The Unisec Group Ltd and Others v Sage Holdings Ltd

• Jurisdiction: South Africa
• Judge: Coetzee J, Franklin J and Grosskopf J
• Judgment Date: 29 December 1982
• Court: Transvaal Provincial Division
• Citation: 1986 (3) SA 259 (T)

Coetzee J:

This is an appeal against the judgment of GOLDSTONE J, which is reported in 1982 (1) SA 337 (W). References to his judgment will be to this report. The various companies, including appellants and respondent, will also be referred to in the same abbreviated form adopted by him (at 340E).

D The matter falls into three compartments and will be dealt with under three headings. The central question concerns the status of certain companies in the Unisec group. Were they at the material times subsidiaries of Unisec? The reason why this question looms large is their present substantial holding of Unisec shares.

E Originally Sage, a shareholder in Unisec, applied for an order declaring that Newstock and Billhawk were subsidiaries of Unisec - hence, that they were disenfranchised in respect of the ordinary shares which they respectively hold in Unisec. After Sage's replying affidavit had been filed, it was granted F leave to add a prayer for a declaration in terms of s 258 of the Companies Act 61 of 1973 as amended ("the Act") that the affairs of the six respondents ought to be investigated by one or more inspectors to be appointed by the Minister of Economic Affairs. Thereafter two further sets of affidavits dealing with this aspect were filed, a second answering affidavit and a G second replying affidavit respectively. Sage succeeded in the Court a quo on both prayers.

A brief résumé of the facts which will be expanded when I come to deal with these three aspects separately is the following. In 1977 the directors of Unisec decided that Newstock and Billhawk, both wholly owned subsidiaries, should purchase H Unisec shares. This necessitated that some scheme be devised to "desubsidiarise" them, as it is termed, not very happily, but there does not seem to be a single verb to describe this process and I shall have to succumb to its use. The scheme on which they settled was one which involved vital amendments to Newstock's articles of association. As Billhawk was Newstock's I subsidiary it was only necessary to reorganise the latter's constitution. Thereafter these two companies bought (in round figures) three million Unisec shares. The latter's issued shares number some 50 million of which eight million (all round figures) are held by other subsidiaries of Unisec. If Newstock is its subsidiary some 21,5 of Unisec's issued share capital is held by its subsidiaries which is quite a startling proportion.

J The following three questions fall for decision:

Coetzee J

1.

Did the scheme result in Newstock ceasing to be A Unisec's subsidiary in terms of s 1 (3) ("the section") of the Act. This is solely a problem of the proper interpretation of this section and will be dealt with under the heading of "The interpretation aspect".

2.

Newstock may, on a proper interpretation of the section, not be a subsidiary of Unisec. However, it B may be that the facts show that the scheme which achieved this result was one in fraudem legis, a mere sham, so that it did not succeed in altering Newstock's erstwhile subsidiary status. This will be dealt with under the heading of "The fraus legis aspect".

3.

The papers may show that an investigation of the C appellants' affairs under s 258 (1) of the Act should be ordered. This will be dealt with under the heading of "The investigation aspect".

Before I proceed to deal with these three aspects separately it is necessary to indicate my approach generally as far as the facts are concerned since this is a matter which has to be decided on the papers before us. Some facts are common cause D while others are in dispute. GOLDSTONE J decided the application on the facts stated by Unisec together with such facts advanced by Sage as are admitted by Unisec - see at 341C. This will also be our approach in dealing with the interpretation and fraus legis aspects. Not so, however, when one comes to deal with the investigation aspect when it may be E necessary to evaluate the ipse dixit of Unisec's spokesman, Dr Pienaar, and to have regard to probabilities in order to decide whether there is a well-grounded suspicion of improprieties in the conduct of this company's affairs in so far as the holding company/subsidiary company relationships and crossholdings were involved.

When dealing with each of these aspects those facts relevant to F such aspect will be summarised or emphasised.

The interpretation aspect

There are very few facts which bear upon this aspect and at this stage only they will be stated. The aforementioned scheme involved mainly the amendment of Newstock's articles which are G reproduced and dealt with in the judgment a quo (at 342 - 5). The result of this reorganisation was:

1.

