There are many lessons to be learnt from the ongoing Kebble
saga. One of the most practical lessons 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 JCI 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, and 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
The content of this article is intended to provide a
general guide to the subject matter. Specialist advice should
be sought about your specific circumstances.
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