J
• Judgment Date: 06 February 2015
• Citation: 2015 (3) SA 146 (WCC)
• Docket Number: 14227/2014
• Counsel: M Fitzgerald SC (with D Goldberg) for the applicant. A Smalberger for the respondents.
• Court: Western Cape Division, Cape Town

Gamble J: C

Introduction

[1] It could be said that the circumstances of this case resemble a D 'commercial divorce case'. Two shareholders in a private company, one with a larger portfolio of shares than the other, have fallen out and want to go their separate ways. In the absence of a squabble over children or the involvement of a paramour, it is really just the division of the parties' jointly held assets that requires the attention of the court.

E [2] The applicant (Omar) is the minority shareholder (45%) in the first respondent (Inhouse), which is the corporate entity on the rocks, while the second respondent ('Gearhouse SA', a wholly owned subsidiary of Gearhouse SA Holdings (Pty) Ltd) holds 50% of the shares. The remaining 5% is held by the third respondent (Govender). The fourth F and fifth respondents ('Lapid' and 'Abbas') effectively control Gearhouse Holdings and Gearhouse SA, of which they are both directors. Lapid and Abbas, together with Omar, Govender and three others (Abbas' wife, Neelofa Khan, James Demore and Nkosinathi Biko) are the directors of Inhouse.

G [3] Omar wants to be fairly compensated for his minority shareholding. Lapid and Abbas say that a fair offer has been made to him but Omar is not happy with their proposal and has sought relief under s 163 of the Companies Act 71 of 2008. [1]

Gamble J

[4] The import of s 163 is, it is common cause, not unlike the provisions A of s 252 of the Companies Act 61 of 1973 (the old Act) and, in interpreting the former, reference may be made to the substantial body of law which has arisen from the application of that section of the old Act. [2]

[5] Unlike our divorce law which is based on the no-fault principle B (where matrimonial misconduct is no longer regarded as relevant before a decree of divorce may be granted), the relief available to an oppressed minority shareholder requires some consideration of the relevant circumstances to enable a party to claim relief under s 163. In O'Neill [3] C Lord Hoffmann dispelled the submission that it was sufficient to sustain a claim under the similar provision in the English Companies Act of 1985, [4] that an applicant need allege only a breakdown of confidence and trust between the parties.

'I did not think that there is any support in the authorities for such a D stark right of unilateral withdrawal. There are cases, such as Re a Company (No 006834 of 1988), Ex parte Kremer [1989] BCLC 365, in which it has been said that if a breakdown in relations has caused the majority to remove a shareholder from participation in the management, it is usually a waste of time to try to investigate who caused the E breakdown. Such breakdowns often occur (as in this case) without either side having done anything seriously wrong or unfair. It is not fair to the excluded member, who will usually have lost his employment, to keep his assets locked in the company. But that does not mean that a member who has not been dismissed or excluded can demand that his shares be purchased simply because he feels that he has lost trust and confidence in the others.' F

[6] The learned Law Lord noted [5] that the English Law Commission too had set its face against a 'no-fault' remedy for dissatisfied shareholders:

'In our view there are strong economic arguments against allowing G shareholders to exit at will. Also, as a matter of principle, such a right would fundamentally contravene the sanctity of the contract binding the members and the company which we considered should guide our approach to shareholder remedies.'

[7] Earlier in that judgment [6] Lord Hoffmann dealt with the application of a court's power to do what was fair under s 459 of the English Act. H

Gamble J

A 'In s 459 Parliament has chosen fairness as the criterion by which the court must decide whether it has jurisdiction to grant relief. It is clear from the legislative history . . . that it chose this concept to free the court from technical considerations of legal right and to confer a wide power to do what appeared just and equitable. But this does not mean B that the court can do whatever the individual judge happens to think fair. The concept of fairness must be applied judicially and the content which it is given by the courts must be based upon rational principles. As Warner J said in Re J E Cade & Son Limited [1992] BCLC 213 at 227: The court . . . has a very wide discretion, but it does not sit under a palm tree.

