---

REPUBLIC OF SOUTH AFRICA

IN THE HIGH COURT OF SOUTH AFRICA,

GAUTENG LOCAL DIVISION, JOHANNESBURG

CASE NO: 42213/2014

DATE: 11 FEBRUARY 2016

In the matter between:

LAZARUS MBETHE...............................................................................................................Applicant

And

UNITED MANGANESE OF KALAHARI (PTY) LTD.....................................................Respondent

J U D G M E N T

WENTZEL AJ

1.               This is an application in terms of section 165(5) of the Companies Act, 2008 (“the Act”) to institute a derivative action in the name of the respondent, United Manganese of Kalahari (Pty) Ltd, in terms of a demand made by the applicant, Lazarus Mbethe, in terms of subsection (2), which the respondent has refused to comply with as contemplated in subsection (4) (b) (ii).

2.               This has, in and of itself conferred upon the applicant, as a director and Chairman of the respondent, locus standi to approach the Court in terms of subsection (5) as contemplated in subsection (2) (b).

3.               However, the applicant insists that in bringing the application he does so, not do so only in his capacity as Chairman and a director of the respondent, but also in his representative capacity as Chairman and director of Majestic Silver Trading 40 (Pty) Ltd (“MST”), its majority shareholder and as Chairman and director of Pitsa Ya Setshaba Holdings (Pty) Ltd (“PYS”), and as a trustee of the Kalahari Community Trust (“KCT”), both indirect shareholders of the respondent, for whose benefit the respondent was allegedly formed. However, no resolution to this effect was produced and it is of some significance that neither PYS nor the Trust have themselves leveled the complaints against the management of the respondent which is the subject matter of the current demand, nor are they parties to the current proceedings which have been launched in the applicant’s name. The applicant thus, only has locus standi to bring the current proceedings in his capacity as a director of the respondent dealt with below.

THE FACTS

4.               The applicant is one of the largest producers of manganese ore in the world. The applicant was formed as a Special Purpose Vehicle for Black Economic Empowerment purposes, which was a precondition for the granting of the prospecting and ultimately, mining rights to the respondent on 10 March 2008.

5.               The shares in the respondent were allocated in the ratio 51% to 49% between a local company, Majestic Silver Trading 40 (Pty) Ltd (“MST”) with BEE objectives, and a Russian based company, Renova Manganese Investments Ltd (“Renova”), that was tasked to establish and run the mining operations. With a view to benefiting the local  Kuruman community and to achieve its BEE objectives,  the KCT was founded by the applicant and MST’s majority shareholding in the respondent was in turn allocated to:

5.1.           Samancor Manganese-38%

5.2.           Chancellor House Minerals Resources -27%

5.3.           PYS- 27%

5.4.           KCT- 8%

6.               Although KCT’s shareholding is by far the smallest shareholder in MST, much has been made of its interest in the respondent in the current application, whose interests the applicant, as a trustee of KCT, has claimed to champion. But more in this regard below.

7.                The respondent was established in 2005 and commenced with exploration and feasibility studies pursuant to a new order exploration permit granted to it in 2005. This was followed by the grant of a mining right. Mining operations commenced in 2008 and the respondent soon became a multibillion rand company with assets in its balance sheet by 2014 valued in excess of R2.5 billion.

8.               With assets of this magnitude, attempts have been made to skim off the profits generated by the respondent through management and other contracts, leaving little, in relative terms, for the benefit of the community for whose benefit KCT was formed. Indeed, there is no evidence of any dividends having been declared to the trust to date, despite profits having been made. Amongst these contracts are the extremely lucrative iron ore crushing contracts awarded to mobile operators which form the subject matter of the current application. 

9.               In order to conduct its mining operations the respondent requires to crush the ore-bearing rock and commenced the construction of a fixed crushing and screening plant which was designed to handle the entire projected production of ore-bearing rock. However, whilst this plant was being built and thereafter, to absorb increased demand, the respondent elected to employ a number of mobile crushing and screening contracting companies to perform this task on a month to month basis.

10.            One of such companies was Zastrospace, which was employed and retained, it is conceded, not for commercial reasons but to further broad BEE objectives and to benefit the some 27 local communities that it purportedly represented. Indeed it is averred that the Zastrospace contract has always been considered as an initiative to benefit local communities and it is conceded that it was not “an arm’s length” transaction in the strict commercial sense.[1]

11.            The preservation of the Zastrospace contract, worth several millions of rands, which was allegedly terminated for commercial reasons due to the decrease in demand for iron-ore, is an overriding motivation for the current application, as I will demonstrate below.

12.            Despite the termination of the Zastrospace contract, that of another mobile crushing operator, African Mining Contractors (“AMC”), was retained in circumstances dealt with by me below, which also forms part of the complaints leveled against the management of the respondent in the statutory demand.

13.            Zastrospace was introduced to the respondent by the applicant, who was admittedly long time friends with its CEO, Mr Roelofse (“Roelofse”), who secured a substantial management fee of 30 % for himself, through his management company, Cytopx (pty) Ltd (“Cytopix”). Cintozene (Pty) Ltd (“ Cintozene”) , is the majority shareholder of Zastrospace with the remaining 49% of the shares being held through Mirodex (Pty) Ltd .

14.            It is averred that Roelofse’s proposed management fee of 30% was disclosed to the respondent in the business plan presented by him to Mr Danie Lourens (“Lourens”), then in charge of the respondent[2]. However, ultimately, this management fee was not claimed by Roelofse personally and instead, was claimed through his management company.

15.            In April 2013, Zastrospace was awarded a mobile crushing contract by the respondent. Over the period from May 2013 to May 2014, a period of only one year, Zastrospace was paid an aggregate of R 32, 5 million of which the main expense was the management fee. Needless to say, it was an extremely lucrative contract. Although it was submitted that it is safe to assume that one or more of the shareholders of Zastrospace represent the 27 local communities in Kuruman, the reference supplied in support of this proposition does not establish this. [3] The only reference I can find to substantiate this is that Roelofse has been involved in the upliftment of the Kuruman community in projects over a protracted period of time [4]

16.            Nevertheless, this was a substantial argument proffered in support of the continuation of the Zastrospace contract and was a basis upon which the company was marketed to the respondent by the applicant[5]. There is very little evidence to support that this was in fact the case as Zastropace itself only employed 18-20 persons at the height of its operations, with its payrolls reflecting only 12-13 employees from the Kuruman communities[6], with Cytopix itself only employing 12 individuals  described as “skilled staff, administrative staff and safety officers” to render its management services[7].

17.            During the period of the Zastrospace contract, Cytopix earned approximately R 10.8 million as a management fee (but at least in excess of R 7 million on the basis of the applicant’s argument that its gross turnover was R 23 million and not R32 million.) Although the averment is made that part of the 30% went to projects in Kuruman, there is no evidence of this[8]. Its wage bill, including that of its managing director, Roelofse was R 365 508.33 per month of which it can safely assumed that Roelofse, quite apart from his interest in Cytopax, got the lions share. Its expenses, apart from its management fee, were minimal spending only R 11 000 per month on diesel and R8000 per month on administration expenses. It can, thereofore, also be safely be assumed that much of its R 5 million in expenses largely was earned by way of salary by Roelofse.

18.            Not that Cytopix is the only party to skim off the profits of the respondent through the auspices of consultancy fees and performance bonuses. Lourens, the commercial manager of the respondent, himself earns a substantial management fee through his corporation, Pangolin CC, of which he is the sole member, through a Business Consultant Agreement with the respondent. This was signed by Johan Kriek  (“ Kriek”) as CEO and Lourens on behalf of the respondent effective 1 January 2011[9]. The investigation of this contract  and is also the subject of one of the demands made.

19.            That brings me to the events that have sparked the current application.

20.            Although the applicant alleges that Zastrospace was promised a fixed term contract at the end of May 2014[10] should it meet its crushing targets, which it did, the Zastrospace contract was terminated in August 2014 at a procurement committee meeting attended by Kriek and Louw, both directors, as well as Mr Robinson Raimate

(“Raimate”) who was not, but also participated in the decision. Raimate, who purports to act as the deputy CEO of the respondent, forms the subject of several of the demands. 

21.            Although the Memorandum of Association provides that the business of the respondent be conducted through various committees, which powers of delegation are endorsed by section 72(1) of the Act, in terms of clause 12 of the shareholders agreement, such committees were required to be presided over by persons who were directors of the respondent and could not make binding decisions unless ratified by the Board. This is a requirement, endorsed by section 72(2) of the Act and King III, which is in conflict with the Memorandum of Association, which is the subject matter of the first two demands dealt with below.

22.            This notwithstanding, it was not until 19 November 2014, after the demand had been delivered by the applicant, that the Board resolved to terminate all its mobile crushing contracts including that of  Zastropace and AMC.

23.            This in itself is a story to tell. Although the respondent has insisted that there is nothing sinister in its termination of the Zastrospace contract as it was terminated purely for commercial reasons, its   crushing contract with AMC was not terminated although its rates were only marginally lower than Zastrospace which had applied for and been granted an increase in its rates. Indeed, the applicant was under the misapprehension that the AMC contract had replaced the Zastrospace contract. It would seem also that attempts were made to ex post facto  justify the termination of the Zastrospace contract by querying the 30% management fee earned by Cytopix and requesting details of the projects it allegedly benefitted. It is of marked significance that those terminating the contract did not purport to do so on anything other basis than on commercial grounds.

24.            On hearing about the termination of the Zastrospace contract, on 21 July 2014, the applicant, as Chairman of the respondent, instructed the company secretary to suspend the holding of all committee meetings as they were unlawful in so far as they were presided over by Ramaite who was not a Board member, and were allegedly rogue, making decisions which they could not validly make without Board approval which were merely rubber-stamped by the Board. Insisting that this would have effectively hamstrung the respondent’s business which was conducted through the delegation by the Board of its powers to committees, this instruction was ignored by Kriek, Louw and Raimate.

25.            On 17 October 2014, Mr Konstantin Sadovnic (“Sadovnic”), the deponent to the answering affidavit and also a director of the respondent, proposed the nomination of an alternative CEO to the applicant, who had been acting as such since 15 September 2005.

26.            This prompted the applicant, through his attorneys, to propose that the issue of rogue committees be addressed at Board level at a meeting to be scheduled. This was dismissed out of hand by the respondent’s attorney,which left the applicant little alternative but to address a statutory demand in terms of section 165 (2) of the Act to the respondent on 22 October 2014, which is the subject matter of the current application[11] .

27.            Somewhat suspiciously, coincidentally, the Registrar of Mineral Resources faxed a notice to the respondent in terms of section 93 of the Mineral and Petroleum Resources Development Act no 28 of 2002 (the Minerals Act”), for a compliance inspection which was to have been conducted on 28 October 2014, but had to be postponed for personal reasons, pursuant to a prior notice[12] . These notices are inexplicably only signed by the Regional office of the Department of Mineral Resources on 12 November 2014 and 28 October 2014 respectively, both post-dating the date of the first scheduled inspection and the date of the latter notice, preceding also that of the prior notice.

