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IN THE HIGH COURT OF SOUTH AFRICA

(WITWATERSRAND LOCAL DIVISION)

CASE NO: 21525/06

In the matter between:

LETSENG DIAMONDS LIMITED Applicant

and

JCI LIMITED First Respondent

INVESTEC BANK LIMITED Second Respondent

JCI INVESTMENT FINANCE (PTY) LTD

(formerly Lexshell 658 Inv. (Pty) Limited) Third Respondent

J S E Fourth Respondent

GEM DIAMOND MINING COMPANY OF

AFRICA LIMITED Fifth Respondent

AND

CASE NO: 06/25734

In the matter between:

TRINITY ASSET MANAGEMENT (PTY) LIMITED First Applicant

TRINITY ENDOWMENT FUND (PTY) LIMITED Second Applicant

ELJAY INVESTMENTS LIMITED Third Applicant

and

INVESTIC BANK LIMITED First Respondent

JCI LIMITED Second Respondent

LEXSHELL 658 INVESTMENTS (PTY) LIMITED Third Respondent

J U D G M E N T

BLIEDEN, J:

[1] The two applications before court are brought by two separate and unconnected companies for similar relief principally against the same respondents. The applications arise out of the same set of circumstances and it was agreed by all the parties that it was convenient for the two applications to be heard together.

The parties

[2] The applicant in the first application is Letseng Diamonds Limited (Letseng). It is a shareholder in the company JCI Limited (JCI). This company is the first respondent in the Letseng application.

[3] The applicants in the second application are Trinity Asset Management (Pty) Limited, Trinity Endowment Fund (Pty) Limited and Eljay Investments Incorporated. These three companies are all part of the same group. For the purposes of this judgment they will be collectively described as “Trinity”. They together are shareholders in JCI. The latter company is the second respondent in the Trinity application.

[4] Investec Bank Limited (Investec) is the second respondent in the Letseng application and the first respondent in the Trinity application.

[5] JCI Investment Finance (Pty) Limited, formerly Lexshell 658 Investments (Pty) Limited is the third respondent in both applications. It is a special purpose vehicle formed by JCI to house certain of the securities which were furnished to Investec. In the papers before this Court it is referred to as the Special Purpose Vehicle (SPV) and will be referred to as such in this judgment.

[6] In addition to these three respondents Letseng has joined the Johannesburg Stock Exchange (JSE) as a fourth respondent and Gem Diamond Company of Africa Limited as a fifth respondent. Neither of these respondents plays any material part in the two applications and neither of them were represented at the hearing. No relief was claimed by or against either of them.

The background facts

[7]

7.1 JCI had been listed as a public company on the J SE. On 19 August 2005 the JSE suspended trade in its shares because of its failure to produce audited financial statements for the year ending 31 March 2005. At present trade in its shares on the JSE is still suspended.

7.2 For some months prior to the suspension of its shares the Board of Directors of JCI had been trying to obtain loan finance in order to stave off a situation where that company would not be able to pay its debts, which included amongst others the redemption of debentures in the sum of R22 million in December 2005 and R370 million in January 2006. Failure to redeem these debentures would have had the inevitable consequence of JCI being wound up.

3. For the period September 1997 to August 2005 JCI’s Board had been controlled by Roger Kebble and his son Brett Kebble. The latter had been the Managing Director and controlling mind of JCI during 2005. During the period the Kebbles had controlled JCI that company had acquired a negative reputation and had lost all credibility in the market-place. It was also facing litigation from a number of parties, and a writ of execution in which more than R60 million was being claimed against it had been issued and served on the company.

3. For some months prior to August 2005 the Board of Directors of JCI had approached financial institutions both oversees and in South Africa for loan finance, but to no avail. No one was prepared to do business with it until Investec in July 2005 showed some interest in coming to its assistance.

3. On 23 August 2005, according to JCI and Investec, an agreement was reached between the Board of JCI and Investec in terms of which Investec would lend JCI R540 million with immediate effect. This loan was subject to a number of conditions, the following being relevant in the present proceedings:

7.5.1 JCI in addition to paying an agreed rate of interest for the money lent and advanced would also pay a “raising fee” of R50 million or 30% of the aggregate increase in the value of the assets which JCI furnished as security for its indebtedness (whichever was the greater on the agreed due date of repayment). This security included certain fixed properties as well as various rights and interests in a number of other companies.

7.5.2 The existing Board of JCI would resign with immediate effect and would be replaced by a board nominated by Investec. Peter Gray was chosen by Investec to become JCI’s new Chief Executive and would act in that capacity on behalf of the former Board of JCI until the new board was put in place.

3. On 30 August 2005 the Investec Loan Agreement (ILA) was entered into by Peter Gray acting on behalf of JCI and the monies were duly paid over as agreed.

3. During the period 23 August 2005 to 12 September 2005 JCI was inquorate, its new board only taking control on the latter date.

3. Subsequent to 30 August 2005 a number of further agreements were entered into by JCI, Investec and the SPV relating to additional amounts loaned and additional further security being furnished by JCI. In all a total in excess of R1 billion was lent and advanced by Investec to JCI.

3. The JSE classified the ILA and the other agreements referred to as “affected agreements”. The consequence of this is that it required prior proof of shareholder approval to these contracts prior to reinstating JCI’s listing on the exchange. Because of the urgency of the matter the JSE agreed that the required approval could be given after the contracts had been concluded, by the shareholders ratifying the affected contracts.

3. The affairs of JCI prospered to the extent that as at September 2006 it had completely paid off its loan liability plus interest to Investec and it was calculated that the “raising fee” which by then had not yet become due, and at the time of the present application is still not due, is substantially in excess of R400 million. JCI wished to pay this amount to Investec in terms of the ILA.

