GUIDE ON ANSWERING PROBLEM-TYPE QUESTIONS IN THE 2015 TYPICAL EXAMINATION

QUESTION PAPER

QUESTION 1:

Legal issue: Whether the acquisition of shares by Makgonatsohle in MDT will constitute a conflict
between his personal interest and his duty to the Pension Fund Company since he is being
remunerated handsomely by the company and is also entitled to a performance-based bonus.

Area of Law: Director’s fiduciary duties with particular focus on the duty to avoid a conflict between
the director’s personal interest and his duty to the company.

Summary of the Law: Directors (including senior executives and employees) of a company are
regarded as fiduciaries of their companies and, as such, owe certain duties to those companies. This
principle is well established in company law and a director owes fiduciary duties and duties of care,
skill & diligence. It is the fiduciary duties that this question is concerned with and therefore my
discussion of the legal principles will focus on directors’ fiduciary duties

Fiduciary duties are anchored by the obligation of loyalty to the company and examples of fiduciary
duties, as established in common law include the duty to avoid a conflict between the director’s
personal interests and his or her duty to the company. The leading case in South Africa on this duty
is that of Robinson v Randfontein Estates Gold Mining Co Ltd 1921 AD 168 in which the Court
authoritatively stated that “[w]here one man stands to another in a position of confidence involving
a duty to protect the interests of that other, he is not allowed to make a secret profit at the other’s
expense or place himself in a position where his interests conflict with his duty. This principle has
recently been affirmed in two very important cases of recent times. In the case of Volvo (Southern
Africa) (Pty) Ltd v Yssel 2009 (6) SA 531 (SCA), the court re-iterated this principle and emphatically
concluded that the question to ask is whether, given all the surrounding circumstances, one party
could reasonably have expected that the other party would act in the former’s best interests with
respect to the subject-matter at issue. Discretion, influence, vulnerability and trust were mentioned
as non-exhaustive examples of evidential factors to be considered in making this determination.
Again, in the recent case of Phillips v Fieldstone Africa (Pty) Ltd, upon which the facts of this question
are based, the Court summarised the position, as it has been articulated in various decided cases, as
follows: ‘The rule is a strict one which allows little room for exceptions … It extends not only to
actual conflicts of interest but also to those which are a real sensible possibility … The defences open
to a fiduciary who breaches his trust are very limited: only the free consent of the principal after full
disclosure will suffice … Because the fiduciary who acquires for himself is deemed to have acquired
for the trust, … once proof of a breach of a fiduciary duty is adduced it is of no relevance that (1) the
trust has suffered no loss or damage … ; (2) the trust could not itself have made use of the
information, opportunity etc … or probably would not have done so … ; (3) the trust, although it
could have used the information, opportunity etc has refused it or would do so … ; (4) there is not
privity between the principal and the party with whom the agent or servant is employed to contract
business and the money would not have gone into the principal’s hands in the first instance … ; (5) it
was no part of the fiduciary’s duty to obtain the benefit for the trust … ; or (6) the fiduciary acted
honestly and reasonably … The Court also concluded that… “these duties [i.e. fiduciary duties],
except in so far as they depend on statutory provisions expressly limited to directors, are not so
restricted but apply equally to any officials of the company who are authorized to act on its behalf,
and in particular to those acting in a managerial capacity.”

Application of the Law to the Facts: In the question, Makgonatsohle’s main argument is that he was
being offered those shares because of the work he was doing and therefore, he does not have to
hold them in trust for the Company. The decisions of Robinson, Volvo and Phillips clearly show that
acquisition of shares for his own account will be contrary to the duty to avoid a conflict between his
interests and those of the company. It is clear that, just like in the case of Phillips, Makgonatsohle
was being handsomely rewarded for seeking companies in which his company could invest and be
compensated by means of equity in those companies, as payment for its services. Even if the
Companies Act, 2008 (particularly s 76(3)(a) and (b) and s 76 (2)), is being applied, the principles of
common law as enunciated above are still applicable and, as such the same conclusion can be
reached whether one uses the common law or the Act.

Conclusion: In the circumstances, it is clear that Makgonatsohle will be in breach of his duty to avoid
a conflict between his personal interest and his duty to the company if he goes ahead and acquire
the shares from MDT for his own account.

QUESTION 2:

Q2.1

Legal Issue: Whether or not the conduct of Mogadi, a 50% shareholder and director of Lizard
Electronics, constitutes an oppressive or an unfairly prejudicial conduct to Tswana, another 50%
shareholder and director of Lizard Electronics, who would like the company to accept an offer for
the purchase of its business from Revolutionary Technologies.

