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Monday, September 1, 2008
Avoiding chaos

There are many lessons to be learnt from the ongoing Kebble saga. One of the most practical emerges from the recent judgment in Letseng Diamonds Ltd v JCI Ltd regarding the governance of companies and the position of shareholders in relation to the company and its directors.
Letseng Diamonds was a shareholder in JCI Ltd. During the period the Kebbles controlled JCI the company had acquired a negative reputation and lost credibility in the market place facing litigation on many fronts.
JCI found itself in serious financial difficulty in mid –August 2005 and on top of that the JSE suspended trading in its shares due to certain compliance procedures not being met. Investec Bank Ltd agreed to lend JCI R540 million subject to a raising fee of 30% of the aggregate increase in the value of the assets furnished as surety and subject to the entire board of directors being replaced.
Letseng Diamonds sought to have the suite of agreements between JCI and Investec declared invalid, despite the fact that the parties themselves at all times regarded the agreements as binding on them. The judgment of Judge Blieden in the Johannesburg High Court sets out very clearly the general legal principles applicable to the dynamic between the shareholders and directors of a company.
The board of directors and the general meeting of shareholders are each organs of a company, having original powers. The directors exercise the managerial and executive powers of the company, save to the extent that their rights are limited by the company’s articles. The shareholders cannot override these powers of the directors, unless permitted by the articles. They can remove the directors or change the articles, but they cannot otherwise control the management of the company placed in the hands of the directors. The shareholders cannot usurp the powers which, according to the articles, are vested in the directors, the directors cannot usurp the powers vested by the articles in the general body of shareholders.
The shareholder has the right to dividends when declared by the directors, to a return of capital if the company is wound up or reduces its capital, and the right to attend and vote at meetings of shareholders to ensure lawful conduct by those running the company. This right to vote at general meetings of shareholders means that an individual shareholder cannot bring an action to complain about an irregularity (as distinct from an illegality) in the conduct of the company’s internal affairs if this can be done by a vote of the company in general meetings. In JCI’s case its articles vested the management and control of the business of the company in the directors.
The court was not prepared to allow Letseng Diamonds as a shareholder to destroy the fundamental rule of company law that a company is an entity separate from its members and that a member has no right to manage the company’s business merely because it is a member. If the directors breach their fiduciary duties so that a contract purportedly entered into by them on behalf of the company is void, it is the company itself that must extricate itself from the contract. The required action needs to be initiated by the board of directors or the shareholders in general meeting. An individual shareholder has no such right. It would be chaos if different shareholders purported to exercise conflicting attitudes on behalf of the company. The company requires action by its shareholders in general meeting according to the vote stipulated by the articles. No matter how supine or rogue directors may be, it is the company acting at the behest of a resolution of its shareholders in general meeting and not an individual shareholder that has the right to take action.
In the circumstances the court refused to allow Letseng Diamonds to intervene. As the court pointed out, the rules relating to the way companies are to be run are designed to ensure that business is done by these entities in a proper and controlled manner. If each shareholder takes upon itself the right to act in a way which each shareholder thinks is in the best interests of the company there would be chaos. So too, if there are claims against the board of directors for any form of illegal conduct or breach of fiduciary obligations it is the company alone that can make such claims unless the majority refuses to act and the minority is given minority rights to a derivative action. If this were not so there would be an endless multiplicity of actions brought by shareholders whenever the shares of a company drop in value as a result of the actions of the board.
The Court concluded that Letseng Diamonds was attempting to usurp the functions of the general meeting of shareholders and accordingly dismissed the application with costs. The attempt to declare the suite of agreements void therefore failed completely.

Copyright © Insurance Times and Investments® Vol:21.8 1st September, 2008
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