3. On 28 September 2006 Letseng brought an urgent application to interdict a general meeting of JCI’s shareholders from considering two ordinary resolutions in which shareholders were asked to ratify the abovementioned agreements between JCI and Investec. This requirement was as a consequence of the JSE directive referred to above. The basis of that application was that the circular notifying shareholders of the two resolutions was claimed to be inadequate and to misrepresent the position. In addition an interdict was sought preventing JCI from making payment of the “raising fee” to Investec. By agreement between Letseng, JCI and Investec, and as an interim measure the two ordinary resolutions were not put to the shareholders at the meeting. It was further agreed that the raising fee would not be paid to Investec pending the finalisation of the application. A consent order to this effect was made an order of court.

7.12 Since the granting of the order referred to above the parties to that application have filed a number of affidavits and Letseng amended its Notice of Motion on 21 November 2006. It now claimed an interdict to prevent an amended resolution being presented to a members’ meeting scheduled on 30 November 2006. In addition, it now for the first time claimed a declaration that eight specified agreements between JCI, Investec and the SPV, which include the ILA, be declared to be void and of no force and effect. This relief was amended at the hearing of the present application to add the words “alternatively voidable” after the word “void” in paragraph 2 of the Notice of Motion. Alternative to the declaratory relief claimed, an interdict against JCI and the SPV to make any payments “pursuant to or arising from the impugned agreements” is claimed. The main application before court is in terms of this amended Notice of Motion. JCI and the SPV have agreed that no further steps will be taken to put the amended or any other resolutions to the meeting until the main application is decided. As the previous interdict to pay the raising fee is still in operation, the only aspect in the Letseng application presently before the court is the declaratory relief claimed by Letseng in its amended application.

7.13 Trinity brought its application as a matter of urgency on 21 November 2006. It claimed a declaration that the ILA is “void for vagueness and/or the impossibility of performance”. In the alternative a declarator is claimed that the conditions of the present ILA (as set out in clause 3 thereof) have not been met. An order is further applied for restoring the position vis-à-vis JCI, Investec and the SPV as if the ILA had not been concluded and an interdict is claimed against Investec from “in any way implementing or benefiting from the ILA”.

7.14 In short, the present proceedings are concerned with the right of two shareholders of JCI, being Letseng and Trinity, to have a suite of agreements, including the ILA, to which neither of them is party, declared invalid one and half years after their implementation, apart from the payment of the raising fee. The parties to the agreements, JCI and Investec, have at all times regarded all the agreements to be binding on them.

The locus standi point

[8] On 19 April 2007 Trinity served a notice on all the parties applying for a ruling that it be determined as a separate issue, prior to any of the other issues being traversed, “whether the applicants (Trinity) has the locus standi to raise the alleged voidness” of the ILA as claimed by it. Prior to the hearing of the present application counsel for Trinity announced that if it is found that it has no locus standi to claim the declaratory relief applied for by it, it has no case against the respondents and its application then falls to be dismissed.

[9] On 20 April 2007 i.e. a day later, Investec gave notice that it would apply for an order in both applications:

“1 That the question whether Letseng has locus standi to raise the following issues be separated from and heard in advance of any other issue in the Letseng application:

1.1 That the JCI directors at all relevant times constituted a ‘rogue board’ or a ‘supine board’, which, to the knowledge of Investec was not capable of performing and did not perform its fiduciary duties; hence the ILA and Disposal Agreement are void;

1.2 That the resolution of the JCI board which was quorate on 23 August 2005 is invalid and in any event did not in its terms authorise the signatories of the ILA and Disposal Agreement to sign such agreements on behalf of JCI;

1.3 That the resolution of the JCI board which was quorate on 23 February 2006 is invalid;

1.4 That the ILA lapsed due to non-fulfilment of suspensive conditions in the ILA and the Disposal Agreement;

1.5 That the implementation of the ILA would breach the provisions of the Competition Act, 1988.

2 That the question whether Trinity has locus standi to raise the issue set out in 1.4 above be separated from and heard in advance of any other issue in the Trinity application. ”

[10] Letseng opposed the Investec application for a separation of the issues. On its behalf it was submitted that such a separation would not save any time as the issue was inextricably linked to the other grounds relied upon by it for the relief claimed.

[11] These other grounds are:

1. That the ILA and certain of the securitization agreements between JCI, Investec and the SPV were concluded at a time when JCI was inquorate (between 23 August and 12 September 2005) and are therefore unauthorised and void alternatively voidable.

2. The Disposal Agreement comprising a disposal of the JCI “sale interests” to the SPV required a shareholders’ resolution under sections 228(1)(a) and (b) of the Companies Act of 1973 and in the absence of such a resolution the Disposal Agreement and with it the interdependent ILA were void.

On behalf of Investec counsel conceded that Letseng, as a shareholder, had and does have locus standi to apply for interdictory relief on these two grounds, but it was submitted that these two grounds, which were opposed, only constitute a small part of the case between the parties and would not require a lengthy hearing for their determination, which is not the case in regard to the other relief claimed, if it is held that Letseng does have locus standi in regard to the issues referred to in the Investec application for a separation of issues.

[12] After hearing counsel and having read the almost 2 800 pages constituting the affidavits in the two applications it seemed to me that if it was found that neither of the applicants have locus standi on the issues as set out in the Investec separation application, this would determine the majority of the issues between Letseng and the respondents, while it would be dispositive of the Trinity application, as already mentioned. In the exercise of my discretion I ordered that the issue of locus standi be separated from the other issues. The application proceeded on this basis and this judgment concerns only the issue of locus standi as defined in paragraph [9] above.

[13] The point of locus standi, taken as it is in the present application as a separated issue, like an exception, must be dealt with on the assumption that all allegations of fact relied upon by the party whose locus standi is attacked, in this case Letseng and Trinity, are true. See Kuter v S A Pharmacy Board 1953 (2) SA 307 (T) at 313.