Area of Law: The remedy of shareholders to bring to an end an unfairly prejudicial or pooresive
conduct by, or on behalf of, a company, with particular focus on s163 of the Companies Act

Summary of the Law: At common law, there exist a remedy for shareholders to approach the court
in order to bring to an end conduct by, or on behalf of, a company which is oppressive and unfairly
prejudicial to aggrieved shareholders. That common law remedy has now been enacted in s 163 of
the Companies Act, 2008. According to s 163 (1), [a] shareholder or a director of a company may
apply to a court for relief if…(a) any act or omission of the company, or a related person, has had a
result that is oppressive or unfairly prejudicial to, or that unfairly disregards the interests of, the
applicant…or if (b) the business of the company, or a related person, is being or has been carried on
or conducted in a manner that is oppressive or unfairly prejudicial to, or that unfairly disregards the
interests of, the applicant; or…if (c) the powers of a director or prescribed officer of the company, or
a person related to the company, are being or have been exercised in a manner that is oppressive or
unfairly prejudicial to, or that unfairly disregards the interests of, the applicant.

In terms of s 163(2), the court may make any interim or final order it considers fit, including…(a) an
order restraining the conduct complained of.

Application of the Law to the facts: In the facts under consideration, it is clear that a resolution
accepting the offer from Revolutionary Technologies to buy the business of Lizard Technologies
cannot be taken in the normal course of events as the equal shareholding of both Mogadi and
Tswana inevitably brings about a deadlock. The matter complained of is not the one that can easily
be resolved by resorting to voting in the normal course of events. It is arguable that the conduct of
Mogadi, in opposing the company’s acceptance of Revolutionary Technologies’ offer, which is
supported by Tswana, is oppressive and unfairly prejudicial to Tswana. Since the Court has the
power to make any order it deems fit to bring to an end the conduct complained of, it is conceivable
that on the basis of the facts given, the court will authorise Tswana to accept the offer on behalf of
the company, despite Mogadi’s opposition.

Conclusion: The conduct by Mogadi is oppressive and unfairly prejudicial to Tswana and, as a result,
the court will exercise the provisions of s163 to restrain his conduct.

Q 2.2

Legal Issue: Whether or not there is any remedy in law for Mogadi, a 15% shareholder in Lizard
Technologies, if the company resolves to pass a resolution for a merger with another company,
Revolutionary Technologies.

Area of Law: Dissenting shareholders’ appraisal remedy in terms of s 164 of the Companies Act,
2008.

Summary of the Law: According to the Act (s 164), if a company has given notice to shareholders of a
meeting to consider adopting a resolution to, among other things, enter into a merger or
amalgamation transaction in terms of s 113, that notice must include a statement informing
shareholders of their appraisal rights under s 164. According to the Act, at any time before that
resolution is to be voted on, a dissenting shareholder may give the company a written notice
objecting to the resolution.

Within 10 business days after a company has adopted a resolution, it must send a notice to each
shareholder who gave the company a written notice of objection and has neither withdrawn that
notice; nor voted in support of the resolution that the resolution to effect a merger has been
adopted. The relevant shareholder may then demand that the company pays him or her fair value
for all of the shares of the company held by that shareholder. The shareholder who has sent a
demand to be paid a fair value of all the shares held by him or her has no further rights in respect of
those shares, other than to be paid their fair value.
Application of the Law to the Facts: As Mogadi holds only 15% of the voting rights in Lizard
Electronics and it is clear that the company will be able to pass the resolution authorising the
merger, Mogadi is advised to follow the process under s 164 of the Act and:

 Give the notice to the company that he will be voting against the resolution
 Attend the meeting and vote against the resolution
 Follow the process after receiving notice from the company that the resolution has been
passed.
 Send a demand to the company to pay the fair value of all the shares he holds within the
company

Conclusion: Mogadi can be able to have his shares bought for a fair value in terms of s 164 if the
company goes ahead to resolve to merge with Revolutionary Technologies.

QUESTION 3

Q3.1

Legal Issue: Whether or not Mr. Opti Mystique’s application for the business rescue of Running on
Empty will succeed given that he appears to have adequate evidence to show that there is a
reasonable prospect for the success of the rescue

Area of Law: Business Rescue Proceedings, with particular emphasis on the initiation of such
proceedings pursuant to a court order in terms of s 131.

