Learning outcomes addressed
• Learning outcome 3: Critically appraise the legal and other issues arising in complex scenarios and apply the relevant law.
• Learning outcome 5: Demonstrate appropriate judgment and present advice on structural and legal issues.
QUESTION 1 1.1 Read the scenario below and answer the question
Maxwell Furniture Limited is a large company which operates several outlets in South Africa. It manufactures high quality furniture which it sells on the South African market and occasionally exports to other African countries. Thomas and
Charlie own 10% and 15% of the company’s shares respectively, while Billy and Veronica own 50% and 25% respectively. The Company’s memorandum of incorporation restricts the transferability of the shares.
Thomas and Charlie are not wholly convinced that they have been receiving a fair share of their investment’s value. They have noted that the expenses relating to directors are usually high. The company has been using an expensive car hire company to ferry the directors to their meetings and impromptu inspections of plants around the country. No one has accused the directors of fraud, but Thomas and Charlie believe that the directors and their families are indirectly benefiting from these arrangements.
Thomas and Charlie with smaller shouldings believe that if the company was better managed, the return on their investment might improve. The greatest difficulty, however, is that they do not command a majority of shares and cannot pass a resolution to force the directors to change anything.
They have retained you as their legal advisor.
Required
1.1.1 Explain in detail, the remedies available to Thomas and Charlie to protect their interests under the Companies Act, 71 of 2008 (“the
Companies Act” or “the Act”). (10)
1.1.2 Evaluate the alternative methods which Thomas and Charlie can take in order to enforce their rights in terms of the Companies Act. (7)
1.2 Read the scenario below and answer the question
Themba and Lerato live in Knysna. They are both minority shareholders of Maxwell Furniture Limited. They received notice of an annual general meeting of Maxwell Furniture Limited to be held in Pretoria. However, they cannot attend the meeting on that day, but feel strongly about certain of the proposed resolutions set out in the notice of the meeting, and want to express their views on these matters to the board of directors. Themba and Lerato also wish to vote against certain of the resolutions which the company has proposed passing.
Required
Determine what method Themba and Lerato could use under the Companies Act to exercise their rights to vote and to express their views at the annual
general meeting of Maxwell Furniture Limited. (8)
[25 marks]
QUESTION 2 Read the scenario and answer the questions
Eskom’s former head of legal and compliance and former group company secretary, Suzanne Daniels made another appearance at the Zondo Commission of Inquiry to provide further insight into the Gupta-linked Tegeta Exploration and Resources purchase of Optimum Coal Mine from mining giant Glencore. Glencore’s sale to Tegeta took place due to a highly questionable board decision to prepay Optimum Coal Mine R1.68-billion. This prepayment was not negotiated with Glencore, but rather with Tegeta.
Commission chairman, Deputy Chief Justice Raymond Zondo told Daniels he “still” found it hard to believe that the Eskom board – on which some highly qualified people sat – approved the prepayment without questioning that it was made out to the “proposed owner”, meaning Tegeta, rather than the owner at the time. While not saying so directly, Justice Zondo’s line of questioning intimated that he felt Daniels had been in dereliction of her duties as company secretary for failing to advise board members of this glaring issue.
“The resolution itself said the agreement must be concluded with the proposed owners and not the owners. If Eskom wanted to secure coal supply they should have concluded the agreement with the owners. Did you not appreciate this?” Justice Zondo asked. Daniels reiterated that she, as the company secretary, drafted the agreement on the instruction of Eskom’s then CFO Anoj Singh and former head of generation, Matshela Koko.
“The underlying issue here is that this resolution was to Help the proposed owners to acquire Optimum,” said Daniels.
Justice Zondo interrogated further, seeking clarity on why Daniels did not question that the R1.68-billion agreement was for pre-payment to Tegeta and not Glencore, to which Daniels admitted that she “did not interrogate these issues”. “I can’t understand how they [board members] could not have seen the resolution that they were being asked for; [it] was for three Eskom officials to conclude an agreement with the proposed owners and not Glencore. I have said to a few members of the board here and I find it difficult to understand that none of the board members saw this, including the chairperson Dr Ben Ngubane. He said [in his testimony] that as far as he was concerned they were concluding the agreement with Glencore”.
“Did you notice that you were drafting a submission that the board must pass a resolution to negotiate with the proposed owner?” Justice Zondo asked again.
“Yes,” replied Daniels.
Continued Justice Zondo: “Why did you not ask Koko that? Should you not have offered legal advice? It would have been your job to advise the board.”
Daniels said she was not the legal adviser. Justice Zondo maintained it was the company secretary’s responsibility, even if not asked for advice, to provide it to the executives and board, who might otherwise have been unaware of the legal issues.
“It is difficult for me to accept that. None of these officials were lawyers,” he said.
Daniels then agreed that she should have offered legal advice.
Adapted from: https://www.dailymaverick.co.za/article/2021-02-20-eskoms-formercompany-secretary-suzanne-daniels-draws-fire-for-failing-to-advise-on-tegetaprepayment/
Required
2.1 As the importance of effective corporate governance continues to be critical in today’s environment, there has been an increased focus on the role of the company secretary.
