Voting Rights

WHEN DIRECTORS PARALYSE A COMPANY – DIRECTORS’ ABILITY TO PREVENT THE CONVENING OF SHAREHOLDERS’ MEETINGS By Don Mahon

MGAdvocate Commercial Law, Company Law, meetings, shareholders , , , , , , ,

“Meetings are indispensible when you don’t want to do anything.” 

– John Kenneth Galbraith

The New Companies Act, 71 of 2008 (“the Act”) brought with it material changes to the machinery by which shareholders can convene shareholders’ meetings.  In terms of the previous Companies Act, two shareholders could convene a shareholders’ meeting by delivering notice of the meeting to the other shareholders (section 180 of the Companies Act 61 of 1973) .

In terms of the New Act, the procedure is a bit more complicated.

Section 61(1) of the Act provides that “the Board of a company or any other person specified in the company’s Memorandum of Incorporation or Rules, may call a shareholders’ meeting at any time”.

Section 61(3) states that “… the Board of a company or any other person specified in the company’s Memorandum of Incorporation or Rules, must call a shareholders’ meeting if one or more written and signed demands for such a meeting are delivered to the company, and –

(a)  each such demand describes the specific purpose for which the meeting is proposed; and

(b)  in aggregate, demands for substantially the same purpose are made and signed by the holders, as of the earliest time specified in any of those demands, of at least 10% of the voting rights entitled to be exercised in relation to the matter proposed to be considered at the meeting.”

Therefore, in terms of the New Act, a shareholders’ meeting cannot be convened by a shareholder but must be convened by “the Board of a company, or any other person specified in the company’s Memorandum of Incorporation or Rules”.

Whilst it is true that certain resolutions may be adopted by the shareholders without the holding of a shareholders’ meeting (see section 60(1)), there are certain instances where a shareholders’ meeting is required.  Take the following example:

Let us assume that a company has two directors, one of whom is the sole shareholder and the other is a rogue director who intends utilising his position on the board to act to the detriment of the company and its shareholders (for the purposes of this example, we shall call him Mr X).

If the shareholder in the company wants to remove Mr X as a director, he requires a meeting of shareholders to be convened in terms of section 71(1).

Section 71(1) states that “Despite anything to the contrary in a company’s Memorandum of Incorporation or Rules, or any agreement between a company a director, or between any shareholders and a director, a director may be removed by an ordinary resolution adopted at a shareholders’ meeting by the persons entitled to exercise voting rights in an election of that director, subject to subjection (2).”

Therefore, in order for the shareholder of the company to remove Mr X as a director, it would need to convene a shareholders’ meeting by following the machinery provided for in section 60(1) of the Act.  Thus, the shareholder would be required to send a demand to the company that a meeting be convened for that purpose.

However, before the meeting can be convened, the Board of Directors would have to call for the shareholders’ meeting.

Naturally, in the example provided, Mr X would, no doubt, refuse to vote in favour of a resolution by the board to convene a meeting of shareholders which is to be convened for the purposes of removing him as a director.

Thus, if the relevant sections of the Act are strictly interpreted, Mr X would be able to simply block any resolution of the board to convene the meeting at which he is to be removed.

The absurdity which arises from this state of affairs is self-evident.  A strict application of the sections of the Act allowed a rogue director to effectively paralyse the functioning of the company and prevent his removal.

However, the provisions of section 61(1) and 61(3) are peremptory in that, upon receipt of a demand by a qualifying shareholder to convene a shareholders’ meeting, the board of a company “must call a shareholders’ meeting”. [My emphasis]

The limited grounds upon which it would seem that the board can elect not to convene the meeting are those provided for in section 61(5) which provides that “a company, or any shareholder of the company, may apply to a court for an order setting aside a demand made in terms of sub-section (3) on the grounds that the demand is frivolous, calls for a meeting for no other purpose than to reconsider a matter that has already been decided by the shareholders, or is otherwise vexatious”.

In S v Cooper and Others 1977 (3) SA 457 (T) at 476, the Court held that “… the word ‘frivolous’ in its ordinary and natural meaning connotes an application characterised by lack of seriousness, as in the case of one which is manifestly insufficient … these words have been used according to the decided cases in respect of pleadings and actions which were obviously unsustainable or manifestly groundless or utterly hopeless and without foundation”.

In Bisset and Others v Boland Bank Ltd and Others 1991 (4) SA 603 (D) at 608 the Court held that “vexatious” means “frivolous, improper, instituted without sufficient ground, to serve solely as an annoyance to the defendant”.

This section would, however, have limited application in the example provided as it would be unlikely that the board, upon considering the demand to convene the meeting, resolved to bring an application to court to set the demand aside on this basis.

So what is the solution where Mr X is able to paralyse the board by procuring a deadlock situation upon the consideration of a demand to convene the shareholders’ meeting?

