Book a Consult >

  • pike|law is corporate law
    pike|law is corporate law
  • pike|law is commercial law
    pike|law is commercial law
  • pike|law is regulatory law
    pike|law is regulatory law
  • pike|law is public law
    pike|law is public law
  • pike|law is dispute resolution
    pike|law is dispute resolution

 

Ugly Ducks, exclusion and Sovereign Foods

This is the second of a two-part post regarding an application that we were instructed to move, seeking an urgent interdict against Sovereign Food Investment Limited.

You will recall that it was the Dissidents' contention that:

  • by crafting all the resolutions in such a manner that they were to be conditional upon and inter-conditional with each other, and
  • by barring dissidents from participation at the New General meeting;

the Dissidents would be effectively disenfranchised.

Sovereign had proposed that a revoking resolution be passed, the effect of which would be to revoke the January 2016 resolutions. Were the revoking resolution to be passed, the Dissidents' shareholder rights in respect of their shares ought to have been reinstated without interruption.[1]

The s252 Approach

The Court was of the view that the jurisprudence developed in respect of s252 of the 1973 Act[2] was relevant to determine what oppressive or unfairly prejudicial conduct is.[3] In the matter of Peel[4] Moshidi J stated the following:

'[52] A careful consideration of the interpretation of our courts to the provisions of s 252 of the old Companies Act and the provisions in s 163 of the new Companies Act, and as argued by counsel for the applicants, correctly in my view, shows a continuing intention by the legislature to broaden relief in these provisions, rather than to limit them.'

[53] That this intention is carried forward into the new Companies Act is apparent from a number of factors, including:

[53.1] The introduction of a new ground, namely conduct 'that unfairly disregards the interests of, the applicant,' (our emphasis) indicating a far wider basis upon which relief may be sought - in other words, the conduct now need not be limited to oppressive conduct or conduct which is 'unfairly prejudicial, unjust or inequitable.'

Stretch observed that conduct may be oppressive or prejudicial even if it does not violate any particular rights. This is made clear in the 2008 Act by the inclusion of conduct that unfairly disregards the 'interests' of the applicant, as opposed to its rights (our emphasis).[5]

The Effect of the Exclusion of the Dissidents from the Meeting

The court accepted that the Dissidents had no rights other than to be paid fair value for their shares. However, if Sovereign were to revoke the resolutions which gave rise to the appraisal remedy, all of the Dissidents rights as shareholders must be reinstated without interruption.

The court held that the exclusion of the Dissidents from participating in the meeting once the resolutions in question had been revoked violates section 164(10), ie the Dissidents' right to have their shareholder rights to be reinstated without interruption upon adoption of the revoking resolution.

Judge Stretch was of the view that Sovereign, by making the revoking resolution inter-conditional with and conditional upon the adoption of the further resolutions, had contrived a situation in which the Dissidents would not be able to exercise its rights upon their re-instatement:[6]

"Sovereign's conduct and its proposed course of conduct is prejudicial and oppressive of the rights of dissenting and minority shareholders and disregards their interests. It is unfair, in my view, for a board such as Sovereign's to manipulate and create this type of lock-in situation by not allowing minority/dissenting shareholders to enjoy fair participation in its business."[7]

Sovereign then argued that it was easy for the dissidents to attend the meeting. They should simply withdraw their demand[8] and their rights would be restored.[9] The court was not enamored with this proposed solution:

"This … amounts to Sovereign dictating to its shareholders and is not fair. … (S)hould the dissenting shareholders forego the rights (…) they are placed in an invidious position. While they may be able to participate in and vote at the new general meeting, it may reasonably be apprehended that the proposed resolutions will not be adopted, in which event the previous resolutions will stand, but dissenting shareholders will have lost their appraisal rights which arose pursuant to the previous resolutions and which were validly exercised then in accordance with those resolutions.

(I)f sufficient shareholders withdraw their demands (…) it may be that Sovereign elects to withdraw the resolutions proposed for the new general meeting, and attempt to proceed with the corporate restructuring it was initially desirous of implementing.

In such instance, if the dissenting shareholders have relinquished their appraisal rights they will be prevented from re-asserting them and Sovereign would be entitled to proceed with its initial scheme (against which the dissenting shareholders voted) but without the consequences of having to allow the dissenting shareholders to follow their appraisal rights."

Judge Stretch held that Sovereign's solution would be manifestly unjust, unfair and unreasonable. It would deny the dissenting shareholders their right to fair participation in the affairs of Sovereign.[10]

The Artifice of the inter conditional Resolutions

Sovereign's last stand was argued as follows:

  • If the resolutions approving the opposed fundamental transaction remain are not revoked, then the dissenters will receive an offer and will be entitled to be paid out the fair value for their shares; [11] but
  • If the repugnant transactions are revoked, the dissidents no longer have a basis to seek to exit.

The court identified the fundamental problem with Sovereign's over-simplification of the state of affairs - The resolutions proposed at the new general meeting are contrived so as to deprive the intervening parties of their rights immediately upon their restoration (our emphasis).

This could have been easily cured by allowing the Dissidents to attend the meeting, and upon the adoption of the revoking resolution, allowing them to and vote on the further resolutions. Sovereign ought to have proposed a self-standing revoking resolution, thereby allowing all the shareholders to vote on the second scheme.

The Effect of the Exclusion and the inter-conditionality of the Resolutions

On the facts, the court found that Sovereign wrongfully sought to lock in shareholders to a deal without affording them the opportunity to vote on it. The Dissidents stood to be denuded of not only their shareholder's rights but also their rights to exit the company on fair terms.[12]

The court held the dissidents had persuasively illustrated that the manner in which Sovereign contrived to disenfranchise the Dissidents fell afoul of the requisites of section 163 and was not only oppressive and unfairly prejudicial to the Dissidents, but in particular that it unfairly disregarded the interests of the applicants, the intervening parties and minority shareholders in general.

[1] In terms of section 164(9) and (10) of the Act.
[2] Section 252 of the Companies Act 61 of 1973
[3] See in this regard Graney Property Limited v Mana/a [2013] 3 All SA 111 (SCA) para 22; Count Gotthard SA Pilati v Witfontein Game Farm (Pty) Ltd [2013] 1 All SA 190 (GNP) at para 17.12; Peel v Hamon J&C Engineering (Pty) Ltd 2013 (2) SA 331 GSJ at paras 41 to 53; Omar v lnhouse Venue Technical Management (Pty) Ltd and Others 2015 (3) SA 146 (YVCC) at para 4.
[4] Peel v Hamon J&C Engineering (Pty) Ltd 2013 (2) SA 331 GSJ.
[5] Cassim, et al, Contemporary Company Law JUTA, Cape Town at 770 opines that it would seem that section 163 has been drafted to include 'interests' in order to underline or emphasise the principle that the oppression remedy is not limited to the strict infringement of legal rights, but that it extends also to the protection of the interests of the applicants.
[6] In terms of section 164(10) of the Act
[7] At paragraph 63.
[8] In terms of section 164(9)(a) of the Act.
[9] In terms of section 164(10) of the Act..
[10] Aspek Pipe Co (Pfy) Ltd v Mauerberger 1968 (1) SA 517 (C) at 527.
[11] As set out in section 164.
[12] At paragraph 28 and 69. 

Adam Pike
Author: Adam Pike
Adam Pike holds BA, LLB and LLM degrees from the University of Cape Town. His LLM, attained from the School of Advanced Legal Studies at the University of Cape Town, focused on commercial and corporate law, particularly corporate governance and securities. Adam specialises in the implementation of corporate actions and transactions.

Share This