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Disclaimer: This is an unofficial translation of the judgment in Smuts v Booyens, Markplaas (Edms) Bpk en 'n Ander v Booyens (222/99, 257/99) [2001] ZASCA 57; [2001] 3 All SA 536 (A) (2 April 2001) produced for SAFLII. The original Afrikaans text takes precedence and should be cited at all times.

This document was compiled by SAFLII with the contribution of:

Judge Edwin Cameron - Translation

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IN THE SUPREME COURT OF APPEAL

SOUTH AFRICA

Translation supplied by Justice Edwin Cameron on 4 January 2018

Judgment originally issued, in Afrikaans only, on 2 April 2001.

Case no. A/222/99

In the matter between:

LEON FERDINAND SMUTS                                                                                   Appellant

and

WILFRED BOOYENS                                                                                         Respondent

 

Case no. 257/99

In the matter between:

MARKPLAAS (PTY) LIMITED                                                                        First Appellant

LEON FERDINAND SMUTS                                                                      Second Appellant

and

WILFRED BOOYENS                                                                                         Respondent

 

Neutral citation:     Smuts v Booyens; Markplaas and Smuts v Booyens [2001] ZASCA 57

Coram:                      Vivier, Nienaber, Olivier, Schutz and Cameron JJA.

Judgments:               Cameron JA (unanimous)

Heard on:                 5 March 2001 (translated by Cameron J, December 2017)

Decided on:              2 April 2001

 

Summary:                 The shares of a private company may not be transferred to a third party in conflict with restrictions on their transfer contained in the company’s articles of association as contained in articles 21-4 of Table B of Schedule 1 to the Companies Act 61 of 1973, even where the third party has no knowledge of those restrictions.

 

JUDGMENT

 

CAMERON JA (Vivier, Nienaber, Olivier and Schutz JJA concurring):

[1] These are two related appeals.  In both the core question is whether a private company’s shares may be transferred to an innocent third party in violation of provisions in the company’s own articles of association.  In the first appeal this question arose in the Court below because the trustee of the seller’s insolvent estate sought to set aside an agreement disposing of the seller’s shareholding in a private company.  The purchaser was the defendant.  Du Plessis J, at the end of the plaintiff’s case, granted absolution from the instance.  Shortly thereafter the purchaser launched an application to secure registration of the shares in his name by rectification of the register of the company’s members. Coetzee AJ granted the order.  This appeal is against both those orders, in the first with this Court’s leave and in the second with the leave of the Court below.  The parties agreed during argument that, should the first appeal succeed, the second should too.

[2] In 1983, Markplaas Pty (Ltd) (“Markplaas”) (the first appellant in the second appeal) was founded.  The two founders, Smuts (the first appellant in the first appeal and the second appellant in the second appeal) and Roux, were equal holders of the issued shares as well as the sole directors.  In 1993, Roux, without Smuts’ knowledge, and in conflict with a right of pre-emption in Markplaas’s articles of association contained in favour of Smuts, concluded an agreement of sale with Booyens (the respondent in both appeals).  The agreement provided that Booyens purchased Roux’s shareholding in Markplaas (together with Roux’s interest in various loan accounts reflecting indebtedness by Markplaas to four companies in which Roux had an interest) for an amount of R250 000.  Roux thereafter in January 1994 attended a meeting of Markplaas’ shareholders and in that capacity took a stand about an issue affecting the company.  Later in the same month Roux signed an agreement in which he ceded the shares in question as security for a loan.  During September 1994 Roux was provisionally sequestrated.  The order of sequestration was made final in October 1994.  The first meeting of creditors took place on 28 November 1994.  The day after, Roux collected the share certificate from Markplaas’ auditors and handed it to Booyens.

[3] In the court below the setting aside of the sale agreement was sought by way of an application with the trustee of Roux’s estate as first applicant, and with Smuts, Roux’s fellow director and fellow shareholder, as second applicant, and the cessionary in the 1994 loan as third applicant.  The seven respondents were respectively Booyens, Markplaas, the Master of the High Court and the four companies in which Roux had an interest and which were involved in the sale agreement.  The application was referred to trial.  The grounds the trustee advanced in the trial court for setting aside the agreement invoked mainly the provisions of the Insolvency Act 24 of 1936.  Since the trustee is no longer a party to these proceedings, those are no longer at issue.  However, Smuts also placed reliance on Roux’s failure to comply with the provisions of Markplaas’ articles of association regarding the sale of shares.  An order was sought declaring that the sale was invalid and thus that Roux’s shareholding vested in his trustee.

