Dr BJ de Klerk (“De Klerk“) and Mr MJ Ferreira (“Ferreira“) held equal membership interests in Plantsaam Bestuurdienste CC (“Plantsaam“) and equal shares in Benjo Eiendomme (Pty) Ltd (“Benjo”) (herein collectively referred to as the “Entities”). De Klerk and Ferreira were the only members and shareholders of the Entities.
Certain agricultural land was registered in the name of Benjo and utilised for farming activities by Plantsaam (the “Land”).
De Klerk worked as a medical practitioner in Canada and was often absent from South Africa, leaving the day-to-day farming operations to Ferreira. As a result of De Klerk’s absence, Ferreira exclusively managed the Entities.
The relationship between De Klerk and Ferreira broke down due to a number of reasons, the most prominent reasons being that Ferreira had misappropriated funds which were due and payable to the Entities as well as the fact that Ferreira was performing farming activities on the Land for his own benefit.
Upon learning of Ferreira’s conduct, De Klerk approached the High Court of South Africa (the “Court”) for an order compelling Ferreira to transfer his membership interests in Plantsaam to De Klerk, in terms of section 49 and section 36 of the Close Corporations Act No. 69 of 1984 (the “CC Act“), and to transfer his shares in Benjo to De Klerk, in terms of section 163 of the Companies Act No. 71 of 2008 (“the“Companies Act“), for an amount representing the value of such membership interests and shares.
Section 163(1) of the Companies Act reads as follows:
“A shareholder or a director of a company may apply to a court for relief if –
(a) any act or omission of the company, or a related person, has had a result that is oppressive or unfairly prejudicial to, or that unfairly disregards the interests of, the applicant;
(b) The business of the company, or a related person, is being or has been carried on or conducted in a manner that is oppressive or unfairly prejudicial to, or that unfairly disregards the interests, the applicant; or
(c) the powers of a director or prescribed officer of the company, or a person related to the company, are being or have been exercised in a manner that is oppressive or unfairly prejudicial to, or that unfairly disregards the interests of, the applicant.”
In terms of section 163(2) of the Companies Act, a court may make any interim or final order it deems to be fit, including an order directing an exchange of shares and an order to pay compensation to an aggrieved person, subject to any other law entitling that person to any particular compensation.
The Court was tasked with determining whether Benjo and Plantsaam were ‘related entities’ as contemplated in the Companies Act. In terms of this inquiry, in order for entities to be deemed to be ‘related entities’, they would need to have a common controller. A further inquiry into the concept of ‘control’ of a juristic person was also required, as both De Klerk and Ferreira held equal membership interests and shares in the Entities.
The Court considered section 2(2)(d) of the Companies Act, which defines ‘control’ as “the ability to materially influence the policy of an entity in a manner which is equivalent to a person who would be able to exercise control of such entity due to having a majority interest in same.”
While both De Klerk and Ferreira had equal de jure control of the Entities, the Court held that Ferreira had de facto control due to his day-to-day operations and management of the Entities and that he had the greater capacity to materially influence the policy of the Entities. Due to Ferreira’s de facto common control of the Entities, the Court held that Plantsaam and Benjo were ‘related entities’ in terms of section 163(1) of the Companies Act.
In addition to the above, the Court held that due to the fundamental breach of trust and confidence between De Klerk and Ferreira, it was no longer reasonably practicable for De Klerk to continue his business relationship with Ferreira in respect of Plantsaam.
Sections 49 and 36 of the CC Act contains similar provisions to the Companies Act which relate to close corporations and members interests. In respect hereof, the Court held that Ferreira would cease to be a member of Plantsaam in terms of section 36 of the CC Act and that De Klerk would acquire his membership interests in terms of either section 36(2)(a) or 49(2) of the CC Act.
The Court further held that as a result of Plantsaam and Benjo being related entities, that what would be considered as beneficial to the business of Plantsaam would also be beneficial to the business of Benjo, and therefore granted relief to De Klerk in terms of section 163 of the Companies Act .
|In circumstances where shareholders/members own entities in equal shares, the shareholder/member who exercises de facto control of the entities is deemed to have control as if he/she was a majority shareholder/member.
In terms of the above, section 163 of the Companies Act and section 36(2)(a) or 49(2) of the CC Act affords relief to shareholders and members in circumstances where there is a deadlock between the parties.
Written by Jonathan Green and Simone Jansen van Rensburg