2.1.1 Discuss Daniels’ liability under the Companies Act where she is
regarded as a prescribed officer. (9)
2.1.2 Critically discuss the role that the company secretary plays in terms of the Companies Act and whether the role has been sufficiently enhanced to strengthen corporate governance in South Africa. (8)
2.2 Discuss the options available to Daniels under the Companies Act should the
court prove her to be incompetent. (8)
[25 marks]
QUESTION 3 Read the scenario and answer the questions
Bongani has been a non-executive director of Apex (Pty) Ltd (Apex) since 2012. He is also a director and sole shareholder of a management consultancy business, Infinity (Pty) Ltd (Infinity). Apex is undergoing a process of internal restructuring. Without knowing of Bongani’s involvement with Infinity , one of the other directors of Apex proposes to the board of directors of Apex that Infinity be approached for advice on the recruitment of key staff. The board of directors of Apex will be voting on this issue at a board meeting scheduled for the next week.
Required
3.1 Make recommendations to Bongani whether he must disclose his interest in this matter to the board of directors of Apex and if so, the procedure to be followed. In your answer, refer to the relevant sections of the Companies Act.
(15)
3.2 Explain the consequences of failure to comply with section 75 of the
Companies Act to Bongani. (10)
[25 marks]
QUESTION 4 Read the scenario and answer the questions
Lesego is a director of One Stop Groceries (Pty) Ltd. When the company needed to appoint a new marketing agent to advertise its products in Gauteng, One Stop Groceries appointed ‘The Best CC’ without conducting proper investigations about the company because they liked the name. Lesego is a minority shareholder of ‘The Best CC’. However, Lesego did not disclose the fact that she had a substantial member’s interest in The Best CC. The Best CC was appointed, but a few months later it became clear that One Stop Groceries had suffered substantial losses in Gauteng because its products were not being advertised effectively, since The Best CC had no experience in this type of work. A number of shareholders in One Stop Groceries now want to hold the company’s directors liable for breach of their duty to act in the best interests of the company and their duty of care, skill and diligence by appointing an inexperienced close corporation as their marketing agent.
Required
4.1 Evaluate Lesego’s liability under the Companies Act. (10)
4.2 Suppose Lesego is not a member of ‘The Best CC’, but she, together with other directors of One Stop Groceries, made the decision to appoint The Best CC based on the reviews of the company they found on its website.
Analyse whether Lesego and those directors can escape liability in terms of
the business judgement rule. (15)
[25 marks]
(Total: 100 marks)
END OF ASSIGNMENT
1.1.1 Remedies available to Thomas and Charlie to protect their interests under the Companies Act, 71 of 2008:
Thomas and Charlie, as minority shareholders, have several remedies available to them under the Companies Act to protect their interests, including the following:
1.1.1.1 Derivative action:
A derivative action is an action that a shareholder may bring on behalf of the company where the company’s directors have breached their duties to the company or where they have acted in a manner that is oppressive, unfairly prejudicial or discriminatory towards minority shareholders. Thomas and Charlie can bring a derivative action to enforce their rights against the directors, who they believe are benefiting indirectly from the company’s expenses, and to recover any losses suffered by the company as a result of the directors’ actions.
1.1.1.2 Oppression and unfairly prejudicial conduct:
Thomas and Charlie may apply to court under section 163 of the Companies Act if the company’s affairs are being conducted in an oppressive, unfairly prejudicial or discriminatory manner towards them as minority shareholders. The court may make any order it considers appropriate, including orders to regulate the company’s affairs in the future, order a buy-out of their shares, or order the company to be wound up.
1.1.1.3 Shareholders agreement:
The shareholders agreement between Thomas, Charlie, Billy, and Veronica may provide for specific rights, including veto rights or minority protection rights, which allow minority shareholders to protect their interests by requiring the company to obtain their consent before taking certain actions.
1.1.1.4 Action for breach of fiduciary duties:
Thomas and Charlie may bring an action against the directors for breach of their fiduciary duties. This may include, for example, breach of the duty of care and skill, breach of the duty of loyalty, or breach of the duty to act in good faith and in the best interests of the company.
1.1.1.5 Liquidation:
Thomas and Charlie may apply to court to have the company liquidated under section 81 of the Companies Act if they believe that it is just and equitable to do so. This may be a drastic remedy, but it may be appropriate if the company is insolvent or if its affairs are being conducted in a manner that is oppressive, unfairly prejudicial or discriminatory towards minority shareholders.
1.1.2 Alternative methods which Thomas and Charlie can take in order to enforce their rights in terms of the Companies Act:
Besides the remedies available under the Companies Act, Thomas and Charlie may also consider the following alternative methods to enforce their rights:
1.1.2.1 Negotiation and communication:
Thomas and Charlie may try to negotiate with the other shareholders and the directors to address their concerns and seek a resolution that benefits all parties.
1.1.2.2 Lobbying other shareholders:
Thomas and Charlie may attempt to persuade other shareholders to support their position and seek to increase their voting power by convincing other shareholders to vote with them on specific matters.
1.1.2.3 Taking legal action outside of the Companies Act:
Thomas and Charlie may consider taking legal action outside of the Companies Act, such as suing the directors personally for breach of contract or negligence, or seeking to enforce any contractual rights they may have against the company or the directors.
1.1.2.4 Selling their shares:
If Thomas and Charlie are unable to protect their interests, they may consider selling their shares and exiting the company. However, they should be aware that they may not receive fair value for their shares if the market knows that they are seeking to exit the company due to disputes or concerns.
1.2 Method Themba and Lerato could use under the Companies Act to exercise their rights to vote and to express their views at the annual general meeting of