The right to participate in a meeting and the right to vote are rights inherent in the ownership of shares and it is thus not competent for the Board of Directors to frustrate or impede that right by not holding a shareholders’ meeting (see Cassim et al: “Contemporary Company Law”, 2nd Ed. at p371 and authorities cited therein).

In the example provided, Mr X would clearly have a conflict of interests when considering a demand to convene a meeting of shareholders which seeks to have him removed as a director.  Perhaps therein lays the solution.

Section 76(2) of the Act provides that:

  “A director of a company must –

(a)  not use the position of director, or any information obtained while acting in the capacity of director –

(i)             to gain an advantage for the director, or for another person other than the company or a wholly owned subsidiary of the company; or

(ii)           to knowingly cause harm to the company or a subsidiary of the company.”

Thus, it is arguable that the patent conflict of interest which Mr X would have in the consideration of a resolution to convene a shareholders’ meeting by the Board of Directors, would require Mr X to recuse himself from any consideration of the resolution to be adopted.

Therefore, the only solution appears to be for the other director to adopt the view that Mr X, due to his conflict of interest, is not entitled to vote on a board resolution to convene a meeting upon the shareholders’ demand.  If that is so, the other director would be entitled to exercise the sole vote in favour of convening the shareholders’ meeting which, in light of Mr X’s conflict of interest, would be valid and binding upon the company.

Once the board of the company, through the vote exercised by the director who is also a shareholder, has resolved to convene the meeting, it would merely be a question of delivering a notice to convene the shareholders’ meeting on the company letterhead.

Despite what is set out above, practitioners would be well advised, when drafting a Memorandum of Incorporation for a company to be formed, to make provision for the convening of shareholders’ meetings by any qualifying shareholder, rather than simply relying on the provisions of section 60(1).

With thanks to Adam Harris and Moneyweb…

MGAdvocate Business Rescue, Commercial Law , , , ,

Interesting article from Adam Harris of Bowman Gilfillan on Moneyweb’s website…

MYBUSINESS

Author: Bowman Gilfillan|

27 November 2012 16:46

Business rescues surge, liquidations decline

Sharp decline in company liquidations as business rescue applications rise

The pace at which company liquidations are decreasing accelerated again in October when liquidations dropped by 35.3% year-on-year, after a 28.5% decline in September and a fall of 20.2% in August, according to figures released by Statistics SA recently.

Adam Harris, director of the litigation department at corporate law firm Bowman Gilfillan, said this indicated that more companies are benefitting from business rescue laws that came into effect in May last year under the Companies Act of 2008. “The fact that the decrease in the number of liquidations has been driven mainly by voluntary liquidations is indicative that the business rescue procedure is taking hold and that there has been an increase in the number of companies seeking assistance.”

Adv Rory Voller, deputy commissioner at the Companies and Intellectual Property Commission (CIPC), recently advised that to date there have been more than 740 entities, including close corporations, private and public companies, that have either filed a notice to begin business rescue proceedings after passing a resolution, or that have approached a court to request to be placed in business rescue.

Harris commented: “It is significant that according to CIPC figures, in the majority of cases, some 82%, it was a voluntary decision by the officers of the entity concerned. In other instances the affected parties (the bank, employees, shareholders or a creditor) approached the court.

“It appears that there is still a high degree of skepticism in the lender community. This is not assisted by the fact that of the 25 or so cases which have been before the courts, in the overwhelming majority there have been irregularities which have been highlighted to show that the courts should rather stay away from granting business rescue orders”.

1time Holdings subsidiary 1time Airline applied for business rescue, which was short-lived, while one of the first companies to undergo business rescue was Pinnacle Point Group. The latter failed after Pinnacle Point’s bankers declined to provide the necessary financial support. Another high-profile business rescue case that failed was construction company Sanyati Holdings. There have, however, also been some significant successes, including Blyvooruitzicht Gold Mining.

The CIPC reported a success rate of approximately 55% of all businesses that have concluded their rescue operations. The act prescribes a three-month turn around but it does leave room for extension. Many of the rescues reported to CIPC have not yet been concluded. The average time-period reported is five months. The Companies Act envisages that the entire business rescue process should be completed within a matter of months. Once a notice of business rescue has been filed with the commission, it appoints a business rescue practitioner who has to produce a rescue plan.

“Business rescue aims at avoiding liquidations and job losses by providing businesses with protection against creditors who may want to apply for liquidation. It is an opportunity to reorganise and restructure distressed but viable companies in order to avoid liquidation,” explained Harris.

Applying for business rescue can provide companies with the opportunity to access interim liquidity to fund their operations while a rescue package is being formulated. It is important for a rescue package to be implemented as soon as possible.

Harris commented that, “Business rescue offers an alternative to liquidation for financially distressed companies, allowing them to be stabilised and restructured. However, business rescue always depends on there being a source of funding, which means companies will also need buy-in from their banks and creditors for an application to be successful.”