TWK Agriculture Ltd v NCT Forestry Co-operative Ltd and Others (8328/2004, 9765/2004) [2006] ZAKZHC 17; 2006 (6) SA 20 (N) (4 April 2006)

REPORTABLE

IN THE HIGH COURT OF SOUTH AFRICA

NATAL PROVINCIAL DIVISION

CASE NUMBERS: 8328/2004 and 9765/2004

In the matter between:

TWK AGRICULTURE LIMITED Plaintiff

and

NCT FORESTRY CO-OPERATIVE LIMITED First Defendant

R P LORENZ Second Defendant

R M NIEBUHR Third Defendant

C A SEELE Fourth Defendant

THE CENTRAL TIMBER CO-OPERATIVE LIMITED Fifth Defendant

THERON J

Date heard; 23 September 2005

Date delivered 4 April 2006

Introduction

[1] The plaintiff has instituted two actions against the five defendants: an action under case number 8328/2004 ("the Durban Wood Chip action") and an action under 9765/2004 ('the ShinCel action"). Both actions are based on a breach by the first defendant and its directors, the second to fourth defendants, of their fiduciary duties to the fifth defendant ("CTC"). In the Durban Wood Chips action the breach arises from the acquisition by the first defendant of shares in NCT Durban this Wood Chips (Pty) Ltd and the construction and operation of a chipping facility by company in competition with CTC. In the ShinCel action the breach arises from the acquisition by the first defendant of shares in ShinCel (Pty) Ltd, a company which trades in competition with CTC, and the conclusion of a supply agreement by this company, in competition with CTC.

[2] It is contended by the plaintiff that the acquisition of shares in NCT Durban Wood Chips (Pty) Ltd and ShinCel (Pty) Ltd and the activities subsequently conducted through these companies were opportunities which properly belonged to CTC and which the first to fourth defendants were obliged to procure for the benefit of CTC and not for their own benefit.

[3] It is common cause that the claims advanced by the plaintiff are advanced on behalf of CTC. The plaintiff claims that the first to fourth defendants must account to CTC, alternatively must pay to CTC damages suffered by the latter.

The exceptions

[4] The second defendant has delivered an exception in both actions. The terms of both exceptions are identical. In essence, the second defendant contends that the plaintiff has no entitlement in law to pursue the claims on behalf of CTC.

The general approach to exceptions

[5] For the purpose of determining whether the. plaintiffs particulars of claim are excipiable all the factual allegations therein must be taken to be admitted.1 Only allegations which aremanifestly false or so divorced from reality that they cannot possibly be proved, need not be accepted.2

The facts relied upon

[6] The plaintiff and the first defendant are the only members of CTC, holding 26% and 74% respectively of the shares therein. Notwithstanding the unequal shareholding, the statutes of CTC provides that:

Each member has one vote.

In the case of an equality of votes the chairman of the meeting shall not have a casting vote in addition to his deliberative vote.

Every matter submitted to a general meeting for decision (save in respect of matters requiring a special resolution) shall be determined by a majority of votes.

A majority of directors shall constitute a quorum for a meeting of the board of directors.

Questions arising at a board meeting are to be decided by a majority of three quarters of the directors present.

[7] In terms of the members agreement between the plaintiff and the first defendant the principle of "one member one vote" is reiterated. The plaintiff and the first defendant are each entitled to appoint three persons to the board of CTC. The plaintiff and the first defendant have each appointed three persons to the board of directors of CTC. This structure entails that neither the plaintiff nor the first defendant holds a majority of votes in either the general meeting of CTC or on its board of directors. The plaintiff alleges that by reason of these facts there is no prospectof the directors or members of CTC adopting an appropriate resolution authorising the institution of an action by CTC and that CTC is accordingly unable to institute action against the defendants.

Discussion

[8] Mr Dickson appeared on behalf of the second defendant. The thrust of his argument is threefold. Firstly, that the common law derivative action is not part of South African law. Secondly, if it is part of South African law it should not be applied to a co-operative and thirdly, even if it is to be applied to a co-operative, the plaintiff has not followed the correct procedure.

