Section 162 as a statutory remedy

Section 162 of the Companies Act provides a crucial remedy for companies where a director’s fiduciary duties are breached. Importantly, once proved, a court has no discretion but to order a declaration of delinquency. In terms of section 162(5) of the Companies Act, a court must declare a director delinquent, if, inter alia, they acted in a manner that amounted to gross negligence, wilful misconduct or breach of trust in in performing their functions and duties to the company. The provision therefore acts both as a deterrent and a protective mechanism.

The dispute

In a sprawling governance dispute surrounding African Legend Investments Proprietary Limited (ALI) and its subsidiary Off the Shelf Investments 56 Proprietary Limited (OTS56), the SCA declared Mr Mashudu Ramano (Director) delinquent for seven years in terms of section 162(2)(a) of the Companies Act read with section 162(5)(c)(iv) and section 162(6)(b).

The dispute arose from a 2017 Pre-Emption Framework Agreement (Framework Agreement) between OTS56 and Glencore South Africa Proprietary Limited and Glencore Energy UK Limited (collectively, Glencore) involving a sequence of transactions, namely Transaction 1 (where OTS56 would exercise, with funding from Glencore, its right of pre-emption to acquire, inter alia, shares in Astron Energy and Astron Botswana) and Transaction 2 (where OTS56 would on-sell such shares to Glencore, subject to certain conditions).

Key thereto was that OTS56 agreed to use its best endeavours to fulfil the conditions, notably Competition Commission (Commission) approval and shareholder resolutions under section 115 of the Companies Act, and to avoid any conduct that could delay or adversely affect satisfaction thereof. ALI shareholders (including the Director) gave irrevocable and unconditional undertakings in favour of Glencore not to take any action or make any statement reasonably likely to be prejudicial to the success of such transactions, including voting in favour of any share issues or share repurchases at ALI.

Delinquency and fiduciary duties

Against that matrix, the SCA set out common-cause pillars justifying that the Director be declared delinquent under section 162(5)(c)(iv) of the Companies Act based on gross negligence, wilful misconduct or breach of trust, as breaches of his fiduciary duties.

Misrepresentation to the board

The Director misrepresented to the board that OTS56’s attorneys believed a letter from Glencore gave OTS56 an entitlement (effectively an option) to buy out Glencore before Transaction 2 closed. The letter, properly read, and as Glencore later confirmed, did not confer such option. 

Deliberate frustration of binding undertakings

The Director caused OTS56 to breach the Framework Agreement and the parties’ undertakings to use their best endeavours to procure fulfilment of the aforementioned conditions and not to hinder their satisfaction, in that:

• He unilaterally and without board authorisation “suspended” OTS56’s compliance with the relevant agreements, causing OTS56 to default on its obligations.
• He delayed and attempted to derail the Commission approval processes by postponing meetings and advancing allegations to persuade the Commission to prohibit the merger, notwithstanding that a majority of OTS56’s board confirmed support for the merger.
• He persuaded ALI shareholders on 30 November 2018 not to pass, and to defer, the section 115 resolutions required to close Transaction 2, thereby delaying closing, in clear breach of OTS56’s and the shareholders’ undertakings.

Governance defiance

After removal as ALI chairperson, the Director purported to convene a shareholders’ meeting “by order of the Chairman”, and persisted with this narrative through lawyers despite clear board communications that no such meeting would proceed, thus breaching his fiduciary duties.

Reneging on undertakings

The Director failed to comply with his own undertakings given to OTS56’s board to provide written responses to breach letters issued by Glencore to OTS56, amounting to a further breach of his fiduciary duties.

Drawing on Gihwala and Others v Grancy Property Ltd and Others [2016] ZASCA 35, the SCA held that the Director owed a fiduciary duty to OST56 to ensure it complied with its binding obligations and that wilful obstruction of OST56’s obligations under a binding agreement constitutes wilful misconduct and a breach of fiduciary duty.

The SCA’s reasoning illustrates how breaches of fiduciary duties intersect with section 162. Under both the common law and sections 75 to 77 of the Companies Act, directors owe duties to act in good faith, in the best interests of the company, for a proper purpose and with care, skill and diligence. Once it is established that a director has breached their fiduciary duties by acting in a manner that amounts to gross negligence, wilful misconduct or breach of trust in relation to the performance of the director’s functions within, and duties to, the company (under section 162(5) of the Companies Act), the court must declare the director delinquent.

Dominant Purpose Approach

Approach Notably, the SCA simultaneously upheld the validity of a board “round robin” resolution under section 74 (sought to be declared invalid in the main application) that issued ALI shares to the Astron Energy Employee Trust as a capital raise for OTS56’s option to acquire shares in Astron Botswana. The SCA endorsed the dominant purpose approach: where multiple purposes exist, a decision stands if the dominant purpose is proper. Here, raising capital to position OTS56 to exercise the option was the dominant purpose. On rationality under section 76(4)(a)(iii), the directors had a rational basis to believe the decision was in ALI’s best interests; no alternative funding was available and vendor finance for Botswana had been declined. Further, an oppression claim by a minority shareholder under section 163 of the Companies Act failed. Dilution inherent in a bona fide capital raise to advance company interests did not meet the high threshold of unfair prejudice where section 76 of the Companies Act was satisfied.

Dissenting Judgment

Molemela J dissented, noting the cross-appeal on delinquency was not appealable, and, in any event, irresoluble on motion given material disputes of fact in respect of the grounds for delinquency. Such dissent highlights that delinquency is fact-intensive and, often, enters trial terrain.

Practical lessons

Notwithstanding the dissent, the majority’s message is plain and directors and companies should bear the practical takeaways in mind.

Grounds for delinquency may arise in the event of the following breaches of fiduciary duties:

• Misrepresentation to the board.
• Defiance of governance processes.
• Defiance of binding undertakings given by a director and by the company (to whom the director must ensure that the undertakings are complied with).

Further, once the grounds in section 162(5) have been established, a court has no discretion but to declare a director delinquent – a severe sanction for misconduct that serves as both a deterrent and protection for companies.

The judgment also makes clear that shareholder dilution will not constitute oppression where decisions are rational and for a proper purpose.

Moreover, this judgment reiterates that the fiduciary duties of directors to act in good faith, for a proper purpose and with candour are not platitudes; they are the price of office.