You will have seen from our April newsletter that Jerome Veldsman had joined us a Director. This has happily boosted our skills levels, particularly in the complex areas of corporate finance, mergers and acquisitions. We have also gained important new clients which is pleasing in today’s times. Jerome has contributed analyses on two recent legal cases dealing with important commercial concepts and legal principles. Gertruida has extracted the key elements of what happens where two controlling shareholders have fallen out and Andrew concludes with positive news from Exchange Control.
For my part, this is the first newsletter that has been issued under my Chairmanship with Denis now being an Executive Consultant but continuing to provide wise counsel to both clients and colleagues.
The Death Of The Legislator, In A Manner Of Speaking
by Jerome Veldsman
In a legal context, interpretation is the process of attributing meaning to the words used in a document, for instance, a statute or a contract. How ought one to ascertain the (legally) correct meaning of a word (or collection of words) in a document? This question has engaged the minds of lawyers for centuries, and in Natal Joint Municipal Pension Fund v Endumeni Municipality, a unanimous judgment delivered by the Supreme Court of Appeal on 15 March 2012, Wallis JA has the final say (at least for now).
In a legal context, for a long time, the dominant approach has been to apply a textual interpretation, by placing emphasis on the meaning of a word in isolation and divorced from its context in the document; and only to consider the context if the interpreter is of the view that there might be ambiguity. Such approach is conventionally described, with regard to a statute, as the process of ascertaining the intention of the legislator; and, with regard to a contract, as the process of ascertaining the intention of the parties(thereto).
For some time, there has been a move towards a contextual interpretation, which considers from the outset the meaning of and context of a word together, with neither predominating over the other. Wallis JA endorses contextual interpretation as follows:"Interpretation is the process of attributing meaning to the words used in a document, be it legislation, some other statutory instrument, or contract, having regard to the context provided by reading the particular provision or provisions in the light of the document as a whole and the circumstances attendant upon its coming into existence. Whatever the nature of the document, consideration must be given to the language used in the light of the ordinary rules of grammar and syntax; the context in which the provision appears; the apparent purpose to which it is directed and the material known to those responsible for its production. Where more than one meaning is possible each possibility must be weighed in the light of all these factors. The process is objective not subjective."
Wallis JA dispenses with the expressions "ascertaining the intention of the legislator" and "ascertaining the intention of the parties", as: "these expressions are misnomers, insofar as they convey or are understood to convey that interpretation involves an enquiry into the mind of the legislature or the contracting parties." The correct position is that the enquiry is restricted to ascertaining the meaning of the actual word(s) in the document.
In practical terms, if the meaning of a word is apparent, then that is its meaning; but, as is sometimes the case, if there are two or more possible meanings that are to a greater or lesser degree candidates for the correct meaning, the interpreter is to select the proper meaning (on which views may legitimately differ). Wallis JA concludes the discussion of interpretation with:"In resolving the problem the apparent purpose of the provision and the context in which it occurs will be important guides to the correct interpretation. An interpretation will not be given that leads to impractical, unbusinesslike or oppressive consequences or that will stultify the broader operation of the legislation or contract under consideration."
Natal Joint Municipal Pension Fund v Endumeni Municipality is a valuable contribution to South African jurisprudence.
The End Of The Road For "Enter At Own Risk"
And "Exclusion Of Liability?
by Amien Hoosain, Belinda van der Vyver, and Jerome Veldsman
Walkers Commercial Department
An owner of immovable property, to which members of the public are invited or permitted to have access, ought to reconsider its exposure to liability for physical harm (injury or death) suffered by individuals on the property, in the context of a judgment delivered by Nicholls J, on 3 April 2012, in the South Gauteng High Court, Johannesburg, in the case of Naidoo v Birchwood Hotel.. The matter may also be of interest to short-term insurers.
Prior to discussing the Naidoo case, we provide some background.
An owner of, for instance, a block of flats (Swinburne v Newbee Investments (Pty) Ltd 2010 (5) SA 296 (KZD), or a shopping complex (Holm v Sonland Ontwikkeling (Mpumalanga) (Edms) Bpk 2010 (6) SA 342 (GNP)), owes a duty of care to people present on the property. Accordingly, if someone suffers physical harm on the property, due to negligence of the owner, the latter will be liable for damages.
Owners protect themselves from liability for their negligence by (1) displaying disclaimer notices stating that "all who enter here do so at own risk", "the owner will not be liable for any damages", or similar wording; and/or (2) requiring a member of the public to sign some document including an exclusionary (or exemption) clause along the same lines.
Courts have in the past in many, but not all, instances held that a disclaimer notice (for instance, Durban's Water Wonderland (Pty) Ltd v Botha and Another 1999 (1) SA 982 (SCA)), and an exclusionary clause (for instance, Afrox Healthcare Bpk v Strydom 2002 (6) SA 21 (SCA)), provides such protection to the owner.
The plaintiff in the Naidoo case was a paying guest in a hotel, and he was injured by a gate falling on him, as a result of negligence of the owner. Nicholls J found that an exclusionary clause (on the reverse side of the hotel registration card) was part of the contract between the owner and the plaintiff. The exclusionary clause was accordingly subjected to constitutional scrutiny.