The nature of the derivative action

[9] As a general rule, where a wrong is alleged to have been committed against a company, it is the company which must seek redress in respect thereof. The reason for this rule, often referred to as "the proper plaintiff rule" or "the rule in Foss v Harbottle", lies in the separate existence of the company as a legal persona and has been described as follows:

"It is a fundamental principle of our law that a company is a legal person, with its own corporate identity, separate and distinct from the directors or shareholders, and with its own property rights and interests to which alone it is entitled. If it is defrauded by a wrongdoer, the company itself is the one person to sue for the damage. Such is the rule in Foss v Harbottle. "3

[10] This rule is subject to the exception that a shareholder will be allowed to enforce the company's rights where those who control the company wrongfully or in breach of duty benefit themselves and by use of their control ensure that no action is brought by the company to obtain redress. The qualification was described in Burland v Earle4 as follows:

"Again, it is clear law that in order to redress a wrong done to the company or to recover moneys or damages alleged to be due to the company, the action should prima facie be broughtby the company itself. ... But an exception is made to the second rule, where the persons against whom the relief is sought themselves hold and control the majority of the shares in the company, and will not permit an action to be brought in the name of the company. In that case the Courts will allow the shareholders complaining to bring an action in their own names. This, however, is mere matter of procedure in order to give a remedy for a wrong which would otherwise escape redress, and it is obvious that in such an action the plaintiffs cannot have a larger right to relief than the company itself would have if it were plaintiff, and cannot complain of acts which are valid if done with the approval of the majority of the shareholders, or are capable of being confirmed by the majority."

In Foss v Harbottle5 this principle was stated as follows:

"If a case should arise of injury to a corporation by some of its members, for which no adequate remedy remained, except that of a suit by individual corporators in their private characters, and asking in such character the protection of those rights to which in their corporate character they were entitled, I cannot but think that the principle so forcibly laid down by Lord Cottenham in ■Wall-worth v Holt... and other cases would apply, ..."

[11] This exception is generally described as the "fraud on the minority" exception. The terminology used is somewhat

misleading, as it is clear from the authorities that "fraud" is not used in the technical sense but in the sense of any misuse or abuse of power by those in control.6

Is the common law derivative action part of South African law?

[12] Mr Dickson's main point under this heading is that the Supreme Court of Appeal in Francis George Hill Family Trust v South African Reserve Bank and Others7 decided that this doctrine hasnot been accepted into South African law. Particular reliance was placed on the following

passage of the judgment of Hoexter JA:

"This finding renders it unnecessary to consider the further point, which was not raised in argument before us, whether (apart from the statutory remedy provided by s 266 of the Companies Act 61 of 1973) the common-law exception to the rule in Foss v Harbottk forms part of South African law."8

[13] The passage relied upon by Mr Dickson must be read in the context of the entire case. Earlier in the judgment Hoexter JA said:

"Apart from these practical deficiencies in the founding affidavit, there is further a matter of principle which, so it seems to me, entirely precludes recourse by the Hill FT to a derivative action. It is trite that a company with limited liability is an independent legal person and separate from its shareholders or directors. In general, therefore, when a wrong is alleged to have been done to a company the proper plaintiff to sue the wrongdoer is the company itself. In English law a derivative action constitutes an exception to that general rule. The exception is recognised when (1) the wrong complained of involves conduct which is either fraudulent or ultra vires and (2) the wrong has been perpetrated by directors or shareholders who are in the majority and so control the company."9

The learned judge went on to consider the facts of that case and came to the conclusion that the facts of the case do not fall within the exception in English law to the rule in Foss v Harbottle.

[14] The question as to whether, apart from the statutory remedy provided by s 266 of the Companies Act, the common law exception to the Foss v Harbottle rule forms part of South African was not argued, considered or pronounced upon in Francis George Hill The court did not find that the common law derivative action is not part of our law as contended by Mr Dickson.