[4] Du Plessis J held amongst others that the articles of association created a purely personal right and that Smuts therefore had to prove that Booyens was aware of the non-compliance with Smuts’ right of pre-emption.  (Compare Associated South African Bakeries (Pty) Ltd v Oryx and Voreinigte Backereien (Pty) Ltd and Others[1].)  There being no evidence to this effect, Du Plessis J granted absolution from the instance.

[5] Coetzee AJ thereafter held that the conclusion of the agreement of sale by itself constituted Booyens the right-holder in respect of the shares.  Booyens was therefore prima facie entitled to be recorded as shareholder and to be registered in the register of members.  He concluded that none of the defences advanced by Markplaas and Smuts had merit.  He rejected the contention that the Court should exercise its discretion against Booyens and also the contention that the application was premature in the light of the proceedings for the setting aside of the sale agreement before Du Plessis J (in respect of which a petition for leave to appeal was then pending).

[6] In this Court, Smuts’ principal argument was that the provision in the company’s articles amounted to an agreement not to transfer the rights (a pactum de non cedendo) which, in the absence of compliance with the procedures the articles prescribed, precluded Booyens from ever becoming the right-holder in the shares. The core question on appeal is thus whether the trial court was correct in finding that proof was necessary that Booyens knew about the provisions in question and non compliance with them.  The argument requires consideration of questions that have not yet been determined by this Court.  In previous analogous cases (where a private company’s articles were enforced), the purchaser’s knowledge of the prohibition was not in issue and the articles in any event contained an express prohibition on transfer.[2]  Counsel for Booyens rightly conceded that a finding that Booyens’ knowledge of the prohibition was irrelevant must lead to the appeal succeeding and that Smuts would be entitled to consonant relief.

[7] The question requires consideration of Roux’s capacity to transfer rights by means of the sale agreement to Booyens and the effect of that agreement.  In Liquidators, Union Share Agency v Hatton[3], Innes CJ emphasised that the basis of shareholding in a company is derived from legislation and that its nature must therefore be determined by legislation:

“A share in a joint stock company is a jus in personam, a right of action, the extent and nature of which and the liability attaching to the ownership of which depend upon statute.”

Naturally the starting point in answering this question must be the provisions of the Companies Act 61 of 1973 (“the Companies Act” or “the Act”).  According to section 20(1) the expression “private company” in the Act means—

“a company having a share capital and which by its articles—

(a) restricts the right to transfer its shares; and

(b) limits the number of its members (exclusive of persons who are in the employment of the company and of persons who having been formerly in the employment of the company were, while in such employment, and have continued after the termination of such employment to be, members of the company) to fifty; and

(c) prohibits any offer to the public for the subscription of any shares or debentures of the company.”

According to section 20(3), no private company may alter its articles of association so that they no longer contain all the provisions in subsection (1) unless that company is at the same time converted into a public company.  Section 20(4) provides that if a private company neglects to conform with the provisions of its articles of association as intended in subsection (1) while they are included in the articles, it immediately becomes subject (unless the Court on application otherwise orders) to the requirements for the issue of financial statements and interim reports applying to a public company.

[8] These provisions warrant three comments.  First, transfer restrictions in respect of shares are an indispensable characteristic of a private company as defined in the Act.  The Act provides by definition that a private company is one that contains this restriction in its articles of association; in its absence it is legally impossible for the entity to be a private company.  These restrictions bear upon the legal nature and essence of a private company.  This as will later appear is important to determining their effect and meaning.

[9] Second, the Act requires that “the right” to transfer shares must be restricted.[4]  The use of the encompassing concept “the right” in section 20(1)(a) is noteworthy.  It points to the legislature’s intention that the shareholders’ capacity to transfer the private company’s shares at all has to be limited by the articles of association.

[10] Third, a transfer in the full a technical sense of the word embraces a series of steps that include the conclusion of an agreement of transfer.  As Rumpff JA explained in Inland Property Development Corporation (Pty) Ltd v Cilliers,[5] (a case concerning section 24bis of the Companies Act 46 of 1926):

“In the regard to shares, the word ‘transfer’ in its full and technical sense, is not a single act but consists of a series of steps, namely an agreement to transfer, the execution of a deed of transfer and, finally, the registration of the transfer.”

There is no indication in the Act that section 20(1)(a) envisages the restriction of only one of these steps.  On the contrary, the provision shows that the legislative meaning is that a private company’s articles of association have to limit the transfer of its shares in the “full and technical sense” to which Rumpff JA refers.  What the articles of association must accordingly restrict is “the right” to conclude the entire series of steps that a transfer embraces.  And that encompasses the conclusion of an agreement to transfer, the execution of a deed of transfer and the eventual registration of the transfer.

[11] Section 91 of the Act accords with this.  This provision bears on the transferability of a private company’s shares.  It is entitled “[n]ature of shares” and reads:

“The shares or other interest which any member has in a company shall be movable property, transferable in the manner provided by this Act and the articles of the company.”