Newstock's capital was divided into 363 "A" shares of 50 cents each and 363 "B" shares of 50 cents each.

2.

The company was always to have an even number of H directors but not less than four nor more than eight.

3.

Half of the directors may be appointed by the holders of the "A" shares while the other half may be appointed by the holders of the "B" shares. The method of appointment is contained in art 25 (d) which reads as follows:

'(d)

Any appointments or removals in terms of (b) or (c) shall be made by written notice to the company signed by the registered holders I for the time being of the issued 'A' and 'B' shares, as the case may be, or the registered holders of a majority thereof respectively and shall be operative as soon as such written notice is received at the office.'

(My italics.)

4.

Appropriate accounts were created in such fashion that, for practical purposes, only the holders of the "A" shares can derive any economic advantage from the J company's income or capital assets.

Coetzee J

A At present the "A" shares are held by Unit Securities as owner and are registered in its name. Unit Securities is a wholly owned subsidiary of Unisec. The "B" shares are held by OTC in its own name. OTC is a company of which the chairman of the board of directors of Unisec, Dr A S Pienaar, is a B director. OTC belongs to Dr Pienaar's wife and members of her family. On the face of it no one controls the composition of Newstock's board and its equity share capital seems to be equally divided between "A" and "B" shareholders. How then can it be any other company's subsidiary in terms of the section? The answer turns wholly on the effects of what the parties term C a "side-letter", signed by both OTC and Unit Securities in terms whereof Unit Securities has the right to purchase all the "B" shares from OTC on or before 31 December 1982 for an amount of R200. This means that at any moment Unit Securities can become the owner of all the "B" shares as a result whereof it can then appoint or remove all the directors of Unisec.

Sage contends that by exercising its rights to acquire the "B" D shares, Unit Securities will indeed within the meaning of s 1 (3) (b) of the Act be exercising "some power" whereby it may appoint a majority of the directors which results in Newstock actually being deemed to be Unit Securities' subsidiary. On behalf of Unisec Mr Plewman contends that this subsection E contemplates an actual power and not merely a potential one such as that of Unit Securities in casu. Mr Shaw, on behalf of Newstock, goes further and says that this subsection, in terminis, applies only to the case of a company which has the power to appoint the directors directly and does not even apply to one which merely has sufficient voting power to accomplish this at a general meeting. Such a company, he argues, would be F a holding company under ss (a) by virtue of its power "to control the composition of the board". Subsection (b) however receives a very restricted interpretation at their hands and would apply exclusively to a company which is (1) a member of the supposed subsidiary and which (2) directly appoints the majority of the board.

Subsection (b) of the section could certainly have been more G explicitly framed and the matter is not free of doubt. To arrive at the real meaning of a statutory provision it is permissible and indeed frequently necessary to consider the history of the legislation in question and particularly to identify the mischief or defect with which the Legislature intended to deal. The remedy which the Legislature has devised H and the reason therefor then fall to be considered. (See Hleka v Johannesburg City Council 1949 (1) SA 842 (A) at 852 - 3; Steyn Die Uitleg van Wette 4th ed at 159 and the catalogue of cases collected under footnote 78.)

Since the earliest days of company law it has been firmly recognised that a company cannot buy its own shares for the reasons set forth by Lord HERSCHELL in Trevor v Whitworth I (1887) 12 AC 409 (HL) at 416, quoted in the judgment a quo at 348. The illegality and voidness of such a purchase actually came to be regarded as part of the common law and is so treated in a number of judgments and by textbook writers. The prohibition against such acquisition was not even expressly contained in any of the company statutes until some 50 years ago. So fundamental is this principle. Our 1926 Companies Act, J which followed the English Companies Acts very closely, did not contain any provision expressly

Coetzee J

prohibiting such purchases and moreover contained no provisions A at all relating to subsidiary or holding companies. The employment of a company's funds in the purchase of, or in loans upon security of the company's shares, was usually dealt with only in the articles but was illegal even in the absence of such a prohibiting article. See Pyemont Company Law of South B Africa 4th ed at 439. This is some indication of how firmly the law has at all times set its face against such activities.

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