[15] In order to contextualise the meaning of the statement by Hoexter JA (in para [12] above) regard must be had to the historical background of the introduction of the statutory derivative action in South Africa. The Companies Act, No 61 of 1973, introduced the statutory derivative action (s266) in terms of which a member can bring an action to enforce the company's rights. The history to the introduction of the statutory derivative action is set out by Blackman, in The Law of South Africa (LAWSA) First Reissue, Vol 4, Part 2 (1996) at para 210 (footnote 2) as follows:

"This action was introduced on the recommendation of the Van Wyk de Vries Commission ... The Commission considered that the common law derivative action 'is stringently limited by the Foss v Harbottle [(1843) [1843] EngR 478; 2 Hare 461] rule*; that its field is 'so narrow that it has little significance in the context of shareholder protection*; ... This action was intended to overcome the disadvantages of derivative action: the disadvantage of the shareholder being 'outside* the company in the sense that he has no access to the records of the company; the disadvantage of the defendants being in control of the company; and the need for adequate deterrents to inhibit frivolous and vexatious proceedings."

[16] I agree with Mr Beckerling, who together with Ms de Kok appeared on behalf of the plaintiff, that what Hoexter JA appears to be saying is that it is not necessary to decide whether and in what form the common law exception survives the introduction of the statutory derivative action in 1973. Prior to the introduction of the statutory derivative action the common law doctrine of the exceptions to the Foss v Harbottle rule was applied by our courts in the context of companies as well as trade unions.10 And the reasons in each case were that there was a separate corporate entity which had a personality distinct from its members, that that separate corporate entity was controlled by its members, that the majority of the members in each case could control what the entity did and the application of the exception was necessary to prevent a wrong which could not otherwise be redressed.

[17] In support of the contention that the derivative action is and has always been part of our common law Mr Beckerling relied primarily on the cases of Moti v Moti and Hassim Moti Ltd 1934 TPD 428; Gundelfinger v African Textile Manufacturers Ltd and Others 1939 SA 314 (AD); McLelland v Hulett and Others 1992 (1) SA 456 (D &CLD) and Fedsure Life Assurance Co Ltd v Worldwide African Investment Holdings (Pty) Ltd and Others 2003 (3) SA 268 (WLD).

[18] Moti was decided before the amendment to the Companies Act.11 Tindall AJP referred with approval to the judgment of Lord Davey in Burland v Earle and the applicability of the exceptions to the rule in Foss v Harbottle:

"where the majority are endeavouring directly or indirectly to appropriate to themselves money, property or advantages which belong to the company or in which the other shareholders are entitled to participate".12

[19] It was submitted by Mr Beckerling that the scenario sketched by Lord Davey accords with the case pleaded. In casu it is alleged that there is an opportunity which belongs to CTC which may not be appropriated by the first defendant or any directors

acting on its behalf. I agree with Mr Beckerling that on the facts pleaded this is a case where the first defendant and its directors

are endeavouring directly or indirectly to appropriate to themselves and the first defendant an advantage which belongs to CTC and in which the other shareholders, such as the plaintiff, are entitled to participate.

[20] Tindall AJP in Moti goes on to quote another Privy Council decision Dominion Cotton Mills CovAmyot (1912 A.C. 546) where Lord MacNaghten said:

"In order to succeed it is incumbent on the minority either to show that the action of the majority is ultra vires or to prove that the majority have abused their powers and are depriving the minority of their rights."13

[21] In Gundelfinger the Appellate Division, as it then was, issued a clear statement to the effect that the derivative action forms part of our law. Stratford CJ, with specific reference to Moti, stated that our courts have recognised and applied the principles emanating from English cases relating to the derivative action.14

[22] Further support for the contention that the derivative action is part of our law can be found in McLelland v Hulett and Others15 where Booysen J decided that the rule in Foss v Harbottle, together with its exceptions, has been received into our law:

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

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

There is no basis for saying that the rule in Foss v Harbottle has been received into our law without the exceptions together with which it is framed."

Unless this judgment is plainly wrong or I can distinguish it, I am bound by this finding. In my view the judgment is neither incorrect nor distinguishable.