28.            On the basis of these notices, the applicant avers that the conduct of the respondent in terminating the Zastrospace contract, which was a substantial part of its BEE requirements enshrined in its shareholder’s agreement to appoint previously disadvantaged vendors, has placed its mining rights in jeopardy.

29.            On receipt of the statutory demand, the directors of the respondent, excluding the applicant, were given notice of a Board meeting to consider the statutory demand. This meeting was held on 29 October 2014 where it was resolved to appoint attorneys to represent the respondent and to request Mr Badenshorst SC to investigate and report to the Board on the demand in terms of section 165 (4) (a) of the Act. An extension of time was requested for him to submit his report on 6 November 2014, which was not granted.

30.            The applicant avers that his exclusion from this meeting renders the resolution invalid as he, as a director, was obliged to be given notice and the resolution passed was, in terms of clause 10.1 the shareholders agreement, inquorate. This formed the basis of an interlocutory application to set aside the appointment of the respondent’s attorneys and to strike out Badenhorst SC’s report. Save to state at this stage that the excuse proffered for not affording the applicant notice was that there was a conflict of interest as he was the author of the demand, this aspect does not have to be decided by me as Mr Bham SC indicated that he did not intend to rely on Badenhorst SC’s report. On the basis of the judgment of Davis J in Mthumunye v Petroleum and Gas Corporation of South Africa (SOC) Ltd and another [2015] JOL 33744 (WCC) it would appear that despite the averred conflict of interest, the applicant was entitled to be given notice of the meeting of the demand and afforded an opportunity to address the Board thereon. In the circumstances, the meeting held and the decisions taken thereat were invalid, including that to appoint Badenhorst SC to investigate the demand. This will have an impact on the question of costs.

31.             Hereafter, on 7 November 2014, notice was given to all directors, this time including the applicant, of a Board meeting on 19 November 2014 to consider the termination of all the mobile crushing contracts. The applicant declined to attend this meeting as he stated that it was to be but a whitewash and to rubber stamp the decision already taken by the procurement committee to terminate the Zastrospace contract  during August 2014.

32.             On 12 November 2014, the former of the aforementioned  inspection notice was again, so it would seem, faxed to the respondent  to conduct an audit relating, inter alia to procurement and enterprise development and  mine community development. It cannot be purely coincidental that this is the exact date that the 15 day period within which the respondent was entitled to apply to set aside the demand in terms of section 165 (3) lapsed.

33.            On 19 November 2014 both the Board meeting was held, that predictably resolved to terminate the Zastrospace contract, and the main application was launched. This was one day before the 60 day period within which Badenhorst SC’s report was required to be provided (an extension not having been agreed to or granted by the Court in terms of section 165 (4)).  Although the point was taken that the application was, on this basis premature, this was on a misreading of section 165(5) as I will demonstrate below.

34.            Of some significance is that, notwithstanding that the AMC contract was not cancelled by the procurement committee, the Board, it is suspected having realized that it could not credibility defend the termination of the one crushing contract and not the other, resolved to terminate this contract as well. However, a scheme was put in place, sanctioned by the Board, to purchase AMC’s equipment for R 40 million instead.  This, despite a recordal that it had been proposed to purchase AMC’s equipment for R23 Million.[13]

35.            Despite the assertion that an economic downturn and drop in demand had prompted the termination of the mobile crushing contracts, this purchase was sought to be justified on the basis that the machinery was a bargain to be employed in the event of an upturn in the market. Why mobile crushing contractors could not then have been retained was not explained nor was the vast sum paid for the plant for which the company would at this stage effectively mothball for a rainy day.

36.            I have little doubt that AMC’s machinery was purchased as compensation for the termination of its mobile crushing contract, the continuation of which could not be justified in the face of the termination of the Zastrospace contract. I mention also that so intent was the Board to justify the termination of the Zastrospace contract allegedly on commercial grounds, that it also resolved at this meeting to ratify the decision taken to conduct a forensic audit into the affairs of Zastrospace and in particular its management contract with Cytopix which had hitherto never bothered it. For the first time, it professed concern as to whether such contract was indeed benefitting the local community it was intended to benefit. On the contrary, Lourens, to whom the management contract was disclosed, expressed no misgivings now expressed as to the exorbitant management fee claimed by Roelofse at the time.

THE STATUTORY DEMANDS

37.            The analysis of the law to the facts must be preceded by an analysis of the demands sought to be enforced. Five demands have been made essentially aimed at:

37.1.        preventing the conducting of the business of the respondent through rogue committees and any persons other than Board members serving and voting on any matter to be decided by such committees ;

37.2.        suspending: the holding of all committee meetings by Kriek and Raimaite ;

37.3.        suspending Kriek as CEO pending an investigation of several complaints leveled against him including his decision to termintate the Zastrospace contract and retain AMC which was not BEE compliant; and

37.4.        investigating the consultancy agreement with Pangolin CC of which Lourens was the sole member;

37.5.        precluding Ramaithe, as a non Board member, from  sitting on any committees where it was prescribed that such be comprised of only Board members; and

37.6.        interdicting Raimate from purporting to act as a deputy CEO when he has not been appointed as such;

37.7.        reinstating the Zastrospace contract, alternatively declaring its termination unlawful and of no force and effect.

38.            A proper analysis of the statutory demands against the aforementioned factual matrix demonstrates that, although dressed up in the noble cause of promoting good corporate governance and the upliftment of the Kuruman community, it is essentially all about the retention of the Zastrospace contract . It was only after the purported termination of this contract by way of committee that such committees have become the subject of complaint by the applicant in the interests of good corporate governance. Needless to say the Court approaches such concerns with some cynicism, as it does the respondent’s ex post facto concerns about the community to justify its termination of such contract.

REQUIREMENTS FOR THE STATUTORY DERIVATIVE ACTION

39. The relevant portions of Section 165 provide:

65 Derivative actions

(1)  Any right at common law of a person other than a company to bring or prosecute any legal proceedings on behalf of that company is abolished, and the rights in this section are in substitution for any such abolished right.

(2)  A person may serve a demand upon a company to commence or continue legal proceedings, or take related steps, to protect the legal interests of the company if the person-

(a)  is a shareholder or a person entitled to be registered as a shareholder, of the company or of a related company;

(b)  is a director or prescribed officer of the company or of a related company;

(c)  is a registered trade union that represents employees of the company, or another representative of employees of the company; or

(d)  has been granted leave of the court to do so, which may be granted only if the court is satisfied that it is necessary or expedient to do so to protect a legal right of that other person.

(3)  A company that has been served with a demand in terms of subsection (2) may apply within 15 business days to a court to set aside the demand only on the grounds that it is frivolous, vexatious or without merit.

(4)  If a company does not make an application contemplated in subsection (3), or the court does not set aside the demand in terms of that subsection, the company must-

(a) appoint an independent and impartial person or committee to investigate the demand, and report to the board on-

(i) any facts or circumstances-

(aa) that may gave rise to a cause of action contemplated in the demand; or

(bb) that may relate to any proceedings contemplated in the demand;

(ii)  the probable costs that would be incurred if the company pursued any such cause of action or continued any such proceedings; and

(iii)  whether it appears to be in the best interests of the company to pursue any such cause of action or continue any such proceedings; and

(b) within 60 business days after being served with the demand, or within a longer time as a court, on application by the company, may allow, either-

(i)  initiate or continue legal proceedings, or take related legal steps to protect the legal interests of the company, as contemplated in the demand; or

(ii)  serve a notice on the person who made the demand, refusing to comply with it.

(5) A person who has made a demand in terms of subsection (2) may apply to a court for leave to bring or continue proceedings in the name and on behalf of the company, and the court may grant leave only if-

(a)  the company-

(i)  has failed to take any particular step required by subsection (4);

(ii)  appointed an investigator or committee who was not independent and impartial;

(iii)  accepted a report that was inadequate in its preparation, or was irrational or unreasonable in its conclusions or recommendations;

(iv)  acted in a manner that was inconsistent with the reasonable report of an independent, impartial investigator or committee; or

(v)  has served a notice refusing to comply with the demand, as contemplated in subsection (4)(b)(ii); and

(b)  the court is satisfied that-

(i)  the applicant is acting in good faith;

(ii)  the proposed or continuing proceedings involve the trial of a serious question of material consequence to the company; and

(iii) it is in the best interests of the company that the applicant be granted leave to commence the proposed proceedings or continue the proceedings, as the case may be.

(6)  In exceptional circumstances, a person contemplated in subsection (2) may apply to a court for leave to bring proceedings in the name and on behalf of the company without making a demand as contemplated in that subsection, or without affording the company time to respond to the demand in accordance with subsection (4), and the court may grant leave only if the court is satisfied that-

(a)  the delay required for the procedures contemplated in subsections (3) to (5) to be completed may result in-

(i)  irreparable harm to the company; or

(ii)  substantial prejudice to the interests of the applicant or another person;

(b)  there is a reasonable probability that the company may not act to prevent that harm or prejudice, or act to protect the company‟s interests that the applicant seeks to protect; and

(c)  that the requirements of subsection (5)(b) are satisfied.

(7)  A rebuttable presumption that granting leave is not in the best interests of the company arises if it is established that-

(a) the proposed or continuing proceedings are by-

(i)  the company against a third party; or

(ii)  a third party against the company;

(b)  the company has decided-

(i) not to bring the proceedings;   

(ii) not to defend the proceedings; or

(iii) to continue settle, or compromise the proceedings

(c)  all of the directors who participated in that decision-

(i)  acted in good faith for a proper purpose;

(ii)  did not have a personal financial interest in the decision, and were not related to a person who had a personal financial interest in the decision;

(iii)  informed themselves about the subject matter of the decision to the extent they reasonably believed to be appropriate; and

(iv)  reasonably believed that the decision was in the best interests of the company.

(8) For the purposes of subsection (7)-

[Para. (a) substituted by s. 104 of Act 3/2011]

(b) proceedings by or against the company include any appeal from a decision made in proceedings by or against the company.

(9)  If a court grants leave to a person under this section-

(a)  the court must also make an order stating who is liable for the remuneration and expenses of the person appointed;

(b)  the court may vary the order at any time;

(c)  the persons who may be made liable under the order, or the order as varied, are-

(i)  all or any of the parties to the proceedings or application; and

(ii)  the company;

(d)  if the order, or the order as varied, makes two or more persons liable, the order may also determine the nature and extent of the liability of each of those persons; and

(e)  the person to whom leave has been granted is entitled, on giving reasonable notice to the company, to inspect any books of the company for any purpose connected with the legal proceedings.

(10)  At any time, a court may make any order it considers appropriate about the costs of the following persons in relation to proceedings brought or intervened in with leave under this section, or in respect of an application for leave under this section:

(a)  The person who applied for or was granted leave;

(b)  the company; or

(c)  any other party to the proceedings or application.

 

40.            Interpreting the section ( in light of the aspects underlined by me), it is apparent that in terms of subsection (1), section 165 has  replaced the  common law derivative action with a statutory derivative action.

