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corporate commercial

corporate commercial | 08 Dec 2020
BY Doron Joffe AND Adam Gordon

Resolutions that may be competently proposed by shareholders, according to the Companies Act

In recent years, minority shareholders in a number of companies have attempted to propose sustainability, climate risk and other environmentally related shareholder resolutions to be tabled and voted upon at forthcoming shareholders' meetings.

Shareholders have proposed these types of resolutions relying on the provisions of section 65(3) of the Companies Act, 2008:

"(3) Any two shareholders of a company –

  • may propose a resolution concerning any matter in respect of which they are each entitled to exercise voting rights; and
  • when proposing a resolution, may require that the resolution be submitted to shareholders for consideration –
    • at a meeting demanded in terms of section 61(3);
    • at the next shareholders meeting; or
    • by written vote in terms of section 60."

The Companies Act affords any two shareholders, regardless of their shareholding percentage, the right to propose resolutions to be voted upon by the general body of shareholders in one of the manners stipulated in section 65(3)(b) of the Companies Act. Importantly, the wording is explicit in that the matter for consideration must be one in respect of which shareholders are "entitled to" exercise voting rights. What this means is that the resolution must entail a matter that is within the purview of shareholders to vote upon. The section does not permit shareholders to propose any resolution for consideration.

This then begs the question of what matters fall within the purview of shareholders to exercise voting rights? Moreover, how does this interact with the powers and duties of a company’s board?

Because section 65(3) of the Companies Act is a right that was introduced by the Companies Act (it did not exist under its predecessor, being the Companies Act, 1973), there is a distinct lack of judicial pronouncement on the section. Therefore, the starting point to determine the answer to the above question is to delve into the Companies Act.

The Companies Act contains a number of sections that expressly refer to shareholder resolutions being required. A few examples of these sections are those that deal with the election and removal of directors and those sections where a shareholder approval is a legally required approval for certain transactions. The Companies Act does not expressly extend the powers of shareholders to exercise voting rights beyond the distinct express references to the stipulated shareholder resolutions in the Companies Act.

Could it be that the Companies Act, when read holistically, may impliedly extend the powers of shareholders to exercise voting rights on matters not expressly listed in the Companies Act?

Based on a reading of the Companies Act, it is clear that the contrary is in fact the case. In terms of the Companies Act, the default position is that the management of a company is a function that is fundamentally within the purview of the board (save as otherwise provided for in the memorandum of incorporation of a company). This is codified in section 66(1) of the Companies Act.

The Companies Act saw fit not to allow an express instruction that relates to specific operational and management decisions, to come from the shareholders to the board. There are sounds reasons for this. The main reason is that the board is the body that is bestowed with the necessary operational knowledge and expertise relating to the business and affairs of a company, which shareholders are not. In addition, the members of the board are subject to fiduciary duties in terms of the Companies Act, which shareholders are not. It would create an absurd position if the board were of the opinion that a resolution was not in the best interests of the company, but was obliged to act upon that resolution because a shareholder had proposed it, and such resolution was approved by the general body of shareholders.

When looking at the common law on this aspect, being the relationship between shareholders and directors, it is clear that shareholders cannot usurp the management functions of the board or interfere in the running of a company. This delineation of authority between shareholders and the board has often been referred to in South African case law.

It is important to bear in mind that having regard to section 5(2) of the Companies Act, to the extent appropriate, a court interpreting or applying the Companies Act may consider foreign company law. Therefore, the current legal position on the subject matter in foreign jurisdictions (ie, the meaning and purpose of the equivalent or substantively similar provisions to section 65(3) of the Companies Act), as well as any up and coming global trends on the subject matter, could be taken into account by a South African court. This may very well be the case for interpreting the provisions of section 65(3) of the Companies Act as this section is still untested in South African law.

It would seem that the purpose of section 65(3) of the Companies Act would be to eliminate the manifestation (or possibility) of unintended circumstances. This could be a situation where shareholders have the right to exercise votes on a particular resolution, but their right to do so could be defeated by the fact that the Companies Act, as read with a company's memorandum of incorporation, would not allow the shareholders to table that resolution before the shareholders to be voted on. Absent section 65(3) of the Companies Act (and section 61(3) of the Companies Act for that matter) applying by default (if not altered in a company's memorandum of incorporation), the board could, for example, preclude shareholders from proposing amendments to the memorandum of incorporation of a company and preclude shareholders from proposing resolutions to appoint and remove directors. Section 65(3) of the Companies Act is actually an essential section to avoid an abuse of power by the board. Of course, this is with the caveat that the section does not extend to allowing shareholders to vote on any matter whatsoever.

When a resolution is proposed by shareholders, the content of the resolution always needs to be considered. The board needs to determine whether a shareholder resolution proposed in terms of section 65(3) of the Companies Act, as read with a company's memorandum of incorporation, could be an attempt by the shareholders to usurp the powers of the board. Although section 65(3) does not expressly permit the board to consider this and make this determination, it is submitted that the board not only has such a right to make this determination but also has a fiduciary duty to make this determination. A good example of why this ought to be the case is because the board should not allow company funds to be wasted in putting futile resolutions to shareholders. Moreover, the board should not permit shareholders to operate under the misapprehension that passing these types of resolutions would be a valid action taken by them.

In view of the above, there is a strong argument for a board to put forward and state that it is not obliged to table these types of resolutions in front of the general body of shareholders to vote upon. The reasoning for this is because the board will always be subject to their prevailing fiduciary duties. This is regardless of the wishes of the general body of shareholders.

It is also important to be mindful of section 61(2)(a) of the Companies Act, which provides as follows:

"(2) Subject to section 60, a company must hold a shareholders meeting –

  • at any time that the board is required by this Act or the Memorandum of Incorporation to refer a matter to shareholders for decision…"

This section still has to be interpreted in light of the court decisions where it has been held that the board can legitimately refuse to call a shareholders' meetings where it is clear that the shareholders are usurping the management functions of the board. It is submitted that, in such a case, the board is entitled to refuse to convene a requisitioned meeting, notwithstanding the peremptory wording of section 61(2)(a). This is because these types of resolutions would be beyond the powers of the shareholders to pass.

Globally, shareholders are becoming actively concerned and interested in environmentally related issues of companies. There is an increasing general belief of shareholders that companies should not limit the shareholders' ability to vote on shareholder proposals that advance certain rights or promote beneficial disclosure by the board. With the pressures of increasing global concern by shareholders over environmentally related issues, companies and their boards will undoubtedly need to remain alert to the possibility of increased shareholder activism and shareholder challenges on such issues.

Reviewed by Doron Joffe, an Executive in ENSafrica’s Corporate Commercial department.

Adam Gordon

Corporate Commercial | Associate

agordon@ENSafrica.com

+27 82 382 9619