[23] The decision in McLelland v Hulett was followed in Fedsure Life Assurance where it was held that the applicant, as shareholder of the third respondent, had demonstrated that it had a derivative action against

the first respondent to ensure the preservation of funds accruing to the third respondent in circumstances where the first respondent

controlled the third respondent and it was shown prima facie that the first respondent had not acted in the best interests of the third respondent. Cloete J in Fedsure Life Assurance, in accordance with the principles emanating from McLelland and Moti dealt with the matter thus:

"First, the first respondent controls the third respondent. The applicant has made out a strong prima facie case that the first respondent has not acted, and in the future does not intend to act, in the best interests of the third respondent. In these circumstances the applicant has shown prima facie that, qua shareholder in the third respondent, it has a so-called 'derivative action* against the first respondent {McLelland v Hulett and Others\992 (1) SA 456 (D) at 467; Moti v Moti and Hassim Moti Ltd 1934 TPD 428 at 441; Cook v Deeks [1916] 1 AC 554 (PC) especially at 563; Daniels v Daniels [1978] 1 Ch 406, especially at 414A-F)'16

In my view there is sufficient authority to support a finding as contended by the plaintiff, that the derivative action is part of our common law.

Can common law principles of minority protection in companies be applied to co-operatives? [24] It was contended by the second defendant that applying common law principles of minority protection in companies to other corporate bodies would be undesirable, inappropriate and unsafe. It was submitted by Mr Dickson that one of the factors which militates

against such "transplanting" is that in modern law the legislature after careful consideration passes appropriate laws and the courts should not assume this function.

[25] The statutory law applicable to co-operatives is the Co-Operatives Act, No. 91 of 1981 which is due to be replaced by the Co-operatives

Act, No. 14 of 2005.17 As at the date of hearing of this matter the new Act had not yet been promulgated.

[26] There are a number of material distinguishing features between companies and co­operatives. A co-operative is an organisation

sui generis which exists for the benefit of its shareholders and producing members and which operates in the agricultural field.18 In the Co-operatives Act there are detailed management and administration provisions and provisions which relate to the democratic running of the meetings and affairs of co-operatives. Apart from winding-up and judicial management as methods of intervention, the Minister of Agriculture has the power to wind-up a co-operative, on a number of grounds.19

[27] There are no equivalents to sections 252 and 266 of the Companies Act in the Co­operatives Act.20 It was submitted by Mr Dickson that the administration procedures provided for both in the current and the new act and the broadening

of democratic governance in the new act provides cogent force to the argument that company law common law principles should not be applied to co-operatives.

[28] The submission was made by Mr Dickson that in light of the major differences between companies and co-operatives and in the absence of a specific statutory remedy in either the current or the new Co-Operatives Act, the derivative action should not be applicable to co-operatives.

[29] Griesel AJ in Karroo Valley Farms Bpk en Andere v Klein Karoo Kooperasie Bpk en n' Ander21 considered not only the distinctions between companies and co-operatives but more importantly, also the similarities between them. Regarding the similarities the judge wrote:

"Aan die ander kant is daar terselfdertyd ook sekere belangrike ooreenkomste tussen maatsskappye en koSperasies, byvoorbeeld die afsonderlike regspersoonlikheid van die entiteite (art 28(a) van die Kooperasiewet); die bindende effek van die statuut op lede sowel as die kooperasie (art 28(d)); die vereistes vir wysiging van die statuut, te wete 'n spesiale besluit (art 32(1)); die beperkte aanspreeklilheid van lede (art 62); die regte van lede op insae in sekere rekords van die koSperasie (art 65); sowel as die fmansiele jaarstate daarvan (art 136); die reg om in die besluitneming van die kooperasie deel te neem by algemene vergaderings van lede (arts 122 en 123) en om daar stemme uit te bring (art 128), om slegs 'n paar voorbeelde te22

[30] Griesel AJ was of the view that notwithstanding the differences between companies and co-operatives, the principle of majority rule was firmly entrenched in both these institutions. Griesel AJ goes on to state:

"Die meerderheid mag egter nie hul groter stemkrag gebruik om te diskrimineer tussen hulself en die minderheid op so 'n wyse dat dit aan hulle 'n voordeel besorg ten koste van die minderheid nie."23

[31] Griesel AJ found that there was no reason in principle why common law remedies available to oppressed minority members of a company should not also be available in the case of co-operatives:

"Na my oordeel is daar geen rede in beginsel waarom *n beswaarde minderheid lede van *n koSperasie nie geregtig is om in gepaste

omstandighede op dieselfde gemeenregtelike remedies te steun as 'n minderheid lede van 'n maatskappy nie. Dit sou meebring dat regshulp onder andere verleen kan word waar daar 'n onregmatige inbreuk op die regte van die minderheid plaasgevind het. In elke geval sal dit op die feite van die saak uitgemaak moet word of daar sodanige inbreuk plaasgevind het al dan nie."24

[32] It was argued, on behalf of the second defendant, that common law company principles are not always applicable or appropriate to be applied to entities which are not companies. Along this vein it was submitted that the Supreme Court of Appeal has recognised this difficulty in relation to the application of the Turquand rule and the doctrine of constructive notice to trusts.25

[33] There have in fact been instances where common law principles of minority protection have been applied to entities other than

companies. In Garment Workers' Union and Others v Smith26 the cases of Foss v Harbottle and Burland v Earle were discussed and applied. On the applicability of the principles enunciated in these two cases to trade unions Watermeyer AJP stated:

"It must not be forgotten that a trade union is a body corporate and the ultimate control of its actions lies with the majority of members. The executive committee may take unconstitutional action, but the majority of members may approve and regularise what the executive committee may have done. If so, upon what ground can the^ Court interdict the executive from doing unconstitutional acts which may have the approval of a majority of members and which the majority intend to ratify?

If unconstitutional action is a wrong it is a wrong done to the trade union as a corporation. ... If so, it is a wrong done to the corporation for which the corporation must seek redress, not individual members of the corporation.

If the matter be approached from another point of view a similar result is arrived at. There is a rule with regard to corporations which has received considerable attention in the English Courts, sometime known as the rule in Foss v Harbottle ..."27 (my emphasis)

[34] The learned judge proceeded to consider the rule with reference to a number of English cases, such as McDougall v Gardiner (1 Ch.D. 13), Burland v Earle, Menier v Hooper's Telegraph Works and Mozley v Alston (65 R.R. 520) and concluded that the principles laid down in these cases seem to be "similar to those which I have sought to apply".28

[35] Similarly, in Petersen and Another v Amalgamated Union of Building Trade Workers of SA29 the court accepted that the principles enunciated in Foss v Harbottle are applicable to registered trade unions.30 The court however found that the rule in Foss v Harbottle had no application in that matter.

[36] Mr Beckerling referred to an American case, Hargrove v Canadian Valley Electric Co­operative Incorporated31 as further authority for the proposition that shareholder derivative actions are applicable to co-operatives. The Supreme Court of Oklahoma held that general rules which apply to shareholder derivative actions applied to an action brought by a class of consumers against a co-operative.

[37] In Canada, the rule in Foss v Harbottle has also been applied to co-operatives. In McGaidey v British Columbia32 the British Columbia Court of Appeal reiterated that a co­operative corporation is an entity separate from its members and concluded that "it is this existence as an independent entity which attracts the rule in Foss v Harbottle”.33

[38] It is clear that co-operatives have a separate corporate identity distinct from its members, that that separate corporate entity is controlled by members, and that the majority of the members controls what the entity does. In my judgment there is no reason why shareholder derivative actions should not be applicable to co-operatives.

[39] It was contended on behalf of the second defendant that English law requires that a minority shareholder apply to court for leave to sue in the name of the company and is required to prove a prima facie reasonable case before an action may be instituted. In support of this argument reliance was placed on Wallersteiner v Moir (No 2) where Lord Denning MR referred to Atwool v Merryweather (1867) LR 5 Eq 464 and said:

"It was accepted in that case [Atwool v Merryweather] that the minority shareholders might file a bill asking leave to use the name of the company. If they showed reasonable ground for charging the directors with fraud, the court would appoint the minority shareholders as representatives of the company to bring proceedings in the name of the company against the wrongdoing directors. By that means the companies would sue in its own name for the wrong done to it."34

It was submitted by Mr Dickson that if the English common law is to be adopted into our law, it must be followed in its origin.