41.            Locus standi is conferred upon a shareholder or a director to serve a statutory demand upon a company (section 165(2)(a) and (b)) to commence or continue legal proceedings, or to take related steps provided that it can be established that this is to protect the legal interests of the company.

42.            However, a person other than a director or shareholder may also make such a demand with leave of the Court if it can be established that it is either necessary or expedient to do so to protect that person’s (not the company’s) legal right ( section 165 (2) (c))

43.            On receipt of the demand, the company  on whom it is served has a number of options. It can either:

43.1.        apply to Court within 15 business days to set aside the demand   (section 165 (3)); or

43.2.        appoint an independent and impartial person or committee to investigate whether the demand is valid and whether to comply with  the  demand would be cost expedient and in the best interests of the company  and to report to the Board thereon within 60 business days, or such longer time that the Court, on application, may allow (section 165 (4)(a) read with subsection (b)).

44.            On receipt of such a report the company may either:

44.1.         comply with the demand ( section 165(4)(i)) ; or

44.2.        serve a notice refusing to comply with the demand (section 165(4) (ii)).

45.            In order to bring proceedings in terms of section 165 (5) the applicant bears and onus to establish that the prescribed procedural requirements set out in subsection (5) (a) and the substantive requirements set out in subsection (5) (b) are met. The incidence of this onus and the threshold required to discharge it was the subject of much debate dealt with below.

46.            What is clear, however, is that the procedural requirements are disjunctive entitling the applicant to apply to bring a derivative action if any of the following requirements have been met - Either the company has:

46.1.        not complied with the demand within 60 business days after receipt of the demand or such extended period as may have, on application by the company within the 60 day period been granted by the Court ( section 165(5)(i) read with section 165 (4) (b);

46.2.        served a notice refusing to comply with the demand ( section 165(5) (a) (i) read with section 165(4) (b)(ii); or

46.3.        failed to appoint an independent and impartial person to investigate and report on the demand ( section 165 (5)(a)(i) ) or appointed an investigator or committee  who was not independent and impartial ( section 165 (5) (a)(ii)),accepted an inadequately prepared or irrational or unreasonable report ( section 165 (5) (a)(iii) or acted in a manner that was inconsistent with a reasonable report  ( section 165 (5) (iv)) .

47.            The service of a statutory demand in terms of section 165 (2) is a prerequisite for the bringing of an application in terms of subsection (5) provided that, in exceptional circumstances, the persons afforded locus standi may apply to Court for leave to bring proceedings in the name or on behalf of the company without making a demand or affording the company the prescribed 60 days to respond in accordance with subsection (4).

48.            Exceptional circumstances will only be found to exist if all the following requirements are met:

48.1.        The delay may result in irreparable harm to the company or substantial prejudice to the interests of the applicant or another person;

48.2.        There is a reasonable probability that the company may not act to prevent that harm or prejudice, or to act to protect the company’s interests that the company seeks to protect; and

48.3.        The Court is satisfied that the substantive requirements for relief under subsection (5) are met namely that:

48.3.1.    the applicant is acting in good faith (section 165 (b)(i));

48.3.2.   the proposed or continuing proceedings involve a trial of a serious question of material consequence to the company ( section 165(b) (ii)); and

48.3.3.   it is in the best interests of the company that the applicant be granted leave to commence the proposed proceedings or continue the proceedings, as the case may be ( and presumably to take the related steps contemplated in subsection (2) (Section 165 (6) (c) read with subsection (5) (b)).

49.            Mr Brett SC, who appeared for the applicant, informed me that the application was also brought in terms of subsection (6). This was in response to an averment by the respondent that the application was premature, which was not seriously persisted with by Mr Bham SC, on behalf of the respondent, in as much as the application was proceeded with prior to receipt of the report by the investigator appointed to consider the demand as required in terms of subsection (4)(a), Badenhorst SC, which brings me to the steps the company is entitled to take on receipt of the demand.

50.            I point out that Mr Bham SC rightly conceded that on a proper reading of subsection (5), which is disjunctive and not conjunctive, an application in terms of subsection (5) may be brought prior to the receipt of such a report if the company has served a notice refusing to comply with the demand, which it was common cause had transpired prior to the launching of the application. It is thus not necessary for me to consider whether exceptional circumstances existed as required in terms of section 165)(6) to bring proceedings in terms of section 165(5).

51.            The respondent also averred that the report of Badenhorst SC, commissioned in terms of section 165(4)(a), was not independent and impartial and was irrational and unreasonable but Mr Bham SC informed me that the respondent did not seek to rely on Badenhorst SC’s report. As locus standi was sufficiently conferred by the notice served by the company refusing to comply with the demand, it is not necessary for me to consider the impartiality or otherwise of Badenhorst SC’s report. As the report was not relied upon, it is also not necessary for me to consider whether the company had authority to commission Badenhorst SC’s report save in the context of costs. The question of the authority of the Board to appoint attorneys to consider and oppose the demand was not seriously pursued in argument.

52.            That brings me to the substantive requirements set out in section 165(5) (b) which must be met.

53.            These are, in contrast to the procedural requirements, conjunctive, all of which must be met. In order to succeed with his application, it is incumbent upon the applicant to satisfy the Court that:

53.1.        the applicant is acting in good faith ( Section 165( 5)(b)(i)); and

53.2.        the proposed proceedings demanded:

53.2.1.    involves a trial of a serious question of material consequence to the company ( section 165(5)(b)(ii)); and

53.2.2.   are in  the best interests of the company (section 165(5)(b)(iii))

54.            I have essentially dealt with the procedural requirements and it remains only to consider whether the substantive requirements of the section have been met warranting the granting of the application to compel compliance with each of the five demands by way of derivative action.

55.            Before dealing with each of the requirements in the section in the light of each of the demands, I must first deal with the preliminary points raised by Mr Bham SC.

56.             The first preliminary issue raised by Mr Bham SC is that it is entirely inappropriate to employ section 165 (5) to enforce the demands as it is, by virtue of the nature of the demands, akin to the respondent seeking leave to sue itself on behalf of itself. In furtherance of this argument he submitted that the applicant had employed section 165 (5) to get around the more stringent requirements of section 163 to declare the relevant directors delinquent.

57.            In the first place, I do not believe that this is an instance of the oppression of minority shareholders and therefore that section 163 would be applicable. In any event, I do not accept that section 165 cannot be properly used in the current context, particularly where it is averred that it is being invoked to promote good corporate governance, which at least covers the first four demands. 

58.            A derivative action is available to shareholders and directors, including minority shareholders, who are not restricted to redress in terms of section 163 of the Act to ensure minority protection where the majority abuses their powers of control over the affairs of the company. It is available to protect the legal interests of the company. The director or shareholder derives his right of action from that of the company to redress wrong done to the company. [14]

59.            However, the Courts will not generally interfere with the internal management of the company where the majority acts lawfully as the principle of majority rule is that the shareholders of a company are bound by the lawful decisions of the majority on the affairs of the company  (Sammel v President Brand Gold Mining Co 1969 (3) SA 629 A at 678 )

60.            It is not an instance of the company suing the company as contended by Mr Bham SC, but a case of the company seeking redress against those who control the company in the interests of the company. In this respect, a shareholder invoking his rights to bring a derivative action in the name of the company seeks to protect the company’s rights, not his rights qua shareholder. Where the wrong is done to the company, the proper plaintiff to redress the wrong is the company itself and not the shareholders, as the company is a distinct legal entity from its shareholders.[15]

61.            As was explained by Lord Davey in Burland v Earle [1902] AC 83(PC) at 93

“ ..in order to redress a wrong done to the company …the action should prima facie be brought by the company itself”.

62.            The company derives its powers to commence litigation from section 66(1) of the Act which provides that, subject to the Memorandum of Incorporation, the business and affairs of a company must be managed by the board, which has the authority to exercise all the powers and perform any function of the company, which includes whether to embark upon litigation. Thus the company itself is generally the proper plaintiff to bring a legal action.

63.            But as was explained by MF Cassim in her article in the South African Law Journal, The Statutory Derivative Action Under the Companies Act of 2008: The Role of Good Faith [16], this rule may :

“give rise to problems and may be the cause of injustice and inequity. The potential for abuse arises where the wrongdoers who commit a wrong against a company are the directors themselves; …. The classic case or the genesis of the derivative action is where the alleged wrongdoers who have harmed the company are the controllers of the company, so that the wrongdoers subsequently use their control to prevent the company from instituting legal proceedings against them to remedy the wrong that they themselves have perpetrated against the company. The danger is particularly acute when the wrongdoers have control of both the board of directors as well as the shareholders in general meeting…..- so that the wrongdoers are able to exploit both their dominant position on the board as well as the shareholders in general meeting to frustrate any decision or resolution to institute legal proceedings against them. For this purposes, the wrongdoers need not even hold a majority of the company’s voting right themselves; the spectrum could extend to control of the majority of the votes held in combination by the offending directors themselves and those voting with them as a result of their influence, support, or simply because of apathy. This is the classic case for a derivative action.”

64.            Thus, the present case constitutes a classic case for the invocation of the statutory derivative action contained in section 165.   It is precisely where the party against whom the action is sought to be brought is not a third party, but those who control the affairs of the company, that the derivative action is required to protect the company from those who control the running of its affairs.

65.            This can be no better explained than by Lord Denning in Wallersteiner v Moir (No 2) [1975] All ER 849 (CA) at 857:

“ The [proper plaintiff] rule is easy enough to apply when the company is defrauded by outsiders. The company itself is the only person who can sue. Likewise, when it is defrauded by insiders of a minor kind, once again the company is the only person who can sue. But suppose it is defrauded by insiders who control its affairs-by directors who hold a majority of shares-who then can sue for damages? Those directors are themselves the wrongdoers. If a board meeting is held, they will not authorize proceedings to be taken by the company against themselves. If a general meeting is called, they will vote down any suggestion that the company should sue themselves. Yet the company is the one person who is damnified. It is the one person who should sue. In one way or another, some means must be found for the company to sue. Otherwise the law would fail in its purpose. Injustice would be done without redress.” (These remarks  are also of some import to Mr Bham’s second preliminary point dealt with below).

66.            In this manner, the common law derivative action has given protection to minority shareholders to remedy a wrong to the company, which would not be remedied by management because they are the wrongdoers themselves. It enables them to seek redress, in the name of the company, against its own management through which it, as an artificial juristic person, can only act. In this respect, the derivative action is not only a tool to protect minority shareholders but is a fundamental tool to enforce good corporate governance which is a central tenant of several of the demands sought to be enforced by way of derivative action in the current application.[17] This is not a case of the company suing itself but rather a means of controlling its management.

67.            Significantly, the statutory derivative action enshrined in section 165 does not merely serve to protect the interests of minority shareholders prejudiced by the actions of the majority, but confers relief to all shareholders and to directors of the company seeking to enforce good corporate governance in the interests of the company as contended by the applicant. Indeed, as set out above, it even extends to a person whose legal right has been infringed where it is necessary and expedient to enable such person to sue in the name of the company to protect that right. (section 165 (2)(a)(b) and (d)).