Nicholls J found guidance in Barkhuizen v Napier 2007 (5) SA 323 (CC). The following two quotations are from the Barkhuizen case:
- "… the proper approach to the constitutional challenges to contractual terms is to determine whether the term challenged is contrary to public policy as evidenced by the constitutional values, in particular, those found in the Bill of Rights. This approach leaves space for the doctrine of pacta sunt servanda [agreements must be honoured] to operate, but at the same time allows courts to decline to enforce contractual terms that are in conflict with the constitutional values even though the parties may have consented to them."
- "Notions of fairness, justice and equity, and reasonableness cannot be separated from public policy. Public policy takes into account the necessity to do simple justice between individuals. Public policy is informed by the concept of Ubuntu."
Nicholls J determined fairness in the Naidoo case by considering the following two questions:
- Is the exclusionary clause objectively reasonable? If the answer is in the negative, the clause is unenforceable. If the answer is in the positive, the second question is to be considered.
- Notwithstanding the exclusionary clause being objectively reasonable, should it be enforced in the particular circumstances (of the litigating parties)?
Due to a technicality, Nicholls J assumed in favour of the owner that the answer to the first question (objective reasonableness) was in the affirmative; despite stating that: "… I am of the view that the exemption clause in which liability for negligently causing bodily injuries or death is excluded will not pass constitutional muster, …"
However, as to the second question (the particular circumstances), Nicholls J stated: "Naidoo was a guest in a hotel. To enter and egress is an integral component of his stay. A guest in a hotel does not take his life in his hands when he exits through the hotel gates. To deny him judicial redress for injuries he suffered in doing so, which came about as a result of the negligent conduct of the hotel, offends against notions of justice and fairness."
Accordingly, Nicholls J refused to enforce the exclusionary clause, and held that the owner liable for the damages suffered by the plaintiff.
Unless the Naidoo case is overruled (which is unlikely), exclusionary clauses relating to injury or death may henceforth be of no real consequence. The same fate may befall disclaimer notices.
Disclaimer notices and exclusion clauses usually also extend to exclusion of liability for damage to property. The prohibition of arbitrary deprivation of property is also enshrined in the Bill of Rights. An exclusionary clause relating to damage to property has not yet been subjected to constitutional scrutiny.
The incident in the Naidoo case preceded the coming into effect of the Consumer Protection Act 68 of 2008. The Act applies in the main (but not exclusively) to the supply of goods or services to natural persons in exchange for consideration. If an exclusionary clause is linked to a supply for consideration (such as a paying guest in a hotel), in terms of the CPA, the circumstances under which an exclusionary clause (relating to death, injury, or damage to property) will be valid are even more stringent than as determined in the Naidoo case.
All shareholders are equal, but some shareholders are more equal than others
(With apologies to George Orwell)
by Gertruida Grové
In the Supreme Court of Appeal Bayly v Knowles 2010 (4) SA 548 case two equal minority shareholders in a company (each with 25.5% shareholding) had an understanding that they would participate equally in the management of the company. Bayly was the managing director and Knowles the sales and marketing director. However the relationship between Bayly and Knowles soured, and all trust and confidence between them were eroded. Bayly started side-lining Knowles from running the affairs of the company and eventually stopped his salary, and other company perks and benefits such as a petrol allowance, medical aid benefits and credit card facility and furthermore had him locked out of his office. It was clear that Bayly wanted Knowles out of the company. The shareholder agreement provided that a shareholder could not sell his shares without first offering them to the other shareholders in proportion to the latter’s holdings.
Bayly then made an offer to purchase Knowles’s shares for R2 million on the condition that Knowles would resign as director and would cease to be employed by the company. Knowles rejected the offer as unacceptable but did neither claim that the price of R2 million offered to him was unfair, nor did he provide reasons for his refusal to accept the offer. Knowles wanted to remain in the company. Knowles then made a counteroffer to Bayly to purchase the latter’s shares at a value to be independently determined. Furthermore he made it clear that if this offer was refused, he would apply to court for the company to be liquidated. Bayly refused the offer and made it clear that he had no intention of selling his shares to Knowles. At this stage Bayly had aligned himself with another minority shareholder and together they held a majority of the shares in the company.
Knowles then applied to the High Court for relief in terms of section 252 of the old Companies Act, Act 61 of 1973 to have his salary and benefits reinstated and to compel Bayly to sell his shares to Knowles at an independent valuation. In the alternative Knowles asked the court to make an order that the company be liquidated.
Section 252 reads:
(1) Any member of a company who complains that any particular act or omission of a company is unfairly prejudicial, unjust or inequitable to him or some part of the members of the company, may ... make an application to the court for an order under this section.
(3) If on any such application it appears to the Court that the particular act or omission is unfairly prejudicial, unjust or inequitable, or that the company's affairs are being conducted as aforesaid and if the Court considers it just and equitable, the Court may, with a view to bringing to an end the matters complained of, make such order as it thinks fit, whether for regulating the future conduct, of the company's affairs or for the purchase of the shares of any members of the company by other members thereof or by the company and, in the case of a purchase by the company, for the reduction accordingly of the company's capital, or otherwise.
