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FORM A

FILING SHEET FOR EASTERN CAPE JUDGMENT

ECJ NO : 060/2005

PARTIES: Price v Van Zyl and Others

REFERENCE NUMBERS -

• Registrar: 366/04

DATE HEARD: 29/07/04; 26/08/04

DATE DELIVERED: 02/12/04

JUDGE(S): Plasket J

LEGAL REPRESENTATIVES -

Appearances:

• for the State/Applicant(s)/Appellant(s): RG Buchanan SC

• for the accused/respondent(s): A Beyleveld

Instructing attorneys:

• Applicant(s)/Appellant(s): Neville Borman & Botha

• Respondent(s): Netteltons

IN THE HIGH COURT OF SOUTH AFRICA

(EASTERN CAPE DIVISION)

CASE NO: 366/04

DATE DELIVERED: 2/12/04

In the matter between:

DONALD HAROLD PRICE PLAINTIFF

and

FREDERICK JACOBUS VAN ZYL FIRST DEFENDANT

GARY JOHN PHILLIPS SECOND DEFENDANT

EDWARD ROYE ALEXANDER WILSON THIRD DEFENDANT

JOHN X SAFARIS (PTY) LTD FOURTH DEFENDANT

Exception – shareholders’ agreement – whether such agreement creates fiduciary relationships between the parties to it.

__________________________________________________________________________________________JUDGMENT________________________

PLASKET J:

[A] THE PARTICULARS OF CLAIM

[1] In the action that the plaintiff instituted against the defendants, he seeks orders against the first defendant compelling him to ‘provide a full statement of account … of all income received by or due to’ the fourth defendant (the company) from its formation until 14 August 2003, to provide a ‘full account’ of all of its ‘business affairs, income and expenditure’ for the same period, to provide a ‘full account’ of all of its expenditure during this period, a debatement of the accounts and to pay to the fourth defendant ‘all net profits which should have accrued to the Company during the aforesaid period’.

[2] He also seeks an order compelling the first, second and third defendants, to pass, together with himself, ‘a resolution that the net profits, less taxation, to accrue to the Company pursuant to the prayers set out more fully above, be paid to the shareholders by way of an appropriate dividend in accordance with their percentage shareholding’.

[3] The defendants have taken an exception to the plaintiff’s particulars of claim. Prior to setting out the terms of the exception in more detail, it is first necessary to say something of the background to this litigation, as alleged in the plaintiff’s particulars of claim.

[4] During the course of February 2002, the plaintiff, the first defendant, the second defendant and the third defendant entered into a shareholders’ agreement in terms of which they agreed to form the fourth defendant, with the plaintiff acquiring 15 percent of the issued shares, the first defendant acquiring 65 percent of them and the second and third defendants each acquiring ten percent of them. Any profits that the fourth defendant was to make would, in due course, be distributed to them by way of dividend in accordance with the ratio of their shareholding. The plaintiff alleges that it was a material term of the agreement, either ‘express, alternatively implied, further alternatively tacit’ that ‘[t]here would exist a particular personal relationship of confidence and trust, similar to that existing between partners, as between the shareholders inter se requiring the shareholders to act reasonably and honestly towards one another’.

[5] It was also agreed that the fourth defendant would acquire the first defendant’s business, John X Safaris, and would trade under that name in conducting the business of professional outfitters and hunters of wild animals throughout Africa, and that the first defendant would take the necessary steps to acquire the business. The plaintiff would then contribute his skills and reputation as a professional hunter and would divert all safari business which came his way to the fourth defendant, and would be employed by it as a professional hunter.

[5] The company was duly formed and the shares were allotted in accordance with the agreement. The plaintiff became a director of the company and the first defendant became its de facto managing director.

[6] The plaintiff’s complaint is that, while he has performed his obligations as contemplated by the shareholders’ agreement, the first defendant has not. Instead, he avers, the first defendant has: diverted income due to the fourth defendant to other entities controlled by himself (including John X Safaris); separated the business affairs and trading activities of John X Safaris from the affairs of the fourth defendant and has frustrated the acquisition of John X Safaris by it; utilised the trading name of the fourth defendant to the benefit of an entity controlled by himself; denied the ‘very existence and formation’ of the fourth defendant and has alleged that the plaintiff is in breach of his obligations to it; acted in conflict with ‘the personal relationship of confidence and trust which should have existed between the members of the Company’; and has ‘not acted reasonably and honestly towards the plaintiff, in his capacity as shareholder in the Company, with regard to the affairs of the Company’ by excluding him from its management.

[7] The plaintiff alleges that this conduct on the part of the first defendant constitutes a repudiation of the shareholders’ agreement, that he accepted the repudiation and duly communicated his repudiation to the first defendant’s attorneys. He claims to be entitled to the relief that he seeks because, by virtue of the agreement ‘and by virtue of the first defendant’s control of the financial affairs of the Company and the relevant records thereof, there exists a fiduciary relationship between the plaintiff and the first defendant which obliges the first defendant to provide a full account to the plaintiff of the affairs of the Company’.