200%">68.            Mr Bham SC seems to suggest that the latter is the primary purpose of the section, which he avers is not designed to allow the company to essentially sue itself where it seeks to control its directors. However, this is plainly not the case as it is only where the derivative action sought to be instituted is aimed at outsiders or third parties that the presumption in section 165 (7) operates to make the institution of such proceedings more difficult. This presumption expressly does not apply where it is sought to be brought in circumstances like the present to reign in directors who it is averred are acting contrary to the interests of the company by failing to adhere to the principles of good governance.

69.            That the section is an appropriate tool to enforce corporate governance was sanctioned by the Ontario Court of appeal in Richardson Greenshields of Canada Ltd v Kalmacoff [1995]BLR (2d) 197 (CA) at 205 where it was emphasized that an important purpose of a derivative action is that :

“ it helps guarantee some degree of accountability and to ensure that control exists over the board of directors by allowing shareholders the right to bring an action against directors if they have breached their duty to the company”.

70.            Similarly the US Courts have stressed that the purpose of a derivative action is not merely to compensate the company but to deter future misconduct by directors and ensure accountability of the directors and managers  of the company to the company and its shareholders. (Diamon v Oreamuno 24 NY 2d 494 ).

71.            Cassim, op cit opines:

“The derivative action could potentially be very useful in promoting good corporate governance in South African law, provided that it is given a full life as an effective remedy by which shareholders may hold corporate management accountable and punish managerial misconduct”.

In light of these vital purposes of the derivative action, the courts should not impose artificial confines on its availability. Without effective mechanisms to enforce the fiduciary and statutory duties of directors and prescribed officers, directors would be immune from legal control and accountability…. For the new statutory derivative action to play a useful role as a watchdog in policing boards of directors, it must be given teeth by the courts by means of a liberal and robust interpretation.”[18]

72.            I propose to give it such teeth in line with the stated purpose of the Act set out in section 7, inter alia, to encourage high standards of corporate governance (section 7(b) (iii)) and to encourage the efficient and responsible management of companies, which the Court is obliged to have regard to in making an Order in terms of the Act (section 158 (b) (ii)).

73.            Sufficient safeguards are in place to prevent abuse in the use of the section by affording companies a right to set aside a demand made that is frivolous or vexatious and brought, not in the interests of the company, but rather, to harass management ( section 165 (3) ).

74.            Where this is the case, the Court will not grant leave to bring derivative proceedings against the directors or management in terms of section 165 (5) and judicial oversight thus plays an important role in preventing the section being abused. It is precisely to prevent such abuse that the legislature has placed an onus on the applicant to satisfy the court that the application is brought in good faith and is in the interests of the company dealt with by me below.

75.            Indeed, in a recent judgment, Larrett v Coega Development Corporation (Pty) Ltd  and 2 others in the East London Circuit Local Division under case no EL 1139/2013 ; ECD 2639/2013 decided on 13 March 2015, Stretch J considered whether or not section 163 of the Act was sufficiently wide to grant the court the power to authorize the institution of an action by the company as against a third party where such institution has not been duly authorized by the Board of Directors of the company.

76.            The court considered  the argument that this could not be the case as:

76.1.         Firstly, there is a separate section in the Act, namely section 165, which has been designed to deal with this very situation and it could not have been contemplated by the legislature that section 163 would afford the court such parallel powers; and

76.2.         Secondly, that section 163 is designed to deal more with the internecine strife amongst shareholders and directors of the company, and not with its external relations with third parties.

77.            The Court held at paragraph [14]]:

“After consideration of the subsection, I am of the view that it was not contemplated by the legislature that the broad powers granted to the court by section 163(2) incorporate the power to authorize the institution of an action against a third party in the absence of a proper resolution to that effect. It seems to me that the legislature has specifically designed section 165 for the very purposes of securing the rights of someone such as the applicant in the present circumstances whilst at the same time ensuring the rights of the company and those of the third party concerned are properly taken into account. Extensive procedures have been created by that section towards these very ends, such as subsection 16[5](4)(a) which provides that the company must (upon a demand being made to commence or continue legal proceedings), appoint an independent and impartial person or committee to investigate the matter and to report to the board on various aspects including the probable costs that would be incurred. There are a number of checks and balances built into a reasonably extensive section the ultimate purpose of which is to create a form of statutory derivative action. Having gone to all this length to create such a vehicle for derivative actions, it seems to me that the legislature could never have contemplated that section 163 would allow, in effect, a derivative action on the part of a person in the position of the applicant.

[15] This view is supported by Henochsberg  where the following is stated [with regard to section 163]:

‘Wide though they are, the powers which are committed to the Court do not include the power to ‘authorize’ shareholders to institute action in the name of the company.’ ”

78.            This makes it clear that in circumstances like the present, the appropriate section to invoke is indeed section 165 and not 163 which disposes of Mr Bham’s first preliminary point.

79.            Mr Bham’s second preliminary argument, that the current dispute should more properly be dealt with by proposing a resolution to the Board which can be considered and voted upon, can also be disposed of. I accept Mr Brett SC’s submission that this would have served no purpose in that the respondent rejected the applicant’s proposal for discussion at Board level at a meeting to be convened out of hand[19]. Any attempt by the applicant to pass a resolution to this effect would have been quashed by those against whom the demands were directed. To call such a meeting and go through the motions  would have been an exercise in futility. In this respect, I make reference to the salutary comments of Lord Denning quoted by me above.

80.            I am thus satisfied that the applicant has locus standi and that section 165(5) is an appropriate means to secure enforcement of the demands aimed at the enforcement of good governance of the company which, as I will demonstrate , would at least cover the  first to fourth demands . Whether it may appropriately be used to enforce the fifth demand aimed at reinstating the Zastrospace contract is another matter with which I will deal below.

81.            This, having been decided I propose to deal with the requirements for relief in terms of section 165 (5) in turn and then to examine whether they have been satisfied with regard to each or the demands.

82.            The onus is on the applicant to satisfy the court, on a balance of probability, of his good faith and the fulfillment of the other requirements set out in section 165(5)(b). (Swanson v Pratt [2002] NSWSC 583; (2002) 42 ACSR 313 at para 26 and Mouritzen v Greystone Enterprises (Pty) Ltd 2012 (5) SA 74 (KZD) at para [59]) .

83.            I propose first to deal with the question whether the demands involve a serious question of material importance to the respondent and whether it is in the best interest of the respondent that the applicant be granted leave to take steps to enforce them. Thereafter, I will deal with the question whether even if this is established, the applicant is acting in good faith in seeking to enforce the demands made or whether he is acting for some collateral purposewhich would preclude relief.

84.            In this respect, the substantive requirements of section 165 (5) (b) are interrelated: a matter which involves a serious question of material importance is more likely to be in the best interests of the company to pursue. Similarly, it could be assumed that a matter that satisfies these requirements is sought to be enforced in good faith unless the contrary appears.

 The  best interests of the company

85.            Mr Bham SC insisted that it is incumbent on the applicant to show not only, that the derivative action sought to be instituted may be in the interests of the company but, that it in fact, is in the best interests of the company. In this respect Mr Bham relied upon the comments in Swansson v Pratt supra quoted with approval in Mouritzen v Greystone Enterprises supra at para [62], that it must be established not that the proposed derivative action:

“may be or appears to be, or is likely to be, in the best interests of the company but, that it is in the best interests of the company”.

86.            Mr Bham SC also sought to rely upon the presumption contained in subsection (7) that the proceedings are not in the best interests of the company where the requirements set out in section 165(7)(c) are met, but only where the proposed proceedings are by the company against a third party or by a third party against the company (section 165 (7)(a)). This does not apply to proceedings by the company against its directors.

87.            Section 165 (8)(a) specifically excludes from third parties, and thus the operation of the presumption, any applicant who is related or inter-related to the company which must thus exclude an application by a shareholder, a director or trade union of the company . The presumption, thus, must only apply to persons other than those upon whom locus standi is conferred in terms of subsection (2)(a) (b) or (c) to whom leave is granted under subsection (2)(d).

88.            It is designed to cater for the situation only where the wrongs are committed by third parties or outsiders and not the management of the company or its controllers against whom the controllers of the company decline to act because they are related parties or have some or other association with the outsider ( as was the case before Stretch J in Larrett v Coega development Corporation (Pty) Ltd (supra) ). 

89.            In this respect I point out that the requirements set out in subsection (7) for the presumption to operate, are conjunctive and not disjunctive and thus all the requirements must be met.  Thus, it is a prerequisite that the proposed proceedings involve a third party rendering the application of the presumption inapplicable in the present matter.

90.            The presumption that the action is not in the interests of the company in these instances makes it substantially more difficult for a derivative action to be brought against an outsider and is not designed to assist the respondent in an action like the present, which is aimed at wrongdoings done by its own directors where the presumption has no application. This is a strong indication that the legislature did not wish to place too onerous a burden on an applicant seeking to employ the section to enforce good corporate governance.

91.            This does, however, that the section can be employed simply for the asking. On the contrary, the onus on the applicant to establish the substantive requirements of the section provides an important safeguard and judicial oversight to prevent the abuse of the section to unduly harass a company’s management for a collateral purpose, which is an aspect with which I will deal in some detail below.

92.            Assuming in favor of the applicant, that each of the demands is a matter of substantial importance if they are in the interests of the respondent, I propose now to consider whether enforcement of each of the demands is in fact in the interests of the respondent.

The first demand

93.            The essence of the first statutory demand is that there are provisions in the shareholder’s agreement relating to Board Committees which are in conflict with the provisions of the Companies Act and  King III Report on Corporate Governance for South Africa 2009 in so far as they relate to activities, authority and quorate decision making processes.

94.            In paragraphs 20 and 22 of the demand it is stated that:

“ 20.    It is apparent that the shareholders agreement of UMK is in conflict with the provisions of the Act and King III in relation to the activities, authority and quorate decision-making processes of the Board Committees. It is consequently bad in law thus rendering void or voidable matters purportedly decided by them to the extent of such inconsistencies

21        We further demand that all requisite legal and related steps taken to declare all decisions taken by any Board Committee of UMK in conflict with the law as set out above null and void and of no force and effect, in particular those of the SIC, the Contracts and Purchasing Committee and the Operations Committee since May 2013, and take all legal and related steps to unwind any legal obligations purportedly created for UMK as a result  of such decisions’’.

95.            This would obviously include the decision to terminate the Zastrospace contract.

96.            In this respect reliance is placed upon section 72 (1) and (2) of the Act which provides:

          “Board committees

72(1)   Except to the extent that the Memorandum of Incorporation of a company provides otherwise, the board of a company may-

(a)  appoint any number of committees of directors; and

(b)  delegate to any committee any of the authority of the board.

(2)        Except to the extent that the Memorandum of Incorporation of a company, or a resolution establishing a committee, provides otherwise, the committee-

(a) may include persons who are not directors of the company, but-

(i) any such person must not be ineligible or disqualified to be a director in terms of section 69; and

(i) confirm the determination of the board; or

(ii) no such person has a vote on a matter to be decided by the committee;

(b)  may consult with or receive advice from any person; and

(c)  has the full authority of the board in respect of a matter referred to it.”