[12] The intention that emerges from section 91 is obviously to prevent shares being transferred in a manner other than that determined by the Act and the company’s articles of association.  Section 91 in other words prohibits attempted share transfers that do not conform with the manner provided by the Act and the articles of association: if the restrictions in the articles of association are not observed, the shares are not, according to section 91, transferable[6] at all.

[13] It is against this statutory background that the provisions of Markplaas’ articles of association must be considered.  The founders and thereafter the members of a private company are naturally free to determine the content of its articles of association within the limitations the Act lays down.  Section 59(2)(b) of the Act merely creates the option that Table B of Schedule 1 of the Act may be incorporated (as in fact occurred in the case of Markplaas); and even then that is subject to possible adjustments and later amendments (section 62) according to the preferences of the founders (and the members).  Table B of Schedule 1 contains a limitation on the transferability of shares.  Where the original shareholders do not at incorporation agree to deviate from the Table, a contractual limitation between the shareholders mutually exists.

[14] In Borland’s Trustee v Steel Brothers & Co Ltd[7] Farwell J emphasised the dual nature of a company’s articles of association.  On the one hand, they are a series of agreements between the shareholders.  In this they are contractual in nature.  On the other, the contract is concluded in accordance within the limits of the companies legislation.  The rights that are incorporated in the shareholding are thus given a statutory basis.  In a well-known passage, Farwell J put it thus:

“A share is the interest of a shareholder in the company measured by a sum of money, for the purpose of liability in the first place, and of interest in the second, but also consisting of a series of mutual covenants entered into by all the shareholders inter se in accordance with s 16 of the Companies Act, 1862.  The contract contained in the articles of association is one of the original incidents of the share.”[8]

South African case law refers repeatedly with approval to the judgment of Farwell J.[9] In my opinion this correctly portrays the interaction between the statutory basis on the one hand and the mutual contractual arrangement on the other that the articles of association of a company constitute.

[15] It is against this background that the relevant provisions of Markplaas’ articles of association must be analysed.  The company’s articles were derived in accordance with section 59(2)(b) of the Companies Act from Table B of Schedule 1.  Articles 21-4 provide as follows:

“21. If a member of the company desires to sell all or any of his shares of the company he shall give notice, in writing, of his intention to sell, to the directors of the company, and state the price he requires for the shares.

22. The directors shall within one month of the date of receipt of the notice referred to in article 21 advise every other member of the company of the contents thereof and each such member shall be entitled to acquire the shares to offered within one month after the date of the receipt of such advice: Provided that if more than one member makes an offer for all of the shares so offered, the shares shall be sold to each such member in equal proportions, and where fractional proportions of shares remain, such members shall become joint holders of such fractional proportions of the shares.

23. If the members of the company are unable to agree upon the selling price of the shares, the auditor of the company may be requested to determine the true and fair value thereof and the members shall accept that value as the selling price of the shares.

24. If none of the members of the company offers to purchase the shares within the time referred to in article 22, or if members of the company offer to purchase a part of the shares so offered, the member who is offering the shares for sale may offer the shares or the remaining portion of the shares which have not been purchased by members of the company, for sale to any other person and, notwithstanding the provisions of article 11, the directors shall approve the registration of the shares in the name of that person unless they have good reason to refuse such registration.”

Article 11 gives the directors with the power to refuse, without providing reasons, to register a transfer of shares in the company.

[16] In Estate Milne v Donohoe Investments,[10] Ogilvie Thompson JA pointed out that the restrictions in the articles of association of a private company are “essentially one of construction of the relevant articles” and that “the prima facie right of a shareholder to deal freely with his shares must perforce yield to contrary provisions ascertained on a correct construction of the company’s articles”.  Given this, pertinent aspects of Markplaas’ three provisions (21, 22 and 24) may be highlighted.  Where a member wishes to sell his shareholding, article 21 requires that he “shall” first give notice of his intention to the directors.  Section 22 then gives the other members “the right” “to acquire” the shares in question before those shares may be offered to anyone else for sale.  The resemblance between the provisions in the Act itself and article 22 of the articles of association is in my opinion not merely coincidental:  the “right” that according to section 20(1)(a) of the Act must be restricted is precisely the “right” that article 22 of the articles of association affords the other members.  This namely is to “acquire” transfer of the shares by offer and acceptance and the conclusion of an agreement of sale, followed by the execution of a deed of transfer and thereafter registration.  Only after compliance with the preceding formalities does article 24 of the articles of association afford the member the power (“may”) at all to offer the shares for sale to an outsider.