JCI’s stance in these proceedings

[14] JCI is represented by both senior and junior counsel. Its attitude as stated in the heads of argument filed on its behalf, and repeated by counsel in court, is that it abides the order of this Court. It takes no sides, although it considers itself bound by the various agreements entered into by it with Investec, including the ILA. It is prepared to pay the raising fee found to be due on demand. It opposes the interdict to make payment to Investec as any delay in making such payment, should Investec ultimately succeed in the main application, would be that it would have to pay an estimated extra R25 million per annum in punitive interest. On the other hand any payment made to Investec now, should it not succeed in this application, would entitle JCI to the immediate repayment of all money paid plus mora interest. The ability of Investec to make such payment is not in issue.

The relevant general legal principles applicable to the position of shareholders in companies

[15] Before dealing with the various contentions of the applicants in the two applications it is necessary to deal with the law relating to the governance of companies and the position of shareholders in such companies as defined by the Companies Act, No. 61 of 1973 (the Companies Act).

[16] In the present application these can be summarised as follows:

16.1 The Board of Directors and the general meeting of shareholders are both organs of a company, each having its own original powers. The Directors do not receive their powers as agents of the company, so that in the absence of a contrary provision in the memorandum of association or articles, even a unanimous general meeting may not supersede the Directors’ power. (The general meeting may ultimately be able to remove or not re-elect Directors, or alter the articles, but these are other matters.) It is possible for a Board of Directors and the general meeting to have concurrent powers. The courts are disinclined to treat managerial and executive powers as concurrent and, unless the articles otherwise provide, they are exercisable exclusively by the Directors. (In the present case they do not “otherwise provide”.) Cilliers & Benade Corporate Law (3^rd edition) (unreported judgment in the Supreme Court of Appeal in LSA UK Ltd (formerly Curtainz Ltd) and Two Others v Impala Platinum Holdings Ltd and Four Others, case number 222/98. Judgment delivered on 28 March 2000.)

16.2 The classic description of the relationship between the bodies constituting a company is that of Greer LJ stated in John Shaw and Sons (Silford) Ltd v Shaw [1935] 2 KB 113 (CA) at 134:

“A company is an entity distinct alike from its shareholders and its directors. Some of its powers may, according to its articles, be exercised by directors, certain other powers may be reserved for the shareholders in general meetings. If powers of management are vested in the directors they and they alone can exercise these powers. The only way in which the general body of shareholders can control the exercise of the powers vested by the articles in the directors is by altering their articles, or, if opportunity arises under the articles, by refusing to re-elect the directors of whose actions they disapprove. They cannot themselves usurp the powers which by the articles are vested in the directors any more than the directors can usurp the powers vested by the articles in the general body of shareholders.”

[17] A share in a company consists of a bundle or conglomerate of personal rights entitling the holder thereof to a certain interest in the company, its assets and dividends; per Corbett JA in Standard Bank of South Africa Ltd v Ocean Commodities Inc 1983 (1) SA 276 (A) at 288H. The personal rights referred to in this passage are those fixed in the company’s articles of association and in the normal course of events afford the shareholder, qua-shareholder, the right to dividends when declared, the return of capital on the winding-up of the company (or authorised reduction of capital); and the right to attend and vote at meetings of shareholders. These rights are limited save where Statute decrees otherwise, for example as provided in section 228(a) and (b) of the Companies Act, or where the company acts ultra vires its articles.

The rule in Foss v Harbottle

[18] It is a principle of law that A cannot, as a general rule, bring an action against B to recover damages or secure other relief on behalf of C. C is the proper plaintiff because C is the party injured and therefore the person in whom the cause of action is vested.

[19] To put it another way a third party cannot interfere in the terms and conditions contained in an agreement between two other parties. It is between them and them alone, and the terms of the agreement only operate between them and no one else. Hillock v Hilsage Investments (Pty) Ltd 1975 (1) SA 508 (A) at 515A-C; Absa Bank Bpk v CL von Abo Farms BK 1999 (3) SA 262 (O) at 274E-G. In the world of company law, the above principle is sometimes described as the rule in Foss v Harbottle [1843] 2 HRE 461[1843] EngR 478; , 67 ER 189 when referring to the relationship between shareholders and a company. This rule preventing strangers from interfering in contracts is fundamental to any rational system of jurisprudence.

[20] From what has already been said, save for the specified and limited exceptions mentioned above, a shareholder is a stranger to the company in its dealings with third parties.

[21] The consequence of the rule, is that an individual shareholder cannot bring an action to complain of an irregularity (as distinct from illegality) in the conduct of the company’s internal affairs provided that the irregularity is one which can be cured by a vote of the company in general meeting.

[22] The position has been succinctly summarised by Cumming Bruce, Templeman and Brightman LJJ in Prudential Assurance Co Ltd v Newman Industries Ltd and Others (No. 2) [1982] 1 All ER 354 at 357j to 358b as follows:

“The classic definition of the rule in Foss v Harbottle is stated in the judgment of Jenkins LJ in Edwards v Halliwell [1950] 2 All ER 1064 at 1066-1067 as follows. (1) The proper plaintiff in an action in respect of a wrong alleged to be done to a corporation is, prima facie, the corporation. (2) Where the alleged wrong is a transaction which might be made binding on the corporation and on all its members by a simple majority of the members, no individual member of the corporation is allowed to maintain an action in respect of that matter because, if the majority confirms the transaction, cadit quaestio; or, if the majority challenges the transaction, there is no valid reason why the company should not sue. (3) There is no room for the operation of the rule if the alleged wrong is ultra vires the corporation, because the majority of members cannot confirm the transaction. (4) There is also no room for the operation of the rule if the transaction complained of could be validly done or sanctioned only by a special resolution or the like, because a simple majority cannot confirm a transaction which requires the concurrence of a greater majority. (5) There is an exception to the rule where what has been done amounts to fraud and the wrongdoers are themselves in control of the company. In this case the rule is relaxed in favour of the aggrieved minority, who are allowed to bring a minority shareholders’ action on behalf of themselves and all others. The reason for this is that, if they were denied that right, their grievance could never reach the court because the wrongdoers themselves, being in control, would not allow the company to sue.”