C Although fairness is a notion which can be applied to all kinds of activities, its content will depend upon the context in which it is being used. Conduct which is perfectly fair between competing businessmen may not be fair between members of a family. In some sports it may require, at best, observance of the rules, in others (it's not cricket) it D may be unfair in some circumstances to take advantage of them. All is said to be fair in love and war. So the context and background are very important.

In the case of s 459, the background has the following two features. First, a company is an association of persons for an economic purpose, E usually entered into with legal advice and some degree of formality. The terms of the association are contained in the articles of association and sometimes in collateral agreements between the shareholders. Thus the manner in which the affairs of the company may be conducted is closely regulated by rules to which the shareholders have agreed. Secondly, company law has developed seamlessly from the law of F partnership, which was treated by equity, like the Roman societas, as a contract of good faith. One of the traditional roles of equity, as a separate jurisdiction, was to restrain the exercise of strict legal rights in certain relationships in which it considered that this would be contrary to good faith. These principles have, with appropriate modification, been carried over into company law.'

G [8] More recently, Rogers J in Visser Sitrus [7] observed that —

'it is not enough for an applicant to show that the conduct of which he complains is "prejudicial" to him or that it "disregards" his interests. The applicant must show that the prejudice or disregard has occurred H "unfairly". "Oppression" likewise connotes an element at least of unfairness if not something worse.'

[9] In their written heads of argument on behalf of Omar, Messrs Fitzgerald SC and Goldberg submitted, persuasively in my view, that an applicant for relief under s 163 must establish a lack of probity or fair I dealing, or a violation of the conditions of fair play on which every shareholder is entitled to rely. Reliance was placed on cases such as

Gamble J

Donaldson Investments [8] and Garden Province [9] (which related to s 252 of A the old Act), and the court was urged to examine the unfairness of the conduct complained of and to assess whether it had been established that the majority shareholders had used their greater voting power in such a manner as to preclude the minority from enjoying fair participation in the affairs of the company. This accords with the approach advocated by Rogers J in Visser Sitrus. [10] B

[10] And so I turn to examine some of the issues which gave rise to the irretrievable breakdown of the relationship between the shareholders of Inhouse.

Corporate history C

[11] The business of Inhouse currently involves the provision of a wide range of equipment to a variety of clients for the staging of mostly corporate but also public events. Equipment such as public-address systems, audiovisual equipment, lighting, rigging, and the like, are provided at venues such as the Cape Town International Convention Centre or the Westin Grand Hotel for conferences, product launches D and even music events. Its origins go back some 15 years or so.

[12] Omar says that in 2000 he had set up a business known as AV Network which targeted this market and at that stage included the Cape Town International Jazz Festival amongst its clients. The business grew and he gained industry know-how and trade connections. E

[13] In about 2002 – 3 Abbas and his wife Khan moved to Cape Town from the United Kingdom. Prior to that they had worked for Gearhouse PLC, a company listed on the London Stock Exchange which went into liquidation in 2001. Abbas and Khan knew Lapid in the United Kingdom and they decided to set up a similar business in South Africa F under that name. The resultant corporate structure later became known as the 'Gearhouse Group'.

[14] At the apex of the Group's pyramid was Gearhouse SA Holdings (Pty) Ltd in which Lapid held 92,5% of the shares and Abbas 7,5%. G The two of them, together with Khan, were the directors of Gearhouse Holdings. Besides Gearhouse SA (to which reference has already been made), the holding company has a beneficial interest in a host of subsidiary companies which are intended to support and/or complement the interests of the entire Group.

[15] In the answering affidavit Abbas describes the affairs of the Group H as follows:

'9.14

The Group not only provides tailor-made and complete solutions for large events, but has also always catered for smaller events such as

Gamble J

A conferences, workshops and social functions typically hosted in conference centres or hotels. To ensure that the quality of service was not compromised in supplying services to the smaller events and venues it was thought appropriate that a specific Subsidiary [sic] focussing on these events be established.'

[16] To cater for functions at venues on a small to medium scale, Abbas B and Lapid set up Inhouse. Other subsidiaries included, for example, Gearhouse Splitbeam (Pty) Ltd, a company that provides lighting and audio equipment to venues for social and corporate events; Havaseat (Pty) Ltd, which provides seating for such events; and Gearhouse System Solutions (Pty) Ltd, which...