Summary of the Law: Business Rescue proceedings may be commenced in two ways in terms of
chapter 6 of the Companies Act. Since the question concerns proceedings pursuant to a court order
following an application by an affected person, the discussion of legal principles will be limited to s
131 court ordered proceedings. In terms of that section, any affected person (including
shareholders, directors, trade unions or employees or their representatives)has legal standing to
approach the court, after notifying the company and the Companies Commissioner, for a business
rescue order if (a) the company is financially distressed; or(b) the company failed to pay an
obligation with respect to employment related matters; or (c) it is otherwise just an equitable to do
so. In addition to satisfying any of the above conditions, the applicant should prove that there is a
reasonable prospect to rescue the company. Unlike proceedings initiated pursuant to a voluntary
board resolution in terms of s 129, this order is available even after liquidation proceedings have
been commenced. If the application is successful, the court will appoint a business rescue
practitioner on recommendation of the applicant, subject to ratification by independent creditors.

Courts have insisted that, although much lower than the “reasonable probability” previously
required, the threshold of ‘reasonable prospect of success’ requires that some concrete and
objectively ascertainable details going beyond mere speculation about the future prospects of the
company be provided: See Southern Palace Investments 265 (Pty) Ltd v Midnight Storm Investments
368 Ltd and Oakdene Square Properties (Pty) Ltd v Farm Bothasfontein (Kyalami) (Pty) Ltd.
However, in the unreported case of Lambertus Daniel Burger Dormehl v Underline Advertising and
Promotions (Proprietary) Limited upon which the facts of this question are based, the court
concluded that the reasonable prospect of success requirement was met where the applicant, who
was the shareholder and director of the company, could be able to prove that the company was a
well-established enterprise with some of the recognised national companies as its major clients. He
was also able to prove that the company was owed over a hundred million Rand by one of its major
clients, which had executed an acknowledgment of debt to that effect and had paid a portion
thereof to the company. He was also able to prove that the company had R12 million at hand, which
was going to be used to pay salaries. On the basis of this, the court agreed that the applicant proved
that there was a reasonable prospect of success that the company would be rescued.

Application of law to the facts: The facts in this question are very similar to that of the Lambertus
case. Mr. Opti Mystique is able to prove that Running on Empty is a well-established enterprise in
the fuel distribution industry with recognised enterprises as the company’s major clients. Also one of
the major client has already paid a substantial portion of their debt to the company and has given an
undertaking that the rest of the debt would be settled in the immediate future. As it was found in
Lambertus’ case that the applicant was able to prove that there was a reasonable prospect of
rescuing a company with similar circumstances as Running on Empty, the court will most likely reach
the same conclusion on the satisfaction of the reasonable prospect of success threshold.

Conclusion: The applicant, Mr. Opti Mystique will clearly satisfy the requirements in terms of s131 to
have the order for business rescue of Running on Empty granted by the court.

Q3.2:

Legal Issue: Is there any legal avenue that the Proud Caucasians (Pty) Ltd can use in order to assist
the Nominees of Born Frees Trust to acquire shares in their company so that the company can
improve its black economic empowerment profile.

Area of Law: Financial assistance for share acquisition in a company, more specifically s 44 of the
Companies Act.

The Law: According to s44(2) of the Companies Act, a Board of a company may take a resolution to
provide financial assistance for share acquisition in the company as long as the Memorandum of
Incorporation of the company does not prohibit the giving of financial assistance for share
acquisition.

In terms of the Act, the following requirements must be met:

(i) The assistance must be either pursuant to an employee share scheme or a special resolution
of the shareholders, adopted within the previous two years;
(ii) The board must be satisfied that immediately after providing the financial assistance, the
company would satisfy the solvency and liquidity test; and that the terms under which the
financial assistance is proposed to be given are fair and reasonable to the company; and
(iii) The board must ensure that any conditions or restrictions respecting the granting of
financial assistance set out in the company’s Memorandum of Incorporation have been
satisfied.

Application: If Proudly Caucasians satisfies the above requirement in terms of s 44 of the Act, it can
be able to provide financial assistance to the Nominees of Born Frees Trust to acquire shares in the
company.

Conclusion: It is possible for Proudly Caucasians to give financial assistance to the Nominees of Born
Frees Trust to acquire shares in the company so that the company can improve its black economic
empowerment profile as long as it satisfies the above requirements of s 44 of the Act