This latter type of action referred to in the above quotation is commonly termed a derivative action.

The law relating to declaratory orders

[23] Section 19(1)(a)(iii) of the Supreme Court Act No. 59 of 1959, gives this Court, in its discretion, and at the instance of any interested person, the power to enquire into and to declare any existing, future or contingent right or obligation, notwithstanding that such person cannot claim any relief consequential upon that determination.

[24] The Supreme Court of Appeal in Cordiant Trading CC v Daimler-Chrysler Financial Services 2005 (6) SA at 212H confirmed the correctness of the approach adopted by Watermeyer JA in commenting on a similar section in previous legislation in Durban City Council v Association of Building Societies 1942 AD 27 at 32, where the learned Judge said:

“The question whether or not an order should be made under this section has to be examined in two stages. First the court must be satisfied that the applicant is a person interested in an ‘existing, future or contingent right or obligation’, and then if satisfied on that point, the court must decide whether the case is a proper one for the exercise of the discretion conferred on it.”

[25] The first question to be determined therefore is who is a person interested in an “existing, future or contingent right or obligation”. This party must have a direct right concerning the subject-matter of the litigation “not merely a financial interest which is only an indirect interest in such litigation” per Horwitz AJP in Henri Viljoen (Pty) Ltd v Awerbach Brothers 1953 (2) SA 151 (O) at 169H. A good example of what is meant by an “indirect interest” which does not give a litigant the right to apply for this relief is provided in the judgment of Corbett J (as he then was) in United Watch & Diamond Co (Pty) Ltd and Others v Disa Hotels Ltd and Another 1972 (4) SA 409 (C) at 417A-C, where the learned judge speaking of the rights of a subtenant stated:

“The interest of a sub-tenant in regard to actions for ejectment against the tenant at the suit of the landlord (owner) has been discussed in several cases and the generally accepted view is that the sub-tenant has no legal interest in the contract between the landlord and the tenant -

'... although he may have a very substantial financial or commercial interest therein which may be prejudicially affected by the judgment'.

(See Henri Viljoen (Pty.) Ltd. v Awerbuch Brothers, supra at p. 167). This, with respect, would seem to be the correct approach. The subtenants' right to, or interest in, the continued occupancy of the premises sub-leased is inherently a derivative one depending vitally upon the validity and continued existence of the right of the tenant to such occupation. The sub-tenant, in effect, hires a defeasible interest. (See Ntai and Others v Vereeniging Town Council and Another, 1953 (4) SA 579 (AD) at p. 591). He can consequently have no direct legal interest in proceedings in which the tenant's continued right of occupation is in issue, however much the termination of that right may affect him commercially and financially. ”

[26] Dealing with the second stage, if the court is satisfied that the applicant is an “interested party”, it is settled law that a court will not make a declaratory order unless there are interested parties on whom the declaration would be binding. Ex Parte Nell 1963 (1) SA 754 (A) at 760B where the point is made that it is not the function of a court to give advice.

[27] By “binding” in the context referred to in Ex Parte Nell (supra) is not meant the effect of stare decisis, but “binding” in the sense of res judicata. In Ex Parte Ginsberg 1936 TPD 155 at 158 Greenberg J (as he then was) delivering the judgment of the full court, with reference to the then statutory provisions relating to declaratory orders, which for present purposes are the same as in the instant case, said:

“The jurisdiction of the Court to act under the section is limited to cases where it is asked, and has the power, to give a decision which is binding on the persons concerned, i.e. as binding as if the dispute had been one in which the right was an existing right which authorised the granting of relief at the time of the institution of proceedings. This presupposes that the person approaching the Court has some right and that the persons who are subject to the reciprocal obligation are given an opportunity of being heard. It was contended on behalf of applicant that the Court was entitled to function under the section even though the only binding force of its decision rested on the doctrine of stare decisis. The difference between this doctrine and that of res judicata is clear – see Rex v. Manasewitz (1933, A.D. at p. 180) – and in my opinion it is the latter doctrine which is applicable to the section. ”

[28] It is plain therefore that unless the effect of the declaratory order is one that binds some parties it is not open to any litigant to bring an application praying for declaratory relief merely to be advised of his legal position. Ex Parte Prokureur-Generaal, Transvaal 1978 (4) SA 15 (T) a decision of the full bench of the Transvaal Provincial Division.

Applying the law to the applicants’ contentions

[29] Mr Kuper on behalf of Letseng analysed in detail the various transactions between Investec, JCI and the SPV which are relevant to the present application. I do not propose to deal with all the arguments put up by him, however the gravaman of his contentions are as follows:

1. When a company intends to dispose of an asset without the justification of a binding contract this is a matter which a shareholder, qua-shareholder, can raise by resorting to court proceedings.

2. The ILA and the other contracts arising from it, are not binding because it and some of them were concluded by a “rogue” board representing JCI contrary to its interests, and Investec who at all times was aware that the agreement was one to protect the rogue board members and not for the benefit of JCI. This position persisted as the new board was nothing but an instrument of Investec, having been appointed at its instance and that board exercised no independent discretion in making the decisions that it did.