[40] Wallersteiner's case does not assist the second defendant. Lord Denning MR stated that the route of first seeking leave to sue is a circuitous one that can be avoided. In fact that circuitous route was not followed in Wallersteiner. The action was instituted by Moir in his own name. Lord Denning MR commented as follows on the procedure adopted:

"As it happens in the present case the formula [of seeking leave to sue in the name of the company] has been discarded. ... The prayer is: 'Mr Moir counterclaims for' several declarations of wrongs done to the two companies, and orders on Dr Wallersteiner to pay specified sums to the two companies, ... No objection has been taken to that form of proceeding. No suggestion has been made that it should be amended. Quite right. Let it stand as it is. It is in accord with principle. Mr Moir sues in his own name but in reality on behalf of the companies: just as an agent may contract in his own name but in reality on behalf of his principal."35 (my emphasis)

[41] It is rare in our law for a litigant to come to court as a preliminary procedure to ask for leave to institute an action. One instance where such leave is required is where proceedings are instituted against a judge. [42] The courts have recognised a member's standing to bring a derivative action without first having proposed a resolution that the company institute action where such a proposal would have been an exercise in futility.36 In Russel v Wakefield Waterworks Co37 it was held that: "It is not necessary that the corporation should absolutely refuse by vote at the general meeting, if it can be shown either that the wrong-doer had command of the majority of the votes, so that it would be absurd to call the meeting." Control does necessarily entail a majority of votes. Rather it entails any form of manipulation of the votes which may block an action against the wrongdoers. Accordingly, the derivative action will also be available in a situation where two shareholders have a parity of votes. Is the derivative action available to the plaintiff? [43] The plaintiff will not be able to obtain a majority vote to authorise the institution of the action by CTC, in either the board of directors or the general meeting of CTC. On this basis the plaintiff alleges that CTC is unable to institute the action in its own name. This allegation of fact must be taken to be admitted for the purposes of determining the exceptions. As such this is a situation where the derivative action is clearly available to the plaintiff. This is a case where it would be an exercise in futility to propose a resolution to institute the actions in the name of CTC. Such a resolution could only be successful if the defendants voted to institute actions against themselves. Whilst this is theoretically possible, it is highly unlikely. In the circumstances, the exceptions are dismissed with costs, such costs to include those occasioned by the employment of two counsel. Plaintiffs counsel: T W Beckerling SC Assisted by: A De Kok Plaintiffs attorneys: Hofmeyer Herbstein & Gihwala Inc. c/o Badenhorst & Olivier Inc. Second Defendant's counsel: A J Dickson SC Second Defendant's attorneys: Venn Nemeth & Hart Inc.

[41] It is rare in our law for a litigant to come to court as a preliminary procedure to ask for leave to institute an action. One instance where such leave is required is where proceedings are instituted against a judge.

[42] The courts have recognised a member's standing to bring a derivative action without first having proposed a resolution that the company institute action where such a proposal would have been an exercise in futility.36

In Russel v Wakefield Waterworks Co37 it was held that:

"It is not necessary that the corporation should absolutely refuse by vote at the general meeting, if it can be shown either that the wrong-doer had command of the majority of the votes, so that it would be absurd to call the meeting."

Control does necessarily entail a majority of votes. Rather it entails any form of manipulation of the votes which may block an action against the wrongdoers. Accordingly, the derivative action will also be available in a situation where two shareholders have a parity of votes.

Is the derivative action available to the plaintiff?

[43] The plaintiff will not be able to obtain a majority vote to authorise the institution of the action by CTC, in either the board of directors or the general meeting of CTC. On this basis the plaintiff alleges that CTC is unable to institute the action in its own name. This allegation of fact must be taken to be admitted for the purposes of determining the exceptions. As such this is a situation where the derivative action is clearly available to the plaintiff.

This is a case where it would be an exercise in futility to propose a resolution to institute the actions in the name of CTC. Such a resolution could only be successful if the defendants voted to institute actions against themselves. Whilst this is theoretically possible, it is highly unlikely.

In the circumstances, the exceptions are dismissed with costs, such costs to include those occasioned by the employment of two counsel.