[B] THE EXCEPTION

[8] As stated above, the defendants have taken an exception to the plaintiff’s particulars of claim. They contend that the particulars of claim lack averments to sustain a cause of action and/or do not disclose a cause of action, alternatively, are vague and embarrassing. The body of the notice of exception reads as follows:

‘1. The plaintiff pleads that by virtue of the agreement concluded between the parties (and as pleaded in the particulars of claim) the first defendant is obliged to account to the plaintiff for the affairs of the fourth defendant;

2. The plaintiff claims, pursuant to the provisions of paragraph 15 of the particulars of claim, that he is entitled to an order obliging the first defendant to pay to the fourth defendant all net profits that should have accrued to the fourth defendant, it being alleged that the fourth defendant would be in a position to pay a dividend to its shareholders, less net profit on taxation;

3. In the prayers the plaintiff seeks an order compelling the first defendant to provide a full accounting of all income received by or due to the fourth defendant until 14 August 2003 and to supply vouchers in respect thereof;

4. In addition, the plaintiff seeks a debate of such account, together with an order that payment be made to the fourth defendant.

5. The right to claim payment from the first defendant is a contractual right which is only available to the fourth defendant, there existing no contractual nexus between the plaintiff and the first defendant in respect of any alleged indebtedness by the plaintiff to the fourth defendant.

6. The plaintiff has available in law the remedies of a minority shareholder for the protection of his minority interest, including the provisions of sections 252 and 266 of the Companies Act, 61 of 1973, as amended.

7. In addition, and in any event, there is in law no automatic right to dividends as claimed by the plaintiff.

8. Furthermore, the plaintiff has rights of inspection of accounting documents of the fourth defendant either pursuant to the provisions of the Companies Act or by virtue of the provisions of the Promotion of Access to Information Act, 2 of 2000, which remedies lie against the fourth defendant and not the first defendant.

9. Accordingly, the defendants contend that any rights of disclosure and furnishing of accounts is a right as against the fourth defendant and not against a shareholder of the fourth defendant.

10. In addition, the written agreement (annexure “A” to the particulars of claim) contains no provisions which oblige the first defendant to provide the plaintiff an accounting of the affairs of the fourth defendant.’

[9] In essence, the issue raised in the exception is whether the shareholders’ agreement creates a fiduciary relationship between the parties to it.

[C] THE SHAREHOLDERS’ AGREEMENT

[10] The company – the fourth defendant – is not a party to the shareholders’ agreement. In its preamble, the agreement states that the purpose of forming the fourth defendant was to acquire the business of the first defendant and then, through it, to ‘trade in the business of professional outfitters and hunters of wild animals throughout the continent of Africa’. For this purpose, the parties recorded that they wished to ‘regulate their relationship as shareholders within the company’.

[11] Clause 16 of the agreement provides that the parties ‘undertake at all times to do all such things, perform all such actions and take all such steps, and to procure the taking of all such steps, as may be open to them and necessary for or incidental to the implementation or ongoing compliance with the terms and conditions of this agreement’.

[12] On the other hand, clause 21 provides:

‘The relationship of the parties, inter se, shall be governed by the terms of this agreement and nothing contained herein shall be deemed to constitute a partnership, joint venture or the like between them nor to constitute one party the agent of the others for any purposes. No party shall by reason of the actions of any of the other parties incur any personal liability as a co-partner to any third party and no party shall be entitled to authorise, represent or to hold out to any third party that the relationship between the parties is that of a partnership, joint venture or the like as aforesaid.’

[13] Clause 24 contains a number of general provisions of relevance. It reads as follows:

’24.1. This agreement constitutes the sole record of the agreement between the parties with regard to the subject matter hereof. No party shall be bound by any express or implied term, representation, warranty, promise or the like not recorded herein.

24.2. No addition to, variation of or agreed cancellation of, this agreement shall be of any force or effect unless in writing and signed by or on behalf of the parties.

24.3. No relaxation or indulgence which any party may grant to any other shall constitute a waiver of the rights of that party and shall not preclude any party from exercising any rights which may have arisen in the past or which may arise in the future.

24.4. Any provision of this agreement which contemplates performance or observance subsequent to any termination or expiration of this agreement shall survive any termination or expiration of this agreement and continue in full force and effect.

24.5. Unless expressly provided as being in the sole discretion of a party, where approval, acceptance, consent or similar action by a party is required under this agreement, such action shall not be unreasonably delayed or withheld. Any approval or consent given by a party under this agreement shall only be valid if in writing and shall not relieve the other party from responsibility from complying with the requirements of this agreement nor shall it be construed as a waiver of any rights under this agreement except as and to the extent otherwise expressly provided in such approval or consent, or elsewhere in this agreement.’