3. The ILA lapsed due to a non-fulfilment of certain suspensive conditions in it and the disposal agreement, which conditions could not be waived, even by Investec for whose benefit they were inserted and who could not waive them – clause 3.3 of the ILA – otherwise than in writing. Nor was Mr Gray authorised to enter into a new agreement on the same terms as the ILA, except for the suspensive conditions. Nor was any such waiver or new agreement validly ratified.

4. The disposal agreement comprising a disposal of the JCI “sale interests” requires a shareholders resolution under both sections 228(1)(a) and (b) of the Companies Act, and, in the absence of such a resolution, the disposal agreement, and with it the interdependent ILA are void.

5. The implementation of the ILA would breach the provisions of the Competition Act, 1988.

6. In the present case the loan transaction between JCI and the SPV and Investec, insofar as the furnishing of security by JCI was concerned, was classified as an “affected transaction” by the JSE which in terms of its rules required the consent of JCI shareholders in advance. It is correct that the JSE agreed to allow this consent to be given after the event by ratification of the majority of the shareholders, but this does not detract from the fact that individual shareholders such as Letseng are deprived of a voice in questioning the transaction meaningfully unless the declaratory relief applied for is granted.

7. Before considering whether it wishes to ratify the transactions between the effected parties, a shareholder such as Letseng is entitled to know by way of a declaratory order whether the contracts it is asked to ratify are legally enforceable or not, or whether they are capable of ratification or not. Without such order the shareholders will not understand what they are voting for, and the general meeting will not be doing its job.

[30] On behalf of Trinity, Mr Hoffmann, adopted the submissions made on behalf of Letseng, but he concentrated his argument on what he called the major deficiencies in the ILA and the various agreements relating to it.

[31] In response to these arguments, Mr Cilliers, on behalf of Investec stated that it does not challenge Letseng’s locus standi to challenge the agreements in regard to the absence of a section 228 resolution, just as it does not challenge Letseng’s locus standi to rely on any argument based on the allegation that various agreements were entered into when JCI was inquorate. However, as regards the other contentions relating to the locus standi of Letseng and Trinity for the relief claimed by them, he submitted that there was no basis therefor.

[32] Mr Cilliers’ argument is to the following effect. Unless otherwise provided in the Companies Act, the rights vesting in the directors on the one hand, and those vesting in the shareholders, on the other hand, are demarcated by the articles of the company. In the present case article 6(b) of JCI’s articles vests the management and control of the business of the company in the directors. The shareholders, and a fortiori a single shareholder, cannot usurp the powers of the directors. Thus, in the absence of the articles vesting such power in the shareholder (or, in casu, in a single shareholder), the shareholder cannot usurp the powers of the directors to enter into agreements, such as the ILA or the disposal agreement, nor can a shareholder and in particular a single shareholder, challenge the validity, or subsistence, or the powers of the directors to perform, a contract entered into by them. To permit such a challenge by a member would be to destroy the fundamental rule of company law that the company is an entity separate from its members, and that a member has no right to manage the company’s business. Blackman, Commentary on the Companies Act, Vol 1, paragraphs 4-114-115 and the cases quoted by the learned authors.

[33] With special reference to the actions of the alleged “rogue” and “supine” boards of directors of JCI, Letseng’s contention that it has locus standi to intervene because “it is the shareholders who are injured and who have a right of recourse” is incorrect. The true position is that where directors contract on behalf of a company and do so in breach of their fiduciary duties, as is claimed in the present case, and the other contracting party was aware that the directors were acting in breach of their fiduciary duties, the legal consequence is that the company, and only the company, at its election, may avoid the contracts because the directors owe their fiduciary duties to the company and not to individual shareholders. LAWSA, First Re-Issue Vol 4 Part 2 paragraph 126 and the cases there quoted; Blackman, Commentary on the Companies Act, Vol 2 paragraph 8-104-8-106.

[34] A shareholder cannot usurp the functions of directors and exercise that election on behalf of the company. So much is obvious if one asks the question: What happens if different shareholders purport to exercise conflicting elections on behalf of the company? And what happens if the shareholders in general meeting by majority, vote to ratify the acts of the directors?

[35 ] In my view this is a complete answer to the “rogue” or “supine” Board argument, insofar as the applicants’ claim to have locus standi to attack the transactions concluded by these Boards. It is JCI as a company, not individual shareholders, such as Letseng and Trinity, who are entitled to take issue with these alleged fiduciary indiscretions.

[36] With regard to the reliance on the ratification requirements of the JSE, again it is not ratification by individual shareholders which is in issue. It is ratification by the general meeting of shareholders. Shareholders, for the reasons already referred to, have no right as shareholders, individually, (they disavow any intention to embark on derivative proceedings) to attack these transactions. If the general body of shareholders has no confidence in the Board it is open to it to elect a new Board who could then act as it chooses, but shareholders, qua shareholders, have no rights in this regard. The ILA and the other agreements attacked on behalf of Letseng, can only effectively be attacked by JCI, the company.

[37] The same principle applies to the alleged breach of the Competition Act on which Letseng relies. It was submitted in Letseng’s heads of argument that its approach was based on principles of “public interest”. In my view this does not afford Letseng any locus standi as an individual shareholder to obtain relief.

[38] Insofar as Letseng’s or Trinity’s claim to have a “financial interest” as a justification for the declaratory relief claimed by them, I refer to paragraph [25] above as to the distinction between a legal and financial interest. It seems to me that Letseng and Trinity have only financial interests. They are in the same position as the sub-tenant referred to in that paragraph.

[39] Put differently, in my view an insuperable impediment to Letseng and Trinity having locus standi to apply for the declaratory orders for which they pray, is that they have no interests in an “existing future or contingent right or obligation” in the issues concerned. It is only JCI and Investec which have such an interest. They have chosen to be bound by the agreements concerned. It is not for a court to decide whether an agreement is binding on parties unless the affected parties require such a decision to be made.

