BACKGROUND AND SUMMARY
The Supreme Court of Appeal (the “SCA”) recently upheld a decision of the High Court of South Africa, Gauteng Local Division, Johannesburg (the “court a quo”), concerning a decision adopted by written consent of the majority of directors in terms of section 74 of the Companies Act No. 71 of 2008 (the “Companies Act”).
The issue for determination was whether or not the aforementioned decision was valid.
In 2013, CDH Invest NV (the “Appellant”) and Amabubesi Investments (Pty) Ltd (the “Second Respondent”) caused Petrotank South Africa (Pty) Ltd (“the First Respondent”) to be incorporated. A memorandum of understanding (the “MOI”) between the parties provided that there would be 5 (five) directors, 3 (three) appointed by the Appellant and 2 (two) appointed by the Second Respondent.
As a result of an error by the person incorporating the First Respondent, the memorandum of incorporation (the “MOI”) of the First Respondent recorded that it had authorised shares of 1, 000 (one thousand) ordinary no par value shares rather than the 100, 000 (one hundred thousand). The Appellant and the Second Respondent were unaware of this error.
On or about 28 March 2014, one of the directors appointed by the Appellant advised his fellow directors that it had come to his attention that the First Respondent was in breach of the Companies Act, in that it had issued more shares than were authorised in terms of the MOI. Further, the director concerned attached a round robin resolution and called on the directors to vote to rectify the breach.
Following receipt thereof, a director appointed by the Second Respondent objected to the round robin resolution on the basis that it incorrectly increased the authorised share capital of the First Respondent to 1, 000, 000 (one million) shares instead of 100, 000 (one hundred thousand) shares as agreed in terms of the MOU.
Notwithstanding the aforegoing objection, on 31 March 2014, all of the directors appointed by the Appellant signed the round robin resolution made in terms of section 74 of the Companies Act. Subsequently, it became apparent that the directors appointed by the Second Respondent were unaware at this stage that the directors appointed by the Appellant had signed the impugned round robin resolution. Furthermore, the Appellant offered no explanation for its failure to have any regard to the objections raised by the director appointed by the Second Respondent.
The court a quo found that the round robin resolution was invalid because the directors who signed the resolution, being the directors appointed by the Appellant, violated their fiduciary duty requiring that the power to increase the authorised shares be exercised in good faith and in the best interests of the company and for a proper purpose.
The SCA held that the directors appointed by the Appellant knew on 28 March 2014 that the round robin resolution in terms of which the directors were called to vote was contrary to the proclaimed purpose and, furthermore, it was contrary to the MOU. The SCA concluded that section 36(2)(b) read with section 36(3)of the Companies Act holds a radical departure from the Companies Act No. 61 of 1973 (the “Old Act”). In terms of sections 75 and 221 of the Old Act, a company could only increase its share capital by means of a special resolution and the directors required the company’s prior approval at a general meeting before allotting or issuing shares, however, in terms of section 36(3) of the Companies Act, a company’s shares can be increased or decreased by the board of a company, save to the extent that the company’s memorandum of incorporation provides otherwise.
The SCA found that the actions of the directors appointed by the Appellant amounted to a misrepresentation of the real purpose behind the introduction of the resolution. By their actions and their continued refusal to provide a justification for the need to increase the authorised shares to 1, 000, 000 (one million), they committed a misrepresentation, which at the very least was designed to obscure the real purpose behind the resolution. Their conduct did not accord with the standard of good faith required of directors in terms of section 76(3) of the Companies Act and, as such, raised the question as to whether or not they exercised their powers as directors for a proper purpose.
The SCA resolved that it was surprising that the Appellant never sought to explain the reason why, in purportedly correcting the patent error in the MOI, the directors appointed by the Appellant resolved to pass a resolution to increase the authorised shares to 1, 000,000 (one million) rather than (one hundred thousand). The SCA found that the round robin resolution was invalid and, accordingly, dismissed the appeal.
Section 74 of the Companies Act enables a majority of the directors to pass a round robin resolution in order to avoid a formal meeting of directors provided that each director has received notice of the matter to be decided. The proviso is to ensure that directors know what is being decided. Our courts have emphasised the importance of giving notice to directors of a meeting so that the participants are aware not only of the existence of a meeting but the reason therefor and, as such, there is no difference between the importance of a notice where a board meeting is called in terms of section 73 of the Companies Act and a notice when the provisions of section 74 are invoked.
Written by Khotso Mmatli and Kerry Theunissen