Background

The context can briefly be summarised as follows. The applicant, Mamokebe, was held by Stanley and Francina, in proportions of 49 shares and 51 shares respectively, after which Stanley and Francina were appointed as directors. Some 10 years later, in September 2016, a document described as a “shareholders’ agreement” was concluded between Stanley and Francina on the one hand, Mamokebe as the company, and Alcucento Proprietary Limited (Alcucento), pursuant to which Alcucento would, via a fresh issue of shares by Mamokebe, become a shareholder in Mamokebe and exercise shareholder rights (Alcucento agreement). It is worth noting that at the time the Alcucento agreement was concluded, Mamokebe was the holder of a prospecting right under the Mineral and Petroleum Resources Development Act 28 of 2002 (MPRDA) – a statute which, by virtue of its well-known section 11, tightly regulates changes of control in respect of rights holders. The provisions of the Alcucento agreement were never subsequently given effect to, however, six years after its conclusion, Alcucento purported to act as a shareholder and gave notice of a shareholders’ meeting of Mamokebe. The minutes recorded that resolutions were purportedly passed to convert and increase Mamokebe’s share capital and to appoint the opposing respondents as directors of Mamokebe. Furthermore, Alcucento, acting through the fourth respondent, caused documents to be lodged with the CIPC recording the impugned directors. The opposing respondents objected to the relief being sought by Mamokebe on a number of different premises, inter alia that Mamokebe lacked legal standing to bring the application, seeing as the board of Mamokebe (which it contended was comprised of the opposing respondents and Stanley, seeing as Francina had subsequently died) did not pass a majority resolution to authorise the litigation. This was, of course, based entirely on the opposing respondents’ version, namely that all the steps taken by Alcucento as the purported shareholder to reconstitute the Mamokebe board, were proper and valid.

Validity and effect of the Alcucento agreement

The opposing respondents’ house of cards essentially started to fold on the key finding by the court on the validity of the Alcucento agreement in the first place, which by implication had a bearing on whether Alcucento was, or ever became, a shareholder of Mamokebe and was thus entitled to take steps to place directors on the board, or to participate in any shareholders’ meetings. The court held that section 11 of the MPRDA, which requires the written consent of the Minister of Mineral and Petroleum Resources for the cession or disposal of a controlling interest in a company holding a prospecting or mining right, applied to the Alcucento agreement. Such consent was never obtained, nor was it a suspensive condition for the operation of the Alcucento agreement. But what did that mean for the Alcucento agreement, given that section 11 is, for the time being, not explicit on what exactly is the plight of contracts that contravene it? This happens to be a very common issue in corporate law: a statute prohibits or restricts something but then does not go on to say what happens if a juristic act conflicts with that prohibition or restriction. Fortunately, a rich body of common law has developed in this regard, the gist of it being that a court should examine the statute, its context and whether the very purpose of the legislation would be undermined if the validity of the contravening act were upheld. Unsurprisingly, the court concluded that to recognise a transaction that contravened section 11 of the MPRDA would defy and undermine the objects of the MPRDA and accordingly, the Alcucento agreement was void ab initio.

The invalidity of the Alcucento agreement had all the expected ensuing knock-on effects, inter alia the nullity of any purported shareholding by Alcucento in Mamokebe and the nullity of all steps taken by Alcucento in purportedly convening and voting at Mamokebe shareholders’ meetings.

Aside from the invalidity of the agreement, the court also agreed with the various secondary arguments raised by Mamokebe relating to the woefully defective – in fact, non-existent – implementation of the share acquisition contemplated in the Alcucento agreement. When issuing fresh shares, there is a checklist which the parties must go through to ensure a valid issuance, as there are multiple aspects to consider under the Companies Act 71 of 2008 (Companies Act) and the company’s constitutional documents, including, among others: Are there enough unissued shares to begin with? Are there pre-emptive rights? Do you need shareholder approval? Is there a board resolution for the issuance? Did you make entries in the securities register? Are the shares fully paid up? On the facts of the Mamokebe case, it was clear that no steps were subsequently taken to effect the required increase to Mamokebe’s share capital or to issue shares to Alcucento, as no resolutions were passed by the shareholders to amend Mamokebe’s memorandum of incorporation (MOI) to increase its authorised share capital, the board did not resolve to issue and allot any shares to Alcucento, give a first refusal offer of authorised shares to existing shareholders, or determine the consideration and terms upon which any shares would be issued, nor did Alcucento pay for any shares. This was not a case of one or two items not being checked.

Who can call a shareholders’ meeting?

The court further pointed out that in the first instance, Alcucento, which had convened the relevant meeting, was not empowered to convene a shareholders’ meeting as it was not a shareholder of Mamokebe and, secondly, even if it were a shareholder, in terms of the Companies Act, such a meeting could in any event only be validly convened by the board, or a person authorised in terms of a company’s MOI, or its section 15(3) governance rules (section 61(1) of the Companies Act). Time and again shareholders get this wrong: unless the MOI says otherwise, shareholders do not have a right to convene a shareholders’ meeting themselves – they can, at most, if they hold at least 10%, demand or requisition the board to do so (section 61(3) of the Companies Act). If the board fails or refuses to do so, the requisitioning shareholder(s) must go to court (section 61(12) of the Companies Act). Accordingly, the proceedings that ensued at the meeting – such as the election of the opposing respondents as directors – were unlawful from their inception.

Additionally, the court considered the lodging of a form CoR39 (notice of director amendments) by the fourth respondent with the CIPC, which form contained signatures of Stanley and Francina that were found by a handwriting expert to be forged. The court reiterated the now well-understood point that the CIPC’s records are not determinative of the objective legal position. The objective validity of a person’s status as director (or otherwise) is determined by whether the correct procedure was followed at board and shareholder level and whether the director provided written consent to act as a director. The CIPC’s records are more of an administrative matter in this regard.

Conclusion

This case highlights the importance of ensuring that agreements comply with the relevant regulatory frameworks that may apply to parties or their underlying business operations, as non-compliance can have severe results, such as rendering the agreement void and without any force or effect. This will in fact be the general or starting position where the statute is silent. It also highlights the importance of ensuring fulsome compliance with the Companies Act, specifically regarding the formalities that apply to shareholders’ meetings and share issuances, as the consequences of non-compliance can similarly be severe, rendering a meeting or any decisions taken or resolutions passed at such meeting, void. The Mamokebe matter is a case study on how not to do these things – which is just as valuable as any manual or checklist on proper implementation.