[ 40] As was stated in Gotze v Estate Van der Westhuizen 1935 AD 300 (at 304) it is an elementary principle of law that notwithstanding that the words used in a contract may have a plain meaning, the parties to a contract can always say, as long as the matter is res integra, that they both understand a particular word or phrase to have had to them a meaning different from the true and ordinary meaning of the word or phrase. This approach is re-enforced by the Appellate Division in Louw v W.P. Kooperatief Bpk en Andere [1994] ZASCA 54; 1994 (3) SA 434 (A) at 445, where Smalberger JA having noted that the parties were ad idem as to the interpretation to be placed on the document in question, cited with approval the following statement in Breedt v Van den Berg and Others 1932 AD 283 at 292:

“If one of two parties to a contract asserts that it has a certain meaning and he and the other agrees that is the meaning to be given to it, a court of law will give effect to that meaning. If this mutually accepted meaning is in conflict with the clear construction of the contract, we have all the requisites for rectification of the documents. ”

[41] The reference to rectification is important. If a dispute had arisen between JCI and Investec regarding the validity or otherwise of the documents because of certain irregularities in them, such as suspensive conditions being impossible of performance at the time of the signing of the document concerned, plainly either of the parties would have been able to have such document rectified in order to have it accord with their common intention. In the present case there is no such difficulty as both JCI and Investec have expressed their wish to be bound by the documents concerned, even though various clauses in such documents and agreements are prima facie incapable of performance, and the resulting contracts can be said to be voidable at the instance of any of the contracting parties.

[42] As is plain from the legal principles relating to declaratory orders to which reference is made above, a court is not entitled to give advice unless such advice is binding on some party. In the present case whether the agreements are binding or not, is not the question, it is whether the applicants, Letseng and Trinity, as individual shareholders of JCI, are entitled to have them set aside in the face of the two affected parties, JCI and Investec, adopting the stance that such contracts are binding. In my view they have no locus standi to do this.

[43] The shareholders, such as Letseng and Trinity, have full knowledge of all the facts, so much is plain from the affidavits filed on their behalf. Whatever order they wish the court to make cannot affect the agreement between Investec and JCI. It is only the decision of the general meeting which can have influence on the ratification or otherwise of the agreements concerned. There is nothing to stop either of the applicants informing the shareholders of JCI of their views before the general meeting and canvassing the individual shareholders at the meeting to refuse to ratify the actions of the Board in regard to the agreements concerned.

[44] It was submitted on behalf of Letseng that the requirements of ratification by the JSE and now subject to statute being the Security Services Act, NO. 36 of 2004, make the failure to have the prior agreement of the shareholders at a general meeting, as occurred in this case, illegal.

[45] This submission cannot be sustained as it is the general meeting of the shareholders who must decide to ratify or not to ratify the transactions concerned. The question whether the contracts are binding or not does not affect the issue that at present JCI and Investec agree that inter se these contracts are binding. JCI is presently attempting to get the general meeting of shareholders, not individual shareholders, to ratify the agreements they regard as binding between that company and Investec. This is a business decision. If a general meeting of shareholders refuses to ratify the agreements, there may be other developments.

[46] It is open to the general meeting of shareholders to refuse to ratify the agreements even if they are enforceable and intra vires the company’s articles. By the same token if the general meeting of shareholders chooses to ratify agreements that are voidable or not enforceable, then inter partes these agreements are binding on JCI. It is only where there is a statutory prohibition of this occurring without the consent of the general meeting of shareholders, as occurs in terms of section 228 of the Companies Act, that a failure to have the transaction ratified makes the transaction invalid. The same principle would apply if the transaction is beyond the powers of the company in terms of its articles or is per se illegal, in the sense that it is a criminal act which has the consequence of making such transactions unenforceable, for example a contract to defraud third parties.

[47] It is significant that in the Security Services Act there is no provision to declare contracts invalid. The remedies for non-compliance with the provisions of the Act affects the parties who have not complied with it, but have nothing to do with the transaction itself. Shareholders as such could by no stretch of the imagination be such parties.

[48] What the applicants in essence are asking this Court to do, is to advise them as to the validity of certain agreements, when the parties to such agreements have no difficulty inter se in understanding and accepting what they agreed to, even if the agreements themselves were in some way or other not perfect. In my view the applicants have no locus standi to apply for such an order. I agree with Mr Cilliers’ submission that it is open to JCI to come to the conclusion that despite any right to avoid the agreement concerned, because it wishes to continue doing business with Investec, and does not wish to embark on any expensive litigation, it will continue to be bound by the agreements concerned even if they are not enforceable in law.

[49] To sum up therefore, minority shareholders such as the present applicants, save for certain exceptional instances which have already been discussed, have no locus standi to interfere in the contractual arrangements arrived at by the Board of JCI and Investec. The rules relating to the way companies are to be run as set out above were designed to ensure that business could be done by these entities in a proper and controlled manner. If this were not the case and each shareholder had the right to take it upon himself to act in a way which he bona fide thought was in the best interests of the company, there would be chaos.

[50 ] In support of Letseng’s contentions, Mr Kuper submitted that the decisions of the English Court of Chancery in Parke v Daily News (No. 2) [1962] Ch. 927 and In re Lee Behrens Ltd [1932] 2 Ch. 46 are strong authority for the view that Letseng as a shareholder has locus standi to claim the relief that it does. Two South African cases were also referred to as further authority for the relief claimed by Letseng these are McLelland v Hulett 1992 (1) SA 456 (D&CLD) and Kalinko v Nisbett and Others 2002 (5) SA 760 (W).