[17] Read in the light of section 20(1)(a) of the Act, it thus seems that the articles of association of Markplaas contain a mutual agreement between the company’s shareholders inter se which, in accordance with the statutory provision, restricts the right to transfer the company’s shares by imperatively requiring that the procedure as set out must first be followed before the shares can lawfully be offered or transferred to an outsider at all.  This warrants the further conclusion that the restriction, in the words of Farwell J, constitutes an original incident of the shares themselves and that in the absence of compliance with the procedure the articles specify, no rights in the shares in question can be transferred to a purchaser.[11]  The mutual arrangement in the articles of association, in compliance with the mandatory prescription of section 20(1)(a) of the Act in other words contains a prohibition on the offer or transfer of the shares at all, unless the procedure set out is first complied with.  Therefore, without compliance with the preconditions, “the right, from its inception, lacks the attribute of transmissibility”.[12]

[18] It follows that Booyens’ contention that Table B of Schedule 1 of the Companies Act does not contain an absolute prohibition, but only procedural rights that can be enforced only by means of an interdict, is without foundation.  And Smuts’ contention that the articles of association by implication create a pactum de non cedendo that prohibits transfer must be sustained:

“the stipulation against cession is part and parcel of the agreement creating the right, and the right is limited by the stipulation.”

Paiges v Van Ryn Gold Mines Estates Ltd;[13] Trust Bank of Africa Ltd v Standard Bank of South Africa Ltd.[14]

[19] It need hardly be said that the restriction on share transfers in conflict with the articles of association exists for the benefit of the shareholders reciprocally and that each fellow shareholder has an interest in the restriction.  Indeed, this emerges self-evidently from the provision in the Act that requires the restriction in question.  Since it is always important for a debtor in an ordinary debtor / creditor relationship to know who his creditor is,[15] it is all the more of pivotal importance for a shareholder in a private company to know who his fellow members are.  In a private company the whole set up exists precisely to restrict control within a limited circle of approved members.[16]  This is the case even where the relationship is preponderantly or exclusively commercial in nature.

[20] It follows that the trial court’s conclusion that Booyens acquired rights from the agreement of sale of the shares and that knowledge of the right of pre-emption in the articles of association was relevant was erroneous.

[21] This conclusion makes it unnecessary to decide on Smuts’ further contentions that, on the facts of the case, there was no valid act of transfer (invoking Botha v Fick);[17] that, if there had been a cession, it conferred diminished rights on Booyens (by analogy with Van der Berg v Transkei Development Corporation);[18] that knowledge of the content of Markplaas’ articles of association in any event had to be imputed to Booyens by law (invoking Abrahamse v Connock’s Pension Fund);[19] and that in the circumstances at trial absolution was in any event wrongly granted.

[22] It follows that Coetzee AJ likewise erred in accepting that Booyens became a right-holder in relation to the shares.  His order must be set aside on this ground alone.  In addition, it is appropriate to point out that, apart from the fact that Booyens’ application under section 115 of the Companies Act was wholly premature in the light of the pending appeal proceedings against the order of Du Plessis J, this provision scarcely offers an appropriate means to acquire transfer of shares in motion court proceedings where there is a dispute of facts that cannot be resolved on the affidavits.[20]

[23] There is also an appeal against the costs order Coetzee AJ granted in an application for condonation by Smuts, but counsel for Smuts could point to no ground on which the discretionary order could be impugned.  As regards the costs of the appeal, counsel for Smuts conceded that one-third of the appeal record was unnecessary.  The respondent cannot be saddled with these costs.  As far as the costs of the trial are concerned, in my view, although the trial could have been considerably shortened if not eliminated by allowing adjudication by way of a stated case, the attitude of Booyens contributed partly towards this.  It would therefore be unjust to deprive Smuts of his costs in the court below.

 

Order

[24] The following orders are made:

1. In case number 222/99:

(a) the appeal succeeds with costs, including the costs of two counsel, but excluding the costs of one-third of the record.

(b) the order of the Court below is set aside and replaced with:

“(i) The application referred to trial succeeds with costs.

(ii) It is declared that 50% of the shares in Markplaas vest in the trustee of the insolvent estate of P S Roux, estate T3163/94.”

2. In case number 257/99:

(a) the appeal succeeds with costs, including the costs of two counsel;

(b) the order of the Court a quo is set aside and replaced with:

“The application is dismissed with costs.”

 

E Cameron

Judge of Appeal

 

(Vivier, Nienaber, Olivier and Schutz JJA concur.)

 

For the appellant:

F A Ras and H J de Wet instructed by Lӓӓs Dӧman Ingelyf, Pretoria

 

For the respondents:

Q Pelser SC and D E van Loggerenberg instructed by John Tribelhorn, Pretoria.

 

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