 

97.            Although Mr Bham put great emphasis on the fact that in terms of section 72 (2) the Act , a committee may include persons who are not directors of the company, there is an important proviso that no such persons may not vote on a matter to be decided on by the committee.  Raimate, who was not a Board member, voted together with the other committee members to terminate the Zastrospace contract. The resolution of the Board to ratify of this decision was passed ex post facto after the statutory demand complaining hereof was delivered.

98.            The applicant, moreover, complains that the Board Committees acted autonomously and “ no longer in accordance with delegated authority” and that “the board of UMK over time effectively abdicated the business and affairs of UMK to the board committees”.

99.            Mr Bham avers that this is in accordance with both the shareholders agreement and the respondent’s Memorandum of Incorporation, to which section 72 of the Act is subject,  inasmuch as :

99.1.        Sections 71 and 81 of the Memorandum of Association  provides:

“79      The directors may delegate any of their powers to committees consisting of such member or members of the body as they think fit. Any committee so formed shall in the exercise of the power so delegated, conform to any rules that may be imposed on it by the director.

81        A committee may meet and adjourn as it thinks fit. Questions arising at any meeting shall be determined by a majority of votes of the members at present, and in the event of an equality of votes the chairman shall have the casting vote.”

99.2.        Clause 12.1  of the shareholder’s agreement provides:

“12.1   The board shall be entitled to delegate its powers to the committees set out  in 12.2 and set at the committees as may be incorporated by the board from time to time, which committees may include representatives other than members of the board with requisite expertise in various designated fields. Any committee so formed shall in the exercise of the functions delegated to them, conform to any rules that may be imposed on that committee by the board.”

100.         In terms of section 15 (7) of the Act, where there is a conflict between the shareholder’s agreement and the Act, the Act prevails which permits a non- director to sit on, but not make decisions of a committee.

101.         In terms of clause 12.2.4 of the Appendix to the Shareholder’s Agreement, the Contracts Purchasing Committee, which purported to take the decision to terminate the Zastrospace contract, did not have decisions making powers.There it is made clear not only that in assessing whether to procure a vendor, general commercial considerations must be taken into account, but also that such a committee has no authority to make decisions itself but only to determine and make recommendations to the Board.

102.          From the transcripts of the interviews with the key players conducted  by Badenhorst SC, I have little doubt that the Contracts and Purchasing Committee purported to take the decision to terminate the Zastrospace contract itself and not merely to recommend to the Board that it do so. It was only after Badenhorst SC expressed the view that this decision was invalid unless ratified by the Board, that this was done on 19 November 2014 ( although I am mindful that the notice of this meeting was given on 7 November 2014 and  his report was not served on the respondent until the date of the meeting. I can only assume that the respondent had insight into the views expressed by him in his report before it was formally delivered.)

103.         Whether these transcripts can properly be referred to by me where  there has been an application to strike out such report and Mr Bahm has indicated he does not wish to rely thereon, is debatable but need not be decided by me in view of my finding on the papers before me that a decision was improperly  taken at committee level to terminate the Zastrospace contract which could only be taken by a duly constituted Board of the respondent on recommendation by the relevant committee.

104.         Although  in terms of section 163(2), the Court is given the express power to rewrite the provisions of the shareholders agreement , there was no claim that I do so by the respondent.

105.         In addition, the Memorandum of Incorporation make it clear that committees must be presided over by directors where a committee makes critical decisions. Decisions relating to procurement, and axiomatically termination, must by definition be critical decisions. It follows that the Contract and Purchasing Committee does not have any decision making powers. Indeed, none of the committees have critical decision making powers.

106.          Thus, although it may be correct that Ramaite may have validly sat on the various committees of the respondent, he was not entitled to participate in any decision made by such committees which would have rendered the Contract and Purchasing Committee’s decision to terminate  the Zastrospace contract invalid, on the assumption that his vote would have been necessary to render such a decision quorate. But for its ratification, the decision taken could validly be attacked and set aside.

107.         I thus find that there was merit in the complaint regarding the authority of the Contracts Purchasing Committee to terminate the Zastrospace Contract.

108.         Be that as it may, once ratified, the decision taken to terminate the Zastrospace contract was validated and there is thus no cognizable cause of action to unwind the decision to terminate same. It is significant that Zastrospace itself has not sought to dispute the validity of the termination of its contract.

The second demand

109.          The second demand is in two parts. The first is aimed at the transgressions by Messrs Kriek, the CEO, of the respondent and Ramaite in repudiating the applicant’s direction, as Chairman of the respondent, to the company secretary that all committees be suspended. The second is aimed at Lourens and the consultancy agreement he has procured for his close corporation, Pangolin CC.

110.         The applicant avers that contrary to his instruction, Kriek and Ramaite had reconvened meetings of certain committees and in so doing had acted.. “ in a rogue and unauthorized manner by willfully defying the instructions of the Chairman of the Board of UMK…”

111.         This is premised on the assumption that the applicant was entitled, qua Chairman, without reference to the other directors, to instruct the suspension of all committees.

112.         The applicant has, however, not been able to demonstrate which provision of the Shareholder’s Agreement conferred such a power on him to give such an instruction. Indeed, in terms of clause 11.1 of the Shareholders Agreement, the Chairman does not have a casting vote at any meeting of the shareholders or directors and control over the management of the respondent was vested in the CEO.

113.         Moreover, in view of the fact that the business of the respondent is essentially conducted through committees, the said persons were probably justified in ignoring the instruction, which would, had it been implemented, have effectively hamstrung the respondents business, which could never be in its best interests.

114.         I thus do not find that there is any basis to interdict Kriek and Ramaite from convening and holding committee meetings subject to the caveat that I have found that no decisions may be taken by such committees by non-Board members, like Ramaite.

115.          Accordingly, I find that this complaint does not have merit.

116.         Moreover, on 11 August 2014, the respondent’s attorney addressed a letter to the respondent recording the applicant’s suspension as a director and Chairman of UMK on 21 July 2014 to which all the directors of the respondent acquiesced. If this decision was indeed validly taken, the applicant would have had no authority, even qua Chairman, to direct the suspension of Board Committee meetings.

117.         Related to this aspect of the second demand is the demand that   Kriek be interdicted and restrained from acting as CEO of the respondent and that he be removed as CEO forthwith, alternatively be suspended pending the outcome of an enquiry into his averred misconduct detailed in paragraph 33.4 of the demand. Included in these averments of misconduct is the repudiation by Kriek and Raimate of the applicant’s instruction to suspend all committee meetings, which I have found he had no authority to order.

118.         With regard to the remaining complaints of misconduct against Kriek, whilst there may be merit in them, there is insufficient evidence before me to establish this.

119.         However, I am mindful that all that is required is that a legally cognizable cause of action be established and that the threshold in this regard is not high ( an aspect with which I will also deal below).  I do, also, take cognizance of the fact that it is only demanded that Kriek be suspended pending the outcome of disciplinary proceedings to be taken against him on these bases and it is thus not necessary for me to decide whether the attacks on him are justified but only if they are sufficiently established to warrant his interim suspension.

120.         Even if this were the case, should these complaints be found to be made as part of a personal vendetta against Kriek for the part he played in terminating the Zastrospace contract, the applicant would not be granted leave to pursue same. In this respect, it is significant that one of the complaints leveled against Kriek is aimed at the validity of the   decision  taken by him at the Contracts Purchasing Committee meeting to terminate the Zastrospace Contract and to procure the allocation of another service provider, AMC  which was not BEE compliant [20] . This is tied up with the question whether the Zastrospace contract was indeed itself BEE compliant which will be dealt with by me  below.

121.         However, it is important to note at this stage that I suspect that it is  the complaint about the termination of the Zastrospace contract that is essentially behind this aspect of the second demand which, if not pursued in good faith in the interests of the respondent, would serve to negate the second demand, no matter how meritorious.

122.         I have indicated above my misgivings regarding the Pangolin Consultancy Agreement and an investigation into same may well be warranted. This is so particularly as Lourens would appear to be somewhat conflicted. It is unlikely that the applicant would be able to secure a resolution to this effect by the Board of the respondent, notwithstanding its resolution to conduct a forensic investigation into the Zastrospace contract. Again, no matter how meritorious this may be, should such an investigation be pursued as part of a personal vendetta against Lourens, the requirements to pursue such an investigation would not be established.

The third demand

123.         The third demand is directed at Ramaite as a consequence of his participation on the Social Investments Committee and the Contracts Purchasing Committee, without being a member of the Board, and his continued participation in the face of the applicant’s instruction to suspend all committees.

124.         As I have said, although I accept that Ramaite may, in terms of the Act and the Memorandum of Association, sit on board committees, he may not be party to any decisions purportedly taken or recommendations made by such committees.  This applies in particular to his participation in the decision to terminate the Zastrospace contract and the decision to appoint AMC allegedly in breach of the duties of the Social Investments Committee as set out in clause 8 to appendix 12.2.3   to the Shareholders agreement.

125.         In support of this demand the applicant seeks also to rely upon clause 12.4 of the shareholders agreement  and King  III :

125.1.     Clause 12. 4 of the shareholders agreement requires members of committees to comply fully with the requirements of the Companies Act and King III; and

125.2.     Paragraph 131 of King III provides that :

“Committees, other than risk committees should only comprise members of the board and should have a majority of non-executive directors. The majority of the non-executive directors serving on these committees should be independent. Committees should be chaired by independent non-executive directors, other than the executive committee which is ordinarily chaired by the CEO”.

126.         As I have said, in so far as Raimate purported to take a decision to terminate the Zatrospace contract, his actions would be unlawful and contrary not only to the appendix to the Shareholders Agreement, the Act and King III. However, the Act is subject to the Memorandum of Association which permits such conduct and trumps the Act and the Shareholders Agreement.

127.         There is thus no merit in the complaint made that Ramaite sit on Board Committees but there is merit in the complaint that such committees make decisions as they are only entitled to make recommendations.

The fourth demand

128.         The fourth demand is directed at precluding  Ramaite from purporting to act as deputy CEO when he is not even a member of the Board. Mr Isaac Letshalo (“Letshalo”) was appointed the deputy CEO by the Board in February 2013 with effect from 1 April 2013 to replace  Ramaite. Despite this, it is averred that Ramaite refuses to relinquish his position as deputy CEO and purports to act as such.

129.         This has not been countered by the respondent save to state that he is the de facto co- CEO with Letshalo, if not legally appointed as the deputy CEO, which is accepted by the other directors.

130.         The office of CEO, as is that of deputy CEO, is a substantial position with wide ranging powers which cannot simply be assumed. In terms of clause 11.2 of the Shareholders Agreement, the CEO is responsible for the day to day management of the respondent and when read with paragraph 60 of King III, this includes ensuring that the respondent comply with all relevant laws and good governance principles.

131.         Accordingly, in so far as Ramaite concedes that he acts as deputy CEO, albeit in conjuction with Letshalo, this is not authorized and there is thus merit in this demand. The shareholder’s agreement, moreover , does not contemplate a deputy CEO.

