Republic of South Africa

IN THE HIGH COURT OF SOUTH AFRICA

 Before the Hon. Mr Justice Binns-Ward

Case no: 498/2010

In the matter between:

and

(Association incorporated under Section 21) 
(reg no. 1929/001590/08)

(Association incorporated under Section 21) 
(reg no. 1945/019203/08)

CORAM						The Honourable Mr Justice A G Binns-Ward

On behalf of Applicants				Adv. W.R.E. DUMINY SC
							Adv. M. JANISCH

Instructed by						Kritzinger & Co

On behalf of the Respondents			Adv. P.B. Hodes SC 
							Adv. R.A. Brusser SC

Instructed by 						Cliffe Dekker Hofmeyr Inc.
Date of Hearing 					10 October 2011
Date of Judgment					21 October 2011

Republic of South Africa

IN THE HIGH COURT OF SOUTH AFRICA

 Before the Hon. Mr Justice Binns-Ward

Case no: 498/2010

In the matter between:

and

(Association incorporated under Section 21) 
(reg no. 1929/001590/08)

(Association incorporated under Section 21) 
(reg no. 1945/019203/08)

JUDGMENT DELIVERED: 21 OCTOBER 2011

BINNS-WARD, J

[2] The companies' articles of association provided for the retirement by rotation in each year of a third of the members of the board. The same persons sat on the respective boards of each company. The positions of four of the directors were affected. All four of them, being eligible, stood for re-election. Voting in the elections was conducted by way of a secret ballot. The use of that voting procedure enjoyed the unanimous assent of the members present at the meetings. The ballot resulted in the re-election of two of the four retiring directors. A majority of votes was cast against the re-election of the other two. The retiring directors, who, for as long as they held office as such, were also members of the companies in terms of the articles, had been excluded from voting in the election.

[5] It seems to me, however, that it will be necessary to consider whether the application should be entertained at the instance of the applicants only if the retiring directors were indeed wrongly excluded from voting on the issue of their re-election, as alleged by the applicants, and disputed by the respondents. Counsel on both sides appeared to agree that this was cardinal issue in dispute between them. I shall therefore deal with that issue first.

[6] Obviously all the members of the companies were entitled to vote on the question of the appointment of directors. The question is whether the four retiring directors qualified as such at the time of the elections. The question falls to be answered in the main on the proper construction of article 15 of the articles of association. The articles of association of both companies follow the same wording. In this regard it needs to be noted that the members of the first and second respondents consisted of (i) the subscribers to their respective memoranda of association, (ii) the directors of the company and (iii) the persons who had been appointed by the directors as members in terms of article 2(c) of the articles of association. The memorandum of association of the first respondent was signed in May 1929, some 80 years before the annual general meeting under consideration. The company registration number of the second respondent (given inconsistently in the papers) suggests that it too was incorporated either in 1929 or 1945. It may thus reasonably be accepted that at the annual general meetings of 2009 the only existing members would have been the directors then in office and those persons alive at that time who had been appointed as members under article 2(c).

[7]     Article 15 provides insofar as currently relevant as follows:

ROTATION OF DIRECTORS
15. At the first annual general meeting of the company all the directors shall retire from office, and at the annual general meeting in every subsequent year one-third of the directors for the time being, or if their number is not three or a multiple of three, the number nearest to one third, shall retire from office, provided that the Director appointed by the Regional Government, shall not retire from office by reason of effluxion of time.
15.1. The directors to retire in every year shall be those who have been longest in office since their last election, but as between persons who became directors on the same day, those to retire shall, unless they otherwise agree among themselves, be determined by lot.
15.2. A retiring director shall be eligible for re-election.

15.5. The company may from time to time in general meeting increase or reduce the number of directors, and may also determine in what rotation such increased or reduced number is to retire from office.
15.6. Unless the members otherwise determine in general meeting any casual vacancy occurring on the board of directors may be filled up by the directors, but the director so appointed shall be subject to retirement at the same time as if he had become a director on the day on which the director in whose stead he is appointed, was last elected a director.
15.7. The directors shall have the power at any time, and from time to time, to appoint a person as an additional director who shall retire from office at the next following ordinary general meeting, but shall be eligible for election by the company at that meeting as an additional director

directors who are deemed to have retired	An appropriate way to deal with this is
that the directors who are to retire remain in office as directors and members until the agenda item dealing with the retirement and appointment of directors. This appears to be the practical solution since it enables all the directors who were directors during any given year to participate in the discussions, and vote on the financial statements and minutes, for the period of their directorship. This approach is also consistent with past company practice.'