Plaintiffs counsel: T W Beckerling SC

Assisted by: A De Kok

Plaintiffs attorneys: Hofmeyer Herbstein & Gihwala Inc.

c/o Badenhorst & Olivier Inc.

Second Defendant's counsel: A J Dickson SC

Second Defendant's attorneys: Venn Nemeth & Hart Inc.

1 Anirudh v Samdei and Others 1975 (2) SA 706 (NPD) at 708E

2 See Natal Fresh Produce Growers' Association and Others v Agroserve (Pty) Ltd and Others 1990 (4) SA 749 (NPD) at 754J-755B and Voget and Others v Kleynhans 2003 (2) SA 148 (CPD) at para [9]

3 Per Lord Denning MR in Wallersteiner v Moir (No 2); Moirv Wallersteiner and Others (No 2) [1975] 1 All ER849 (CA) at 857d

4 1902 AC 83 at 93

5 [1843] EngR 478; (1843) 2 Hare 461 at para 492

6 See Sammel and Others v President Brand G.M. Co Ltd 1969 (3) SA 629 (AD) at 679F-H where Trollip JA stated: "It is true that ii was neither alleged nor contended for the appellants that the resolutions constituted an actual fraud on the minority shareholders; but 'fraud' in that expression does not necessarily mean fraud in its technical sense; it is there used in its wider connotation of being any abuse or misuse of power by the majority of shareholders. It seems to me that at least part of the argument for the appellants amounted to maintaining the commission of a fraud on the minority of shareholders in that extended sense; in particular, the alleged circumvention or deprivation of the minority's rights could only be founded on that principle. It must therefore be considered."

6 See Sammel and Others v President Brand G.M. Co Ltd 1969 (3) SA 629 (AD) at 679F-H where Trollip JA stated:

"It is true that ii was neither alleged nor contended for the appellants that the resolutions constituted an actual fraud on the minority shareholders; but 'fraud' in that expression does not necessarily mean fraud in its technical sense; it is there used in its wider connotation of being any abuse or misuse of power by the majority of shareholders. It seems to me that at least part of the argument for the appellants amounted to maintaining the commission of a fraud on the minority of shareholders in that extended sense; in particular, the alleged circumvention or deprivation of the minority's rights could only be founded on that principle. It must therefore be considered."

7 1992(3) SA91 (AD)

8 At 98A-B

9 At 97B-D

10 This is dealt with more fully in paras [33]-[35] of this judgment.

11In Moti Tindall AJP set out the nature of the derivative action: "An action of this kind, brought by a minority shareholder to redress a wrong done to the company is, of course, based on the exceptions to the rules laid down in cases like Burland v. Earle (1902, A.C. 83) that the Court will not interfere with the internal management of companies acting within their powers and that in order to redress a wrong done to the company prima facie the company alone can sue. The exceptions are stated in Palmer, Company Precedents (13th Edition, volume 1, page 1246) to be: (a) where the act complained of is ultra vires the company, (b) where the act complained of is a fraud on the minority, (c) where there is an absolute necessity to waive the rule in order that there may not be a denial of justice. It is the second of these exceptions that is relied on in the plaintiff's claim ..." (at 441)

11In Moti Tindall AJP set out the nature of the derivative action:

"An action of this kind, brought by a minority shareholder to redress a wrong done to the company is, of course, based on the exceptions to the rules laid down in cases like Burland v. Earle (1902, A.C. 83) that the Court will not interfere with the internal management of companies acting within their powers and that in order to redress a wrong done to the company prima facie the company alone can sue. The exceptions are stated in Palmer, Company Precedents (13th Edition, volume 1, page 1246) to be: (a) where the act complained of is ultra vires the company, (b) where the act complained of is a fraud on the minority, (c) where there is an absolute necessity to waive the rule in order that there may not be a denial of justice. It is the second of these exceptions that is relied on in the plaintiff's claim ..." (at 441)