132.         However, again, if it is found that this complaint, albeit worthy of merit,   is directed at  Ramaite because he was party to the termination of the Zastrospace contract, the applicant’s bona fides in pursuing this demand may be questioned and would preclude relief to pursue this demand.

 

The fifth demand

133.         The applicant admits that the retention of the  Zastrospace contract cannot be justified on commercial grounds. He also admits that Zastrospace itself would not have a claim in law to enforce its contract; indeed it has made no attempt to do so. The applicant has not been able to establish any legal obligation to contract with Zastrospace other than an unsubstantiated averred understanding that if it met its crushing targets, a fixed term contract would be concluded with it. There is no substantiation for this.

134.         It is for this reason that the applicant has sought to pin its case for the continuation of this contract on the averred obligation of the respondent to promote the interests of the community in line with broad economic empowerment principles required in terms of the Shareholders Agreement, the Act and King III.

135.         This, the applicant   argues is in accordance with good governance. This, so it is argued, includes complying with the BEE and social responsibility provisions contained in section 7 of the Act  to promote high standards of corporate governance as appropriate, given the significant role of enterprises within the social and economic life of the nation. This is  in accordance with the principles of good governance including fairness, accountability, responsibility and transparency recommended in paragraph 5 of King III and clause 12.4 of the Shareholders Agreement which places a fiduciary duty on the directors of the respondent to promote the interests of the community. This, the applicant insists, the Zastropace contract was designed to promote.

136.         Furthermore, so it is averred, the respondent submitted a Mining Work Programme and Social and Labour Plan (“SLP”) which was a precondition for its application for  its mining rights which included aligning local economic development projects to the municipal intergrated development plans, supporting the recruitment of suitable local labour, encouraging their training and  enhancing local job creation .

137.         Adhering to these undertakings, the respondent set up a Social Investment Committee, which  in terms of appendix 12.2.3 to provide overall guidance to the respondent on its social investment programme . There such committee is required to:

137.1.      guide the implementation of the social investment programme and the allocation of resources to deserving causes:

137.2.      identify focus areas for social development and make recommendations to the Board of Directors;

137.3.     identify projects that will serve the needs of the communities within which the company is conducting business;

137.4.     be responsible for promoting the company’s profile and image within the communities;

137.5.     ensure the alignment of social investment projects with the company’s business objectives;

137.6.     ensure that all projects undertaken are sustainable and will empower, develop, uplift the communities concerned;

137.7.     develop guidelines for allocating resources to communities in terms of the social investment program.

138.         Not only did the respondent undertake to adhere to these social responsibilities in tendering for its mineral rights, but, it is argued, that adherence with these duties is a precondition for the continuation of such right.

139.         In terms of the executive summary of the Shareholders Agreement, the respondent undertook to endeavor to provide for local procurement opportunities where feasible and to grow the potential for utilizing local service providers via its procurement processes. Pursuant to this obligation, the respondent formulated a procurement plan that aimed at providing historically disadvantaged individuals and local service providers with a preferred supplier status. In this respect it was obliged to evaluate the BEE status of all prospective service providers.

140.         Thus, it is argued that the applicant as a director and shareholder, is entitled, in the interests of good corporate governance (which must axiomatically be in the interest of the respondent), to ensure that the Zastrospace contract, which was BEE compliant and allegedly furthered these objectives, was not replaced with the AMC contract, which was not BEE compliant , and did not.

141.         In this respect the applicant stresses that the respondent is a special purpose vehicle to achieve the upliftment of all stakeholders and participant disadvantaged persons.

142.         This, it is argued, precludes the directors of the respondent from terminating the Zastrospace contract on purely commercial grounds, which it is stated was never the basis upon which the contract was awarded to Zastrospace in the first place.

143.         Mr Bham argued that it was an absurd proposition to suggest that the directors of a company have any other fiduciary duty but to make a profit for the shareholders of the company that they serve. Indeed, such a duty is endorsed in the Act itself.

144.         However, although I accept that commercial considerations are paramount in properly running a company, there is, in light of the provisions relied upon by the applicant, and in particular section 7 of the Act, an element of social responsibility in executing that function. This would include preferring a BEE compliant service provider over  one that is not.

145.         Mr Bham SC also argued that good corporate governance demands that the business of the respondent be conducted for a profit and on sound commercial grounds. He also states that a nefarious right to be appointed as a contractor is not sufficient, and that a legal right to the enforcement of the Zastrospace contract must be established, relying on the express wording in section 165(2) quoted above. There it is made clear that a statutory demand may only be served to protect the “legal interest” of the company.

146.         There is much to be said for this argument. However, although it is accepted that Zastrospace would have no legal right to enforce its contract, it is not the third party’s right that is relevant but rather that of the company itself. The respondent would have a legal interest to protect its mining right, which the applicant maintains is in jeopardy as a result of the cancellation of the Zatrospace contract. The applicant maintains that as the advancement of the community was a precondition to the granting of the respondent’s mining rights, the maintenance of BEE compliant contracts is central to the preservation of such right.

147.         Subject to section 47 of the Mineral and Pretoleum Resources Development Act no 28 of 2002 ,the respondent’s a mining right may be cancelled or suspended if it fails to honor or carry out any arrangement or agreement or undertaking including the undertaking made by it in terms of the Broad Based Socio Economic Empowerment Charter and Social and Labour Plan on which the Minister relied for the granting of the Mining right. The applicant avers that as compliance notices have been served on the company, the cancellation of the Zastrospace contract may put its mining right in jeopardy.

148.         As I have said, the timing of these notices is somewhat suspect, as are the dates upon which they purport to be signed. Bearing in mind the onus on the applicant, the delivery of these notices is a far cry from establishing that the respondent’s mining rights are indeed in jeopardy; a supposition that the cancellation of the Zastrospace contract might place the respondent’s mining right in jeopardy is not sufficient no matter how low the threshold of proof may be dealt with below.

149.         There is no evidence what the results of the scheduled inspection was or that the cancellation of the Zastrospace contract put the respondent’s mining right in jeopardy, notwithstanding that the proposed inspection was scheduled to have taken place on 2 December 2014.

150.         In any event, in the scheme of the respondent’s business, it has not been established that the Zastrospace contract is a serious question of material consequence to the respondent as required in terms of subsection (5) (b) (ii) where it is not cardinal to the preservation of the respondent’s mining right and where it has not been demonstrated that it  provides substantial benefit to the local community .

151.         As I have said, where it is established that the preservation of the Zastrospace contract is not justified in the name of good corporate governance or to preserve its mining rights, this calls into question the  bona fides of the other demands made in the name of good corporate governance, particularly where it is suspected that they were only made as a consequence of the cancellation of the Zastrospace contract.

152.          In this respect, the question arises whether the respondent has satisfied the Court that the application has not been brought for the collateral purpose of reinstating the Zastrospace contract. Section 165(5) makes it clear that even if it can be established that the demands are of material significance and are in the best interest of the respondent, leave will not be granted to enforce them unless it is shown that the application if brought in good faith. This, is a self standing requirement and not merely one of the factors to be taken into account as is the case with the equivalent English legislation.

153.         The requirement of good faith, thus, can be a determinant, which, if not established, may be fatal to an application under the section. This makes the question of onus with regard to the requirement of good faith crucially important, a fact fully appreciated by Mr Brett who sought to persuade me not only that the threshold level of evidence the applicant was required to produce to establish good faith was a low one, but also that good faith should be presumed unless there is cogent evidence to the contrary which it was the onus of the respondent to produce. I have a number of difficulties with these propositions, as I will demonstrate below.

Good Faith

154.         The South African statutory derivative action has been substantially influenced by that in Australia, Canada and England.  The leading Australian case of Swansson v RA Pratt Properties Pty Ltd [2002] NSWSC 583, quoted with approval in Mouritzen v Greystone Enterprises (Pty) Ltd 2012 (5) SA 74  at paragraph [51], laid down that there are two interrelated questions in determining good faith. First, the applicant must honestly believe that a good cause of action exists and that it has a reasonable prospect of success.  As  a converse of this, the applicant must also show that the application is not brought for a collateral purpose. In this respect, the requirements of good faith in subsection (5) are a corollary of the requirements of bad faith in subsection (3) where not only must it ne shown that the demand is frivolous and vexatious, but also that it is without merit.  The merits of the demand are thus a crucial aspect of the requirement of good faith and the absence thereof.

155.         In Swanson v RA Pratt Properties Pty Ltd (supra), it was held that the applicant may be disbelieved if his proclaimed interest in the pursuit of the action is so unreasonable that no reasonable person in the circumstances of the applicant would hold such a belief. In this respect the first part of the test of good faith is not purely a subjective one, but has an objective element and is tied up with the requirement that the demands have merit and are in the interests of the company.

156.         In this resect, the requirement of good faith is also inextricably tied up with the other substantive requirements in the subsection. Where it is not shown that the proposed action has merit (in the sense that a legally cognizable cause of action exists), and is in the interests of the company , it would be harder for the applicant to satisfy the Court that the application is brought in good faith as no reasonable person would in such circumstances want to pursue such an action. Conversely, where the derivative action appears to have merit and is in the interests of the company, it would more readily be accepted that the applicant is acting in good faith unless there are objective circumstances to establish otherwise.

157.         But this does not mean that there is lesser threshold required to establish good faith than required to establish the other requirements of the section which must be established by the applicant on a balance of probabilities .

158.         There is no reported case directly on  this issue. However, Mr Brett SC referred me to the comments of  Myburgh AJ in Amdocs SA Joint Enterprise (Pty) Ltd v Kwezi Technologies 2014 (5) SA 532 GJ concerning the requirements that the company needs to satisfy to set aside a  section 165(2) demand set out in terms of section 165 (3). He argued, on the strength of these comments, that a lesser standard of proof is required to be established for relief under section 165 (5), relying also upon the article on this topic by MF Cassim, The Statutory Derivative Action Under the Companies Act of 2008: The Role of Good Faith, published in the South African Law Journal[21], on whose research I have substantially relied in writing this judgment.

159.          On the strength of these authorities dealt with by me below, Mr Brett SC argued that to establish good faith, all that need be established was that there was some prospect of success in the sense of a legally cognizable cause of action. If this is established, so he argued, good faith should be presumed, in the absence of evidence to the contrary by the respondent, in essence shifting an evidentiary burden, if not the burden of proof in this regard to the respondent.

160.         In Mouritzen’s case ( supra)  Ndlovu J, dealing with an application under section 165(5) to bring a derivative action, dealt with the foreign legislation upon which our statutory derivative action is based. Relying on Swansson v Pratt ( supra), he explained the significance of the   requirement of good faith as follows:

“[58] It is necessary to determine whether, on the facts of this case, the acrimony between these two brothers was the cause of the applicant seeking to have proceedings instituted against the second respondent in the name of the company. It is important that there must be a demonstration of good conscience and sincere belief on the existence of reasonable prospects of success in the proposed litigation and, therefore, absence of ulterior motive, on the part of an applicant. In Swansson v Pratt the leaned Judge stated:

“[I]n my opinion, there are at least two interrelated factors to which the Courts will always have regard to in determining whether the good faith requirement of s.237(2)(b) is satisfied. The first is whether the applicant honestly believes that a good cause of action exists and has a reasonable prospect of success. Clearly, whether the applicant honestly holds such a belief would not simply be a matter of bald assertion: the applicant may be disbelieved if no reasonable person in the circumstances could hold that belief. The second factor is whether the applicant is seeking to bring the derivative suit for such a collateral purpose as would amount to an abuse of process.