The High Court ordered that Bayly must sell his shares to Knowles.
On appeal, the Supreme Court of Appeal ruled that where a minority shareholder has been prima facie unfairly treated (as Knowles had been in this case) and furthermore refuses a fair offer for his shares it is strong evidence at a willingness to endure such prima facie inequitable treatment despite the choice of a viable alternative. The court said by refusing the fair price for his shares, Knowles had abrogated the right to rely on his prior unfair treatment at the hands of the company.
The court further said that having refused a fair offer for his shares, it was an abuse of process for Knowles to take his grievances to the court. Knowles had been given the opportunity before he approached the court to protect and redeem his investment, but he insisted on retaining his shares.
The court said that the relief offered by section 252 of the old Companies Act was not intended to enable the court to preside over a protracted and expensive contest of virtue between the shareholders and award the company to the winner. The Supreme Court of Appeal said that in determining what order to make in terms of section 252(1), the court must take into account not only the interests of the warring factions of shareholders, but the interests of the other shareholders and the best interests of the company itself;
The company was viable and successful and had become so under the direction of Bayly over a period of years. Bayly was the driving force behind the company: he was at the helm of the company, hired and fired, enjoyed the confidence of the staff and had maintained goodwill with the company's major supplier. Knowles mostly worked away from the company’s premises selling the product. By the time the Supreme Court of Appeal judgment was handed down more than two years had passed since Knowles’ last involvement in the management of the company. To force Bayly out, said the Supreme Court of Appeal, and to place Knowles in control would have negative effects on the company "which can only be guessed at".
The court pointed out that, to order the liquidation of the company (as Knowles had asked for in the alternative) would be avoided except for the most extraordinary circumstances, as it would result in destroying a perfectly viable company. Liquidation would moreover provide Knowles with no redress for whatever oppression he had suffered and would favour revenge above reason.
The court found that the only practical order to make in the circumstances was that Knowles must sell his shares to Bayly, and not the other way round. However such an order was not sought and could not be granted by the court.
Section 252 has been incorporated into Section 163 of the new Companies Act, Act 71 of 2008. Section 163 gives the court a wide discretion to protect the interests of an aggrieved shareholder.
It is clear from the Bayly v Knowles decision and the wide scope of section 163 of the new Companies Act that where a company's prosperity is being damaged by a feud between warring shareholders, the courts will seek a practical solution. The Bayly v Knowles interpretation of section 252 tells us that a court will be reluctant to order that a viable company be liquidated just because its shareholders are in dispute. Furthermore the remedy provided in section 252 of the old Companies Act was not intended to require a court to preside over a protracted and expensive contest of virtue between the shareholders and award the company to the winner. Where a shareholder has suffered inequitable treatment, but is offered a fair price at which he can sell all his shares to the other shareholders, that inequity disappears and cannot be relied upon. Also in determining what order to make in terms of section 252(1), the court will take into account not only the interests of the warring factions of shareholders, but also the interests of the shareholders who have stood apart and the best interests of the company itself. Where one of the warring shareholders as director successfully steered the company to prosperity, held the helm, hired and fired, enjoys the confidence of the staff and the confidence of the company's trading partners, it would be impractical for a court to order, in terms of section 252, that his shares must be sold to another shareholder who does not have such a proven record of success. Although it may be very unusual for the Court to order a majority shareholder actively concerned in the management of the company to sell his shares to a minority shareholder when he is willing and able to buy out the minority shareholder at a fair price, as it was indeed pointed out in Bayly v Knowles, the wide discretion afforded to the court by section 252(3) does not exclude such a possibility in appropriate circumstances.
A Leap Of Faith
by Andrew Duncan
Some time ago I wrote an article entitled “Exchange Control Coerces Immigration to Protect Nest Eggs” pointing out that many wealthy South Africans who would like to stay in the country, but want to secure a portion of their wealth offshore as a hedge against political and economic uncertainties, are being forced to consider emigration as a serious option.
One might be able to maintain contact with South Africa through occasional visits and online interactions while operating from an offshore base, but it could become tricky.
The essence of the various articles that I had previously written was that that Exchange Control was about to be abolished. The reason being that the real motive behind the Amnesty in 2004 and the recent VDP was to increase SARS tax receipts based on previously unknown offshore earnings. The deal implicit was that, as a South African resident, you can take your money where you want, but you have to pay tax on those earnings if you want to live in South Africa. The failure to abolish Exchange Control breaches this deal. Treasury is frustrated by this and as a result the Foreign Allowance has been constantly and dramatically increased to effectively bypass Exchange Control. The present approach is to increase the Foreign Allowance of R5m up to R200m without too much enquiry and even if you make it plain that you are thinking of emigrating.
This means you do not have to emigrate to get your assets out of the country. Reality has won through albeit with little fanfare that investor friendly countries allow their own residents to invest when and how they like subject to paying tax on their earnings which is a fair enough bargain!