[51 ] The facts in Parke v Daily News (supra) are that a company which had sold its business, through its Board of Directors, had resolved to pay £1 million to its former workers and the widows of such former workers. A shareholder brought an application to prevent this happening on the ground that such a payment went beyond the articles of association of the company, and such payment to ex-employees was not reasonably incidental to the carrying on of the business of the company. The court upheld the shareholders’ case, its ratio being that the making of an ex gratia payment as the company intended to do, and in the circumstances where that company no longer operated, was not reasonably incidental to the conduct of its business and was therefore ultra vires the company’s memorandum and articles. In such circumstances, so it was held, a shareholder has the right to bring the action which the plaintiff in Parke’s case did.

[52 ] In Lee Behrens’ and Company Ltd (supra) the court was concerned with the illegality of a deed of covenant entered into by a company at a time when it was a going concern, in which it granted a pension of £500 per annum to the widow of a former managing director. Referring to the legal position in that case, Eve J, at page 51 stated:

“But whether they be made ‘under an express or implied power’, all such grants involve an expenditure of the company’s money, and that money can only be spent for purposes reasonably incidental to the carrying on of the company’s business, and the validity of such grants is to be tested, as is shown in all the authorities, by the answers to three pertinent questions:

1. Is the transaction reasonably incidental to the carrying on of the company’s business?

2. Is it a bona fide transaction?

3. Is it done for the benefit and to promote the prosperity of the company?”

[53 ] The learned Judge in that case held that the liquidator’s claim to recover payments made in terms of that covenant was good as the payment made to the widow was purely gratuitous and had nothing to do with benefiting the company and was therefore ultra vires that company.

[54 ] In McLelland v Hulett and Others (supra) the plaintiff sued two directors of a company, in liquidation, in which he had been both a director and a shareholder for damages which he claimed he had suffered because of their negligent conduct in the running of the company’s affairs. Booysen J held that he was entitled to do so. At 467G-I the learned Judge said:

“Whilst it is clear that the primary rule that a company must sue for a loss such as that in question in this case, and not the shareholder, is a logical reflection of the concept of limited liability, in practice the real reason why the rule must exist is linked more fundamentally to the separate existence of the company, with the result that, if the shareholder is allowed to sue any wrongdoer will be subject to ‘double jeopardy’.

Where as in the present case the risk is non-existent, and a shareholder is left with a diminished patrimony, the continued application of the rule would amount to an unwarranted and technical obstruction to the cause of justice.”

[55] Kalinko v Nisbett (supra) is a case where a company had been wound up. A shareholder sued certain directors of that company in terms of section 424 of the Companies Act. The matter before the court was on exception. The learned Judge, Claassens J, followed the dictum of Booysens J as quoted above and held that at the exception stage it was inappropriate to decide whether the plaintiff as a shareholder had a cause of action or not. The exception was therefore dismissed.

[56] In my view Parke v Daily News (supra) is distinguishable from the present case. In that case the company concerned was no longer trading, and to all intents and purposes was being wound up. The articles made no provision for the gratuitous payment of monies to people who were no longer its employees and who could not in any way influence its business. In the present case, article 85 of the JCI articles of association (page 856 of the papers) gives the company specific powers to borrow monies and to issue guarantees in order to furnish security for its obligations and loans, including but not limited to loans to subsidiaries. There were therefore express powers to borrow monies on security. It seems to me that the correct approach in regard to such transactions is that stated by Oliver J in Re Halt Garage Ltd [1982] 3 All ER 1016 (Ch) at 1030D-G where the learned Judge said:

“But it is said that Parke’s case and the cases which preceded it were all cases where what the court had to consider was the test to be applied where reliance was being placed, either by directors or by a general meeting, on an implied power, whereas the power in the instant case, which is written into the company’s constitution and is not subject to any expressed limitation, is an express power.

So far as express powers are concerned, there has been, at least in the context of dealings for value between the company and an outsider, a clear rejection of the Lee, Behrens & Co test in Charterbridge Corp Ltd v Lloyds Bank Ltd [1969] 2 All ER 1185, [1970] Ch 62, a case concerned with the exercise by directors of an express power in a company’s articles to guarantee liabilities either of the company or of other persons falling within a given description. I can take the effect of the decision from the headnote ([1970] Ch 62 at 63) –

‘that where, as here, a company was carrying out the purposes expressed in its memorandum, and did an act within the scope of a power expressed in it, that act was within the powers of the company; that the memorandum of a company set out its objects and proclaimed them to persons dealing with the company and it would be contrary to the whole function of the memorandum if objects unequivocally set out in it should be subject to some implied limitation by reference to the state of mind of the parties concerned; and that the state of mind of the officers of C. Ltd. and the bank as to whether the transaction was intended to benefit the company was irrelevant on the issue of ultra vires.”

[57] The above passage is consistent with the summary of the law as it presently exists in England in regard to ultra vires as stated in Gower and Davies, Principles of Modern Company Law (7^th edition) paragraph 134 footnote 21. The learned authors summarise the findings of the most recent English cases on the subject and in this footnote list the following principles as being the law as it presently exists:

“(i) Ultra vires should be restricted to the question whether the company has acted within its capacity;

2. This depends solely on the construction of its objects clause;

2. If it has acted within those objects and the express and implied powers, the act is intra vires, whether or not it was done bona fide for the benefit of the company and for a proper purpose. (That is relevant only in connection with the related question of whether the organ which acted for it had authority to do so.);

2. An exercise of the express power can never be ultra vires unless perhaps, the power was not stated to be an independent object, and its exercise was undertaken in pursuance of activity beyond its objects.”

[58] In my view there is no reason why the above summary should not be the law here, although I have not been able to find authority in South Africa which is directly in point. It seems to me to be in conformity with common sense and the rules relating to the powers of the organs of a company as fixed in the Companies Act.