[15] The nature of a shareholders’ agreement has been set out in the following terms by Gauntlett AJ in Delfante and another v Delta Electrical Industries Ltd and another:¹

‘A shareholders’ agreement such as the amending agreement must be recognised for what it is. It represents in the present case an endeavour to strike a balance of power between groups of shareholders plainly divided by different interests and loyalties. In this sense the agreement preserves the diversity – and even marked division – between the shareholders in what is clearly a wary commercial cohabitation. It expressly qualifies and restricts pro tanto the operation of the principle of majoritarianism underlying the joint stock company … by a consensual pluralism.’

[16] In the light of the above, it is apparent that, as a general rule, a shareholders’ agreement regulates an arms-length commercial relationship between shareholders, who may often have little in common. In such circumstances, there is nothing in the relationship thus created that of necessity imposes a duty of trust on shareholders in relation to each other, nothing that imposes on each in relation to the others any higher standard of conduct than the ‘morals of the marketplace’.² That said, however, sight must not be lost of the fact that the ‘existence of such a duty and its nature and extent are questions of fact to be adduced from a thorough consideration of the substance of the relationship and any relevant circumstances which affect the operation of the relationship’.³

[16] In other words, the terms of the shareholders’ agreement and the nature of the relationship that it creates will determine whether a fiduciary relationship between the shareholders is created, either expressly or impliedly.⁴ Substance rather than form is all-important, a point made in the following terms in Bellairs v Hodnett and another:⁵

‘We think that the analogy of a partnership to the relationship of Bellairs and Hodnett and the Company is an apposite and true one. That they chose the form of a company to give effect to and carry out that relationship does not affect the existence, nature, or extent of any fiduciary duty resting upon Bellair that is relevant to the present dispute. Since principles of equity underlie a fiduciary duty we think that the substance of their relationship and not the form in which it was cast must be looked at in order to ascertain its existence, nature, and extent.’

[17] The shareholders’ agreement does not create a fiduciary relationship between the shareholders in express terms. There is, in other words, no provision to the effect that the ‘parties hereto shall exhibit the utmost good faith in all their dealings with one another and with the Company’, which was the provision in the shareholders’ agreement that created a fiduciary relationship in Bellairs v Hodnett and another.⁶

[18] Furthermore, there would seem to be little or no scope for the existence of a tacit term – one created by the unexpressed agreement of the parties⁷ – to the effect that fiduciary duties between shareholders are created. Clause 24.1⁸ would seem to be fatal to such a term.

[19] The question nevertheless is whether, despite the express provisions of the shareholders’ agreement, a fiduciary relationship between the shareholders could come into existence through an implied term – through the operation of law, in other words. Whether this particular shareholders’ agreement contains such an implied term depends (all things being equal) on the facts concerning the substance of the relationship it creates between the shareholders. The nature of this factual enquiry was dealt with by Wilberforce LJ in Ebrahimi v Westbourne Galleries⁹ in which he stated:

‘It would be impossible, and wholly undesirable, to define the circumstances in which these considerations may arise. Certainly the fact that a company is a small one, or a private company, is not enough. There are very many of these where the association is a purely commercial one, of which it can be safely said that the basis of the association is adequately and exhaustively laid down in the articles. The superimposition of equitable considerations requires something more, which typically may include one, or probably more, of the following elements: (i) an association formed or continued on the basis of a personal relationship, involving mutual confidence – this element will often be found where a pre-existing partnership has been converted into a limited company; (ii) an agreement, or understanding, that all, or some (for there may be “sleeping” members), of the shareholders shall participate in the conduct of the business; (iii) restriction upon the transfer of the members’ interest in the company – so that if confidence is lost, or one member is removed from management, he cannot take out his stake and go elsewhere.’

[20] It was argued by the defendants that clause 21¹⁰ has the effect of ousting such an implied term (assuming its existence). It is not necessary for me to give detailed attention to the interpretation of clause 21. Suffice it to say that it seems to me that it may be reasonably capable of being interpreted to mean no more than that one shareholder may not, in terms of the agreement, bind the others, as may be the case in a partnership, joint venture or the like because none of them are agents for the others. On this interpretation, clause 21 regulates and limits the power of the shareholders to contract on behalf of, and to bind, each other, rather than the nature of their own relationship and the extent of any duties they may owe each other. Understood in this way, clause 21 is not inimical to the creation of a fiduciary relationship between the parties.

[D] CONCLUSION

[21] In the light of the above, it is my view that the shareholders’ agreement is reasonably capable of being interpreted to sustain the averment in paragraph 8.6 of the particulars of claim that it was an ‘express, alternatively implied, further alternatively tacit, and material’ term of the agreement that there would be ‘a particular personal relationship of confidence and trust, similar to that existing between partners, as between shareholders inter se requiring the shareholders to act reasonably and honestly towards one another’, and thus support some, if not all, of the relief claimed. It follows that the exception must fail.

[22] The exception is accordingly dismissed with costs.

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C. PLASKET

JUDGE OF THE HIGH COURT

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