If a shareholder, who has a majority holding of voting rights, wants to propose a resolution to other shareholders, is it able to do so on its own?
Section 61 of the Companies Act deals with shareholders meetings. Section 61(1) empowers the board of a company with a discretion to call a shareholder meeting at any time. However, section 61(3) compels the board to call such a meeting where the board has received one or more written and signed demands for such a meeting and:
each such demand describes the specific purpose for which the meeting is proposed, and
in aggregate, demands for substantially the same purpose are made and signed by the shareholder/s, of at least 10% of the voting rights entitled to be exercised in relation to the matter proposes to be considered at the meeting.
Section 65(3) empowers shareholders to propose a resolution on any matter on which they are entitled to exercise a right. It provides that 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).
In 2023 in the case of Foxvest Group (Pty) Ltd and Another v Rocky Park Holdings (Pty) Ltd and Others, the Gauteng Division of the High Court in Johannesburg found that a resolution passed pursuant to a demand in terms of section 61(3) was invalid and set aside the proposed resolution as it was not seconded by another shareholder.
Background
Foxvest and Rocky Park Farming were the sole shareholders of Rocky Park Holdings, with Foxvest holding 49% and Rocky Park 51%. Disputes arose when Rocky Park requisitioned a shareholders meeting to remove Warwick Marshall Blamey, nominated by Foxvest, as a director of Holdings, citing alleged fraudulent conduct.
Rocky Park had requisitioned the shareholders meeting in terms of section 61(1) of the Companies Act as read with section 61(3).
A shareholders meeting was convened and the resolution proposed by Rocky Park was passed by Rocky Park as the only shareholder in attendance of the meeting.
Legal Issues
The central issue before the court was whether a single shareholder could propose a resolution to remove a director. Section 65(3) of the Companies Act mandates that any two shareholders may propose a resolution concerning any matter in respect of which they are each entitled to exercise voting rights. Foxvest contended that the resolution was invalid because it was proposed by only one shareholder, contrary to the statutory requirement (i.e. the demand made by Rocky Park on the board of the company to call a shareholders meeting for the removal of Blamey).
Court's Findings
The court ruled that the resolution was invalid, emphasizing that the Companies Act explicitly requires at least two shareholders to propose