[59] In the instant case, and for the reasons already stated, there can be no question that the JCI Board of Directors, whether they be the “rogue” board or the “supine” board, did act intra vires in entering into the ILA and ancillary agreements, irrespective of whether these actions were honest or not. Therefore, the terms and conditions relating to the loan, its repayments and any “raising fees” to be paid was an issue between JCI and Investec, and not between it and any individual shareholder. As has already been said, whether JCI wants to repay the loan for good sound business reasons is a question between these two parties, and a shareholder cannot interfere with it.

[60] The two South African cases quoted by counsel for Letseng, namely McLelland v Hulett and Others (supra) and Kalinko v Nisbett and Others (supra) also do not take the matter much further. In each of these cases the company itself no longer existed so there was no question of any general meeting of shareholders being held. There was also no question in either of these cases, of the plaintiff being entitled to proceed by way of a derivative action.

[61] In each of these cases the learned Judge hearing it gave as a reason for shareholders as such not having the right to make claims against the Board of Directors, the fact that there could be a duplication of actions. In both of these cases it was found that such a duplication could not occur and therefore the claims were in fact entertained. In the present case there is also no chance of any duplication of claims occurring. However, in both cases the learned Judge concerned did not consider the other consequence of allowing individual minority shareholders to pursue claims against the directors. As has already been stated such actions would be contrary to the very essence of the rules relating to the running of companies and the separation of powers between the organs of such companies. It could only be in very exceptional cases, such as where the companies had been wound up and there was no remedy available to a plaintiff, as occurred in McLelland’s case, that relief to an individual shareholder could be granted. In the present case, where there are thousands of shareholders owning millions of shares, allowing individual shareholders to bring claims against the company, save to the limited extent already referred to, would result in anarchy in the affairs of the company.

[62] If there are any claims against the Board of Directors for any form of malfeasance or failure to comply with their fiduciary obligations, as is claimed by Letseng, it is the company, and the company alone, who can make such claims. If this were not so one would have an endless multiplicity of actions brought by shareholders where the shares concerned had dropped in value as a result of the actions of the Board of Directors. It is of course open to a shareholder, to get the company to take steps to deal with any wrongful conduct on the part of the directors. As has already been stated if such shareholder finds himself in the position that the company will not assist him, and the wrongdoers are in control of the company and protecting themselves, he can bring a derivative action. In the present case both Letseng and Trinity specifically disavowed any intention to bring such an action.

[63] The argument presented on behalf of Trinity to a large measure is overlapped by that presented on behalf of Letseng. However, in Trinity’s Heads of Argument, Mr Hoffmann referred to a number of Appeal Court decisions in support of a contention that “there is no general principle in our law to the effect that a third party may not contend that an agreement between other parties is invalid on the face of its terms simply because the instant parties view it as valid between them”. Schroder v Vakansieburo (Edms) Bpk 1970 (3) SA 240 (A); Traub v Barclays National Bank Ltd 1983 (3) SA 619 (A) and National Sorghum Breweries Ltd v Corp Capital Bank Ltd 2006 (6) SA 208 (SCA). In none of these three cases was the issue to be determined the locus standi of a third party such as Letseng or Trinity, to claim a declarator that other parties in the contractual relationship, namely JCI and Investec and the SPV, to which the third party was not privy, do not have a binding contract. The attitude of the contracting parties is that they wish to perform such a contract.

[64] As has already been said, Trinity’s case is limited only to the declaratory relief claimed by it which in turn is limited to the validity or otherwise of the various contracts entered into by JCI, the SPV and Investec. For the reasons already stated, I am of the view that it has not the locus standi to bring such an application.

Conclusion

[65] Letseng and Trinity are attempting to usurp the functions of the general meeting and to try and anticipate the result of such a meeting. They are not entitled to act in this way and I am of the view that they have no locus standi to raise any of the issues referred to in the Investec separation application as defined in paragraph [9] above.

[66] In the circumstances I make the following order:

In the Letseng application:

1. It is declared that the applicant has no locus standi to raise any of the issues referred to in the Investec separation application dated 20 April 2007 (as quoted in paragraph 9 of this judgment).

2. The main application is postponed sine die in order for the other issues stated therein to be adjudicated.

3. Letseng is ordered to pay the costs of Investec and JCI in regard to the separation application, such costs are to include the costs of two counsel.

In the Trinity application:

The application is dismissed with costs such costs are to include the costs of JCI and Investec in regard to the separation application, which costs are to include those of two counsel.

_________________________

P BLIEDEN

JUDGE OF THE HIGH COURT

IN THE LETSENG APPLICATION:

ON BEHALF OF APPLICANT ADV M D KUPER SC

ADV D UNTERHALTER SC

INSTRUCTED BY TUGENDHAFT WAPNICK

BANCHETTI & PARTNERS

ON BEHALF OF FIRST AND

THIRD APPLICANTS ADV A REDDING SC

ADV A WILLIAMSON

INSTRUCTED BY MERVYN TABACK INC

ON BEHALF OF SECOND RESPONDENT ADV S A CILLIERS SC

ADV A RUBENS SC

ADV J BLOU

INSTRUCTED BY WERKSMANS INC

IN THE TRINITY APLICATION:

ON BEHALF OF APPLICANT ADV GUY HOFFMAN SC

ADV M W JANISCH

INSTRUCTED BY KORBERS INC CAPE TOWN

ON BEHALF OF FIRST RESPONDENT ADV S A CILLIERS SC

ADV A RUBENS SC

ADV J BLOU

INSTRUCTED BY WERKSMANS INC

ON BEHALF OF SECOND AND

THIRD RESPONDENTS ADV A REDDING SC

ADV A WILLIAMSON

INSTRUCTED BY MERVYN TABACK INC

DATES OF HEARING 23 TO 26 APRIL 2007

DATE OF JUDGMENT 28 JUNE 2007

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