These two factors will in most, but not all, cases entirely overlap: if the Court is not satisfied that the applicant actually holds the requisite belief, that fact alone would be sufficient to lead to the conclusion that the application must be made for a collateral purpose, as to be an abuse of process. The applicant may, however, believe that the company has a good cause of action with a reasonable prospect of success but nevertheless may be intent on bringing the derivative action, not to prosecute it to a conclusion, but to use it as a means for obtaining some advantage for which the action is not designed or for some collateral advantage beyond what the law offers. If that is shown, the application and the derivative suit itself would be an abuse of the Court’s process: Williams v Spautz  [1992] HCA 34;  (1992) 174 CLR 509, at 526. The applicant would fail the requirement of s.237(2)(b).”

 

[59] In my view, factual proof of any pre-existing personal animosity between the parties, such as in the present instance, does not per se serve as conclusive proof that any person referred to in section 165(2) of the Act is not acting in good faith in serving a demand under that subsection, or instituting an application under section 165(5). However, personal animosity between the opposed parties is an important factor which the Court will always take into account together with other relevant evidentiary material presented before the Court in a given situation, in determining whether or not an applicant has, on a balance of probabilities, satisfied the ‘good faith’ requirement. In Swansson v Pratt the Court pointed out:

“To take another example: a derivative action sought to be instituted by a current shareholder for the purpose of restoring value to his or her shares in the company would not be an abuse of process even if the applicant is spurred on by intense personal animosity, even malice, against the defendant: it is not the law that only a plaintiff who feels goodwill towards the defendant is entitled to sue: see eg Dowling v Colonial Mutual Life Assurance Society  [1915] HCA 56;  (1915) 20 CLR 509 at 521-2;  21 ALR 425 at 433; IOC Australia Pty Ltd v Mobil Oil Australia Ltd [1905] HCA 28[1905] HCA 28; ;  (1975) 11 ALR 417, at 426-7. On the other hand, an action sought to be instituted by a former shareholder with a history of grievances against the current majority of shareholders or the current board may be easier to characterize as brought for the purpose of satisfying nothing more than the applicant’s private vendetta. An applicant with such a purpose would not be acting in good faith.”

 

[60] Indeed, there is no requirement in law that the directors of a company need to be friends or even to be in talking terms. What is of utmost fundamental importance, amongst others, is the fiduciary duty which they individually owe to the company of which they are the directors. This aspect of a director’s responsibility vis-à-vis his or her company is equally relevantly important in relation to this application, in that such fiduciary duty entails, on the part of every director, the same duty as required of an applicant under section 165(5)(b), namely, to ‘act in good faith’ and ‘in the best interests of the company’. Recently, in Da Silva v CH Chemicals39 the Supreme Court of Appeal (per Scott JA) reminded all concerned that “[i]t is a well-established rule of company law that directors have a fiduciary duty to exercise their powers in good faith and in the best interests of the company.^{”(my emphasis)}

 

161.         In Amdoc’s case ( supra), Myburgh JA dealt with the converse situation where the onus was on the company to establish the absence of good faith in order to set aside a demand on the basis that it was vexatious, frivolous and without merit in terms of section 165 (3). With regard to the latter requirement, Myburgh AJ held that an applicant for relief in terms of s 165(3) was entitled to succeed if he was able to demonstrate that the demand was without merit in the sense that it could not succeed- If it appeared that the demand was misdirected in the sense that it was either bad in law or was at odds with the facts to the extent that the proposed action could not succeed, then it could properly be set aside. In this respect, the applicant company bore the onus and the absence of merit had to be clearly demonstrated. This is in direct contradistinction to the first part of the good faith requirement in section 165(5) where only a legally cognizable cause of action need be shown which if, established, it will be assumed is pursued in good faith unless no reasonable person would possibly seek to pursue it.

162.         Myburgh JA, distinguished the Australian case of Swansson v Pratt ( supra) on the basis that the Australian statute differed from the South African one in as much as South African Court is obliged to interpret our legislation in line with the principles enshrined in the Constitution which had a  central tenant, the promotion of accountability and access to the Courts  (at para [4]). He also distinguished Mouritzen, which had approved Swansson v Pratt on the basis that it dealt with subsection (5) and not (3) of the Act. He found that :

[17] …. it seems to me that the correct approach is to consider the gravamen and thrust of the demand and to ask whether, on the available evidence, the company might conceivably succeed in the envisaged action/s.  I specifically say ‘might conceivably’ for it seems to me that the issues of probability cannot properly be taken into account at this stage. The threshold which a complainant has to cross is a low one. Conversely, the onus and persuasion which an applicant for relief in terms of section 165(3) bears is a rather heavy one”.

163.         Relying on these statements, Mr Brett SC argued that the threshold was a low one and  in demonstrating that the continuation of the Zastrospace contract might be delivering some benefit to the community is as high as the onus the applicant has to discharge goes in establishing that there was conceivably a cause of action to enforce the Zastrospace contract. He argued that there was no onus on the applicant to show that such contract in fact was for the benefit of the community.

164.         Mr Brett also sought to persuade me that once a cognizable cause of action is established, it was incumbent on the respondent to establish the absence of good faith by demonstrating that the demand was brought for a collateral purpose as to amount to an abuse of the process.

165.         Analysing this argument in light of the two stage approach to determining good faith espoused in Swansson v Pratt , in essence what he suggests is that the first element of good faith, upon which the applicant bears the onus, is established merely by showing that the respondent might conceivably succeed in its derivative actions. This is a relatively easy onus to discharge

166.         Once this is established, so it was argued, the onus  shifts to the respondent to show that notwithstanding this, the application has been pursued for a collateral purpose, a substantially more onerous onus to discharge, in essence, making no distinction between the onus under subsection (3) on a company seeking to set aside a demand and that on it under subsection (5) to resist an application to sue in the name of the company.

167.         I  think that this takes the words of Myburgh JA too far. It also serves to conflate the onus and the requirements of subsections (3) and (5) which the legislature has made distinct. It also flies in the face of the express intent of the legislature to place the onus on an applicant wishing to institute a derivative action to demonstrate good faith. As I have said, this is an important safeguard to prevent the section being abused to pursue personal vendettas and advance collateral interests. Were good faith simply to be presumed unless the contrary is proved, these important safeguards would be lost.

168.         To require an applicant wishing to institute a derivative action to demonstrate his good faith would not serve to deprive persons seeking to protect the interests of the company against bad corporate governance or discourage accountability but rather serve to protect the section against abuse. This is particularly so where the onus to show the elements of good faith in the sense required in Swansson v Pratt is a substantially less onerous an onus to discharge than that on a company wishing to set aside a demand under subsection (3) which involves establishing not only that the demand is without merit but is also brought frivolously and vexatiously. That is sufficient safeguard to ensure that a legitimate demand is not too readily quashed and set aside. That is sufficient to ensure that accountability and good corporate governance can readily be enforced.

169.         The requirement of good faith subsection (5)(b)(i) (in respect of which the person making the demand bears the onus) is not simply the corollary of the requirements in subsection (3) ( in respect of which the company wishing to set aside the demand bears the onus. Although I accept that where an application is vexatious or frivolous, this would demonstrate the absence of good faith ( or bad faith), there is no  onus on the respondent to disprove good faith ( proved simply by showing that there is some conceivable cause of action) by showing that the application is  vexatious or frivolous. On the contrary these words are not mentioned in the subsection and it is made quite clear that the applicant seeking relief under the subsection bears the onus to discharge both elements of good faith, including that the application has not been brought for a collateral purpose. There is no onus on the respondent to establish this.

170.         I can not  accept is that on the mere assertion of good faith , established, not by a demonstration of bona fides, but rather only by establishing that the respondent might succeed in its action, the onus would shift to the respondent  to refute this by establishing that the application has been brought in bad faith in the sense that it has been pursued for a collateral purpose. The legislature has quite clearly placed a substantive  onus on an applicant seeking to bring a derivative action to show that he is acting in good faith which requires his establishing both elements of the requirement of good faith set out in Swansson v Pratt. This is a substantive self- standing requirement for relief.

171.         Mr Brett also sought to persuade me that although the applicant bears the onus to prove good faith in the sense outlined above, there is a presumption to this effect which it is incumbent on the respondent to rebut by tendering evidence to the contrary.

172.         In this respect, Mr Brett SC relied on the opinions expressed by Cassim op cit at 521. Having regard to the approach in Australia and Canada to their legislation, upon which our derivative action has been based, she argues that:

“ The question arises as to the level of  evidence that is required to establish good-faith. Must the applicant actually prove that this application is brought in good faith -in which case the onus of proof is a weighty one- or will the courts  presume that the applicant is acting in good faith unless the facts and circumstances of the matter show a lack of good faith? It is submitted that the better approach for the South African courts to espouse would be the latter approach. Where a derivative action appears to have merit and is in the best interests of the company, it should be presumed that the applicant is acting in good faith, unless there are objective facts and circumstances to establish otherwise. To require applicant to prove his or her good faith positively would be to impose a restrictively heavy burden that would discourage prospective applicants from seeking permission to litigate to protect the company’s legal interests. More importantly, it would also gives rise to the problem of how applicant is to prove his or her good faith and what type of evidence would suffice, bearing in mind that good faith is largely a subjective test which depends upon the applicants state of mind  or his  or her  honest belief that the company has a good cause of action. As I have discussed above, although the proposed test for  good faith is the subject of one, it is relative or qualified by an objective inquiry; if a reasonable person, in light of the objective circumstances of the matter, could not reasonably have believed that the company has a valid  cause of action with reasonable prospects of success, the applicants assertion of his or her honest belief  could stand to be rejected. This submission ( ie  that a South African applicant should be presumed to be in good faith unless there are objective acts and circumstances to the contrary) is buttressed by considerable authority and other comparable jurisdictions, especially Canada and Australia. It is nonetheless noteworthy that even in these jurisdictions this issue has elicited conflicting approaches.

In this regard, in Canadian law, good faith has been held to exist where there is prima facie evidence that the applicant has proper motives, such as a reasonable belief in the claim. The issue of good-faith is a question of fact to be determined on the circumstances of each case. Numerous Canadian cases have adopted the view that the applicant will be presumed to be acting in good faith where the  proposed action appears to have merit. The onus then shifts to the respondents to show a lack of good faith for instance, by showing that the applicant is pursuing a private vendetta or some other collateral purpose. However, there are other Canadian decisions that have espoused a different approach, and have ruled that a substantial onus lies on the  applicant who must prove positively  that he or she is acting in good faith.