12 At 441

13 At 441

14 The following passage of the judgment is relevant: "This view is sufficient answer to the plaintiffs claim, but there is a further serious obstacle to it in the resolutions passed at the general meeting of the Textile Company on the 24th January, 1938, called at the request of the plaintiff. Against the validity of the resolutions passed at this meeting the plaintiff

levelled his main attack. It was said that the resolutions were a fraud on the minority: it being contended that moneys belonging to all the shareholders of the Textile Company had, by an abuse of majority voting power, been illegally and fraudulently taken from the coffers of the company and put into the pockets of the majority. This indeed was the charge, and I think the only charge, made in the declaration. So far as we can gather from the reasons for judgment it was the only issue debated in the Trial Court and such cases as Menier v Hooper's Telegraph Works (9 Ch. Appeals 3501 and Burland v Earle (1902. A.C. 83) were quoted in support of it. If the facts of this case permitted the application of the principles enunciated in those cases, the Courts of this country have

recognised and applied them ..." (my emphasis) Per Stratford CJ at 324-325

14 The following passage of the judgment is relevant:

"This view is sufficient answer to the plaintiffs claim, but there is a further serious obstacle to it in the resolutions passed at the general meeting of the Textile Company on the 24th January, 1938, called at the request of the plaintiff. Against the validity of the resolutions passed at this meeting the plaintiff

levelled his main attack. It was said that the resolutions were a fraud on the minority: it being contended that moneys belonging to all the shareholders of the Textile Company had, by an abuse of majority voting power, been illegally and fraudulently taken from the coffers of the company and put into the pockets of the majority. This indeed was the charge, and I think the only charge, made in the declaration. So far as we can gather from the reasons for judgment it was the only issue debated in the Trial Court and such cases as Menier v Hooper's Telegraph Works (9 Ch. Appeals 3501 and Burland v Earle (1902. A.C. 83) were quoted in support of it.

If the facts of this case permitted the application of the principles enunciated in those cases, the Courts of this country have

recognised and applied them ..." (my emphasis) Per Stratford CJ at 324-325

15 1992 (1) SA 456 (D & CLD) at467G-I

16 At para [55]

17 The new Act was published in the Government Gazette dated 18 August 2005, No. 27912 and is to be brought into operation by proclamation

in the Government Gazette

18. See LAWSA, (Second Edition) Vol 5, Part 1 (2004), para 265

19 Section 182 of the Co-Operatives Act

20 Sections 252 and 266 of the Companies Act, respectively, deals with a member's remedy in case of oppressive and unfairly prejudicial

conduct and the launching of proceedings by a member on behalf of a company.

21 1998 (4) SA 226

22 At para [22]

23 At para [24j]

24 At para [29]

25See Land and Agricultural Bank of South Africa v Parker and Others 2005 (2) SA 77 (SCA) at para [ 18]

26 1936 CPD 249

27 At 255-256

28 At 258

29 1973 (2)SA 140 (ECD)

30 Kannemeyer J at 143G referred to Garment Workers Union and Others v Smith and Grundiing v Beyers and Others 1967 (2) SA 131 (WLD) in support of this proposition. In GrUndling the court found that the rule in Foss v Harbottle "is as applicable to incorporated trade unions as it is to companies" (at 139F)

31 792 P.2d 50 (1990) OK

32 39B.C.L.R (2d) 223

33 At paras [29]-[31]

34 At 857h

35 At 858f-g

36 See Wallersteiner where Lord Denning MR at 857d explained: "The rule [Foss v Harbottle] 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 authorise 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." See also Hargrove v Canadian Valley Electric at paras [l]-[4] where the general principle was restated that: "before a court will entertain an action brought by shareholders, the shareholders must first show that they sought relief through corporate channels without success." The court however recognised that this rule could be departed from where an approach to the corporation would have been futile.

36 See Wallersteiner where Lord Denning MR at 857d explained:

"The rule [Foss v Harbottle] 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 authorise 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."

See also Hargrove v Canadian Valley Electric at paras [l]-[4] where the general principle was restated that:

"before a court will entertain an action brought by shareholders, the shareholders must first show that they sought relief through corporate channels without success."

The court however recognised that this rule could be departed from where an approach to the corporation would

have been futile.

37 (1875) LR 20 Eq474 at 482