[9] Despite the fact that the approach advised by the companies' attorneys does not appear in fact to have 'been consistent with past company practice', the meeting was conducted in accordance with this advice. Consequently, the retiring directors were excluded from the meetings when the item of business concerning the election of directors was reached on the meeting agenda. One of the directors thus excluded was the chairman of the boards, who, in terms of article 7.8, was required to 'preside as chairman at every general meeting of the company'.
[10]   The retiring directors removed themselves from the meetings on the basis of an explanation by the company secretary recorded as follows in the minutes of the meetings:

[11] As counsel for the applicants pointed out, the advice given by the company secretary to the meetings did not convey the gist of the legal advice received with complete accuracy; in particular, it did not inform the meetings of the attorneys' opinion that it was not altogether clear from the articles at what stage the retiring directors actually vacated their office. This has some bearing, I think, on the determination of the validity of the submission by the respondents' counsel that the directors who left the meetings and did not participate in the voting did so of their own volition and that accordingly, the meetings having remained quorate, the consequences of their voluntary non-involvement in the voting does not give rise to a justiciable issue. A more realistic view of the evidence is that the retiring directors who left the meetings did so having been brought under the impression that they were required so to do, and that this occurred in circumstances in which they had not been given a reasonable opportunity to consider or interrogate the correctness of the legal advice to the companies as it had been described by the company secretary. My conclusion is that the retiring directors were effectively excluded from participation in the election of directors. Their failure to have protested against that exclusion cannot properly be characterised as waiver or informed consent.

[12] In the circumstances it is evident that if the retiring directors were entitled to participate in the elections, the conduct thereof in their absence was irregular and in conflict with the companies' articles of association. It is impossible to say with any certainty what the results would have been had the excluded directors cast votes in the elections. Arithmetically, and taking account of the right of the chairman of the meetings to decide any draw with a casting vote, there was a possibility that all four of them might have been re-elected.

[16] The following features, individually and collectively, point strongly against the correctness of the attorneys' advice:

I have therefore concluded that on a proper construction of the relevant provisions of the first and second respondents' articles a seamless transition of directorships, whether by re-election, deemed re-election or replacement, as the case might be, is envisaged at the annual general meetings in respect of the vacancies created by the scheme of rotational retirement set up in terms of article 15.
[17] In my judgment it follows that the retiring directors were entitled to participate as members at the annual general meetings until and unless they were replaced as incumbents of their respective offices. In the result it is clear on the facts that the election of directors at the October 2009 annual general meeting was conducted in a manner materially inconsistent with the company's constitution and that the election was thus irregular.

[26] The exception was upheld. James LJ, who wrote the principal judgment, considered that any wrong that was done through the conduct of the general meeting in the manner described was a wrong to the company, and not to the members whose right to a determination by poll had been ousted. An important consideration in the learned judge's approach to the case was it presented on its facts a situation which a majority could remedy by its own initiative. That was even more clearly the approach adopted in the concurring judgment of Mellish LJ.

[32] This application, although instituted with reasonable expedition after the election in October 2009, only came to hearing in October 2011. I would have expected that at least one, perhaps two, annual general meetings of the company would have been held in the interim. The intervention of subsequent meetings and the effect of the election of directors at those meetings would have been a factor weighing against the exercise of the court's discretion in favour of the applicants at so great a remove from the impugned resolution, despite their otherwise meritorious case. When I raised this with the applicant's counsel I was informed from the bar that the respondents had in fact not held an annual general meeting since October 2009. This information was confirmed from the bar by the respondents' counsel. The composition of the boards of the two companies thus currently remains as determined at the October 2009 annual general meetings, with the exception of the position of one director (Mr Hardie) which has been the subject of litigation unrelated to the current proceedings.

[34]   The following order will issue:
1. The resolutions pertaining to the election of directors of the first and second respondents, respectively, at the annual general meetings of those companies on 27 October 2009 are declared invalid and are set aside.
2. The first and second respondents are declared liable, jointly and severally, the one paying the other being absolved, to pay the applicants' costs of suit, including the costs of two counsel.

A.G. BINNS-WARD
Judge of the High Court