Similar trends may be observed in Australian law. By  and large, the general attitude of the Australian courts is that the applicant is to be regarded as acting in good faith unless there is some factor that indicates bad faith. The applicants may generally prove his or her honest belief that a good cause of action exists and has a reasonable prospect of success, on fairly low evidence. But this would not simply be a matter of ‘bald assertion’ , as the court proclaimed in Swansson v Pratt. The applicant may be disbelieved if no reasonable person in the circumstances could hold that belief…..”

173.         On this basis she suggests:

Accordingly, the better route for South African courts to  take is to presume that the applicant is acting in good faith, unless there are  objective circumstances that established otherwise.

174.         I do not believe that there is any basis for such a presumption particularly in the absence of a statutory presumption of good faith in the section where the legislature has dealt with presumptions where it has felt necessary but has not seen fit to do so with regard to the requirement of good faith dealt with me above. The onus to establish good faith remains on the applicant ; there is no evidentiary burden  on the respondent to establish the absence of bona fides, let alone an onus.

175.         Although generally the Canadian courts require that the applicant substantiate this on a balance of probabilities (where the Australian Courts apply a less stringent test and will accept the bona fides of the applicant unless bad faith is shown), a bald assertion of good faith on both approaches is not sufficient.

176.         Accepting that the applicant, as a director and officer of the respondent, may be  acting in good faith in pursuing the first four demands in the interests of the good management of the company, this does not necessarily apply to the fifth demand.

177.         Mr Brett SC argued that this onus has been discharged by the applicant’s uncontroverted assertion that he has no interest whatsoever in the Zastrospace contract. The respondent has been unable, so he argued, to disprove this and the only connection between the applicant and Roelofse shown by the respondent, apart from the fact that they are friends and the applicant introduced Roelofse to the respondent, is that they both use the domain name of the Ukupha Group with whom they both have close links. Were the burden of proof to shift to   the respondent as contended by Mr Brett SC, this would not be sufficient to disprove the assertion by the applicant that he has no interest whatsoever in the Zastrospace contract . Alive to this, Mr Brett SC submitted that a finding as to the overall onus to establish good faith was fundamental to the outcome of the application. He inasmuch impliedly conceded that the applicant had not discharged the substantial onus that the application had not been brought for a collateral purpose.

178.         Moreover, the assertion that the applicant has no interest in the Zastrospace contract does not necessarily establish that the applicant is acting in good faith in pursuing it. On the contrary, his absence of interest in the contract may be indicative of the opposite. In this respect the comments of Cassim op cit  p 523 are apposite:

“While an applicant’s self interest will not necessarily destroy his or her good faith  ( as I have discussed above), the absence of any self interest may conversely be taken to show an absence of good faith . This certainly was the position under the common law derivative action, under which it was more difficult to establish good-faith if the shareholder had  little incentive to sue on behalf of the company. For instance in High Street Capital vTchigirinsky (No 2)[22] where is shareholder who sought to bring a common-law derivative action held less than 1% of the company shares, which it purchased only after the alleged wrongdoing had entered  public domain ( and thus at a price  which reflected the market response to the alleged wrongdoing ), the court found that the shareholder lacked good faith. Pure altruism is rarely the  motive for costly and lengthy derivative litigation, particularly bearing in mind that it is the company that will benefit from the success of the action, while the applicant benefits only indirectly from the enrichment of the company.

A similar trend may be gleaned from Canadian and Australian law, in which useful signposts may be unearthed to navigate the way forward for South African courts. In this retard, in assessing whether an applicant has a collateral purpose, the Australian courts may rely on evidence to draw inferences about applicant’s motives, and the extent to which the courts scrutinize the good faith criterion varies depending on the applicant financial interest in the company and his or her incentive to sue on behalf of the company: in other words, his or her self interest. According to Swansson v Pratt, when an applicant has nothing obvious to gain by the success of the derivative action, the court may have a reason to be more circumspect in scrutinizing the good faith criterion. Conversely, good faith may be more easily established, for instance, when the applicant in a derivative claim seeking the recovery of the company’s property is currently a shareholder in the company with more than a token shareholding with the consequence that the derivative action, if successful, would increase the value of the applicants shares.

Similarly, if an applicant is a current director or officer of the company, good faith may be proved by the applicant showing that he or she has a legitimate interest in the welfare and the good management of the company, and that the purpose of the derivative action is to protect these interests…

On the other hand it may be more difficult to establish good faith if the applicants are shareholders with merely a token shareholding in the company, or if  the applicants have nothing obvious to gain by the success of the statutory deriviative action or otherwise have little incentive to sue on behalf of the company. When an applicant has little to gain and little incentive to sue on behalf of the company, he or she is more likely to be found to be motivated by a personal vendetta amounting to abuse of process-for instance where there is a history of grievances against the majority shareholders or the board of directors of the company. In contrast, an applicant who stands to gain by the success of a derivative action is more likely to be found to be acting in good faith even if he or she is spurred on by intense personal animosity against the defendant”.

179.         In this respect the applicant, averring no personal interest, is in a conundrum as this may be indicative of bad faith .

180.         Similary, although it  would generally be in the interests of the company to enforce good corporate governance, where this is in truth and in fact aimed at precluding the  cancellation of the Zastrospace contract by committees which are presided over my non- Board members ,  the absence of good faith would nevertheless preclude a derivative action to enforce these demands. This is particularly so where the complaints about good governance were not raised before the Zastrospace contract was terminated by a committee decision in which a non Board member, Ramaite participated.

181.         It is similarly of significance that it is this very committee member who it is averred improperly acts as deputy CEO against whom the remaining demands are directed. It is thus crucial that the preservation of the Zastrospace contract has merit and is in the interests of the company to establish that the application is pursued in good faith. Where this is not the case, it will more likely be that it is pursued for a collateral purpose particularly where the applicant has no interest in the continuation of the contract. Where this is shown to be the case, it will inevitably rebut the prima facie assertions of good faith in pursuing the other demands notwithstanding that they, being directed at good corporate governance, may themselves be in the interests of the company.

182.         The questionable nature of the purported entitlement to continue with the Zastrospace contract serves also to disprove the averment of good faith. This is all the more so where this is not based on a legally cognizable cause of action apart from an amorphous obligation in line with the Constitution, section 7 of the Companies Act and King III to promote the interests of the community failing which the respondent’s mining right may be in jeopardy.

183.         However, even if this is established, this does not mean that the requirements will be satisfied as good faith is a separated and distinct precondition for the granting of relief and  the absence of good faith will preclude relief even if the contemplated action has merit , is in the interests of the company and is a matter of substantial importance to it. In this respect the South African statute is different from the English one where good faith is not a stand alone and distinct requirement but is but merely one of the factors to consider in granting relief .

184.         Whether or not the application is pursued in good faith depends upon all the circumstances of the case, including the fact that the complaints made in the other demands were not hitherto ever complained about. One gets the impression that it was only after the cancellation of this contract that the applicant became so concerned about corporate governance and the unlawful conducting of the applicant’s business through committees.

185.          It is of some significance that in formulating the first demand it is averred that any decisions taken by such committees in conflict with the Act and King III would be void or voidable, which would include the decision taken by the procurement committee to cancel the Zastropace contract. Indeed it is expressly stated in the fifth demand that the termintation of the Zastrospace contract is contrary to the requirement that only the Board could terminate the contract [23]

186.         There is no evidence as to how the community has benefited from the Zastrospace contract and the Court is left with the impression that its BEE status was but window dressing and that the contract has served to enrich Roelofse and not the community. The same would seem to apply to the KCT as although it is averred that it was formed by the applicant with the specific purpose of representing the BEE requirement which enabled the applicant to capture its mining right , there is no evidence that a single dividend has been declared to the community. I have already stated that the employment of 18 to 20 persons from the local community does not satisfy the stated purpose to benefit the Kuruman community.

187.         With the Zastrospace contract looming in the background to all the demands which has as its beneficiary a close friend of the applicant who was introduced to the respondent by him, something more than the applicant’s declaration under oath that he has no interest, direct or otherwise in the Zastrospace contract is required for the applicant to discharge the onus of good faith.  This would have been some demonstration that his new found concern with corporate governance was not tied to the termination of the Zastrospace contract. It would have required some proof that his attacks on Ramaite were not directed at him as a result of his decision to terminate the Zastrospace contract . It would have required substantial proof that he indeed has the interests of the Kuruman community at heart and that the continuation of such contract is to the benefit of the community. He would have to show that the termination of the Zastrospace contract would  probably put the respondent’s mining right in jeopardy.

188.         The applicant has not discharged his onus of establishing any of these facts. In the result, the demands have not been established to be in the interest of the respondent or to have been brought in good faith. Even although the first four demands may have merit if viewed in isolation, because they are inextricably tied up with the Zastrospace contract, the inference is inescapable that they have the termination of the Zastrospace as their motivation or collateral purpose.

189.         In the circumstances I find that the applicant has not established the requirements for relief under section 165 (5) and in the result, the application must dismissed.

190.         As an aside ,  I do not agree with the view expressed by Cassim that even if the requirements for relief had been satisfied, I would nevertheless have had a discretion to refuse relief in view of  the use of the word “may” in subsection (5) . This, with respect to the learned author , is a misreading of the subsection where  the word “may” is used in the sense of permitting the Court to grant relief only if the requirements are met and not otherwise. It is expressly provided that the court “may grant relief only if” the requirements are satisfied. The use of the word “may” in this context does not confer discretion but rather authority to the Court to only grant relief if the requirements of the subsection are satisfied. Where they are  satisfied, there is no residual discretion conferred upon the court not to grant relief.

191.         This, however, is not necessary for my decision, as I have found that the requirements are not satisfied and thus I am precluded from granting leave to the applicant to bring proceedings on behalf of the respondent as contemplated in the demands.

192.         Costs should follow the result. As the matter is one involving a substantial amount of money tied up in the continuation of the Zastrospace contract, I believe that these costs should  include the costs consequent upon the employment of two counsel which were employed on both sides.

193.         However, as I have found that the Badenhorst SC’s report had not been validly commissioned as the applicant was not given notice of the meeting at which it was resolved to appoint him as an impartial investigator, these costs should not include the costs of his report. As I believe that there was merit in the application to strike out,  I propose to grant the costs of that application to the applicant.

194.         I accordingly make an Order as follows:

194.1.     The main application is dismissed with costs including the costs consequent upon the employment of two counsel. These costs do not include the costs of Badenhorst SC’s report.

194.2.     The costs of the interlocutory application to set aside the appointment of the respondent’s attorneys and Badenhorst SC and to strike out Badenhorst’s report are awarded to the applicant.

SM WENTZEL

ACTING JUDGE

COUNSEL FOR THE APPLICANT J BRETT (SC)

INSTRUCTED BY NATALIE LUBBE & ASSOCIATES

COUNSEL FOR THE RESPONDENT A BHAM (SC)

INSTRUCTED BYMERVYN TABACK INC

DATE OF HEARING 26 OCTOBER 2015

DATE OF JUDGMENT 11 FEBRUARY 2016

---