Written by Thandiwe Nhlapho, associate, Fasken, supported by Fasken partner, David Hoffe
It has been almost a decade since the Companies Act No. 71 of 2008 (“Companies Act”) came into effect, however many of its provisions remain untested or have not been definitively interpreted by our South African courts. These untested provisions have continuously created uncertainty in commercial practice, with the possibility that courts may subsequently apply or interpret such provisions differently. This occurred with the court’s interpretation in the case of CDH Invest NV v Petrotank South Africa (Pty) Ltd & Others. The pertinent issue raised in this case was whether a director of a company is obliged to provide a justification when he or she proposes an increase in the authorised shares of a company by way of round robin resolution.
The Companies Act allows for a board of directors to increase or decrease the company’s authorised shares, save to the extent that the company’s memorandum of incorporation (“MOI”) provides otherwise. In order to achieve this, the board of directors may convene a formal meeting in terms of section 73 of the Companies Act. Alternatively and more conveniently, a director’s meeting may be conducted by way of a round robin resolution in terms of section 74 of the Companies Act provided that each director has received notice of the matter to be decided.
In this case, CDH Invest NV (the “Appellant”) and Amabubesi Investments Proprietary Limited (the “Second Respondent”) formed a partnership, Petrotank South Africa Proprietary Limited (the “First Respondent”). The memorandum of understanding (“MOU”) entered into by the parties provided that there would be five directors, three appointed by the Appellant and two by the Second Respondent. The MOU further contemplated that the First Respondent would have 100 000 shares issued to the Appellant and Second Respondent in a 60 000/ 40 000 split, respectively. However, as a result of an error in the MOI upon the incorporation of the First Respondent, the MOI recorded 1 000 ordinary no par value shares.
When the error transpired, one of the directors, appointed by the Appellant, proposed that the discrepancy is rectified. To this end, a resolution was circulated to the board of directors. The resolution provided that in terms of section 36(2)(b) and (3) of the Companies Act, the board increased the authorised shares to 1 000 000 ordinary no par value shares. The two directors appointed by the Second Respondent impugned the resolution on the basis that the authorised shares had to be increased to 100 000 shares in line with the MOU and not 1 000 000 as it was proposed in the resolution. Notwithstanding this objection, the three directors signed the resolution and instructed for its lodgment with the Companies and Intellectual Property Commission which was successfully done.
The court found that the three directors who signed the board resolution “committed a misrepresentation which was at the very least designed to obfuscate the real purpose behind the resolution”. The court further found that their conduct did not conform to the standard of good faith and thus their exercise of powers for a proper purpose was questionable. On this basis the court held that the board resolution in question was invalid.
It is unclear if directors of companies will now have to justify the increase of the authorised shares which is currently not a requirement in terms of the Companies Act. Furthermore, the judgement creates further uncertainty on whether board resolutions validly passed in accordance with the Companies Act can be invalidated by a court owing to the directors’ breach of fiduciary duties. It remains to be seen if this judgement will set precedent for similar cases in the future and is certainly worth keeping an eye on.