Pure corporate control in South Africa : chapter 3 : part two : South Africa on corporate control
| Pages | 31-74 |
| Date | 01 January 2010 |
| Published date | 01 January 2010 |
| DOI | 10.10520/EJC74134 |
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PART TWO: SOUTH AFRICA ON CORPORATE CONTROL
CHAPTER 3: PURE CORPORATE CONTROL IN SOUTH
AFRICA
3.1 Introduction
Corporate governance regulates the extent of the power shareholders
have in a company.1 It regulates how the shareholders can exercise
their rights and have a productive relationship with the company and
the management. The subject of corporate control is therefore, a sub-
ject which directly emanates from corporate governance. Corporate
governance means the nature of ownership and control of organisa-
tions within an economy.2 The definition further translates into the way
companies are owned, the form in which they are controlled and the
process by which changes in ownership and control take place.3
Control is an essential feature in companies and without it companies
become non-functioning. In the absence of a struggle for control, it
is difficult to determine whether the management or a set of stock-
holders control the selection of the board of directors, or whether
they are a single coalition.4 This chapter firstly examines the cir-
cumstances under which shareholders exercise corporate control.
Different avenues through which corporate control can be exploited
are examined commencing with share ownership benefits, to ana-
lysing whether ownership does in fact equal automatic control. The
majority and minority control sections in this chapter investigate the
extent of control, which can be exercised by either the majority or
the minority shareholders. As a deviation from the majority share-
holder point of view the chapter will also fully exploit the question of
corporate control through control blocks, how shareholders can ex-
tract benefits from their control position by utilising differential voting
tactics and pyramid stocks. These methods of control demonstrate
control tactics by a minority shareholder, and how such can be used
to control company decisions despite having a marginal stake in
terms of equity of company. This minority control position moves
from the normal situations where a majority shareholder wields con-
trol proportionate to the voting rights attached to his shares.
The final control over the affairs of a company is exercised by its
shareholders in the general meeting. Although it is recognised
that shareholders have lost the ultimate authority in the corporate
structure,5 it is contended that, shareholders in fact still command
1 A company refers to a corporation or a firm.
2 Cook and Deakin 1999: 2.
3 Cook and Deakin 1999: 2.
4 Stigler and Friedland 1983: 248.
5 Pryce-Brown 1995: 114.
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immense power in corporate decisions through the exercise of their
votes. The chapter secondly examines the role of the board of direc-
tors and as the enforcers of corporate control and therefore, second
in command to shareholders because of the separation of owner-
ship and control. It will therefore analyse the instances where the
directors exercise control and the limitations of that control.
3.2 Voting shares ownership
The Companies Act6 describes a share of a company as a share in
the share capital of a company including stock, shares, debentures
and any rights and interests in a company.7 A share has been seen
as moveable property, which is transferable between the members
and third parties.8 However, court decisions give a much more elab-
orate explanation of what a share means and what the possession
of a share entails. A share in a company means a representation
of an interest in the capital of the company, which enables share-
holders possession of a number of different rights.9 These rights
are the rights to residual capital on winding-up of the company and
on reduction of the capital of the company.10 It follows that since a
shareholder by virtue of being a shareholder possess an interest in
the capital of the company, such should have either common law
or statutory remedies available protecting this interest against the
infringement by the company and its constituents.
As shares have rights attached to them to determine their voting; divi-
dends capital distribution,11 shareholder compensation or expense
payments, related-party transactions and share-buy back capacity.12
The strength of shares lies in their voting power where corporate con-
trol is concerned. The Companies Bill 2007 describes voting power
as consisting of a percentage of all voting rights of a company held
by a person and can be exercised with regard to any matter affecting
a company.13 Shareholders have the right to exercise their votes as
according to the conditions attached to those votes. In Ben Tovim v
Ben Tovim & Others,14 it was decided that the members of a company
do not stand in a fiduciary relationship to the company and hence are
not under a duty to exercise their votes bona fide in the interest of
the company as whole. Shareholders vote in respect of their shares,
6 Companies Act 61 of 1973.
7 Companies Act 61 of 1973: section 1(1).
8 Companies Act 61 of 1973: section 91 and Blackman 1996: 155.
9 Cooper v Boyens NO 1994 (4) SA 521 (C): 535. Standard Bank of SA
Ltd v Ocean Commodities Inc 1983 (1) SA 276 (A): 288.
10 Blackman 1996: 154.
11 Cilliers et al 2000.
12 Much and Purcell 2003.
13 Companies Bill 2007: Definitions.
14 Ben Tovim v Ben Tovim & Others 2001 (3) SA 1074 (C).
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which are specifically limited property. The right to vote is attached to
the share itself as an incident of property, which may be exercised by
the shareholder in his or her own interest.15 This conclusion is reason-
able as shareholders are investors who invest in companies for per-
sonal profit and should not be forced to choose morality over profit.
The Companies Act forbids companies to issue shares without any
voting rights except under certain special circumstances.16 For in-
stance, the articles of association can provide that a certain class of
shares, such as preference shares, will not have any voting rights at
all. However, preference shares are allowed to have voting rights if
the payment of dividends on preference shares is in arrears and thus
not paid or if a company takes a resolution which affects the rights or
interests attached to the preference share.17 It follows that the exercise
of shares is an integral part of the decision-making process in com-
panies; therefore it is unusual to have shares with no voting power at
all. To emphasise the importance of voting rights, listed companies on
the Johannesburg Stock Exchange are required to have shares. That
is, all shares in any one class should have the same rank and that all
the ordinary shares in a company should have voting rights attached
to them as proportional to their nominal value.18
A discussion on ownership control warrants an analysis of the theo-
ry of ownership of the company and the significance of a share as a
property right. Shareholders in public companies have been labelled
as ‘owners’ of their corporations. Their ownership, according to this
line of reasoning, entitles them to two formal rights; the right to con-
trol the company and the right to appropriate the residual earning of
the company.19 Worthington argues that while a share has been de-
fined as an item of intangible property and bundle of rights, this does
not give a shareholder the ownership of the assets of the company
or the ownership of a company as a thing. However, ownership of
shares does give a certain measure of legal protection, as it is still
some form of property.20 Worthington furthermore maintains that,
in modern companies, shares are perceived as intangible personal
property, which can be used as an investment property with a legal
basis.21 In other words, ownership of shares in companies means to
15 Ben Tovim v Ben Tovim & Others 2001 (3) SA 1074 (C): 1088 D-E. Gold
Fields Ltd and Another v Harmony Gold Mining Company Ltd and Others
2005 (3) All SA 114 (SCA): 118.
16 Companies Act 61 of 1973: section 193-194. Companies Bill 2007:
section 37(1) and (3).
17 Companies Act 61 of 1973: section 194. Cilliers et al 2000: 230.
18 Pretorius et al 1999: 155.
19 Hansmann 1990: 283.
20 Worthington 2001: 258.
21 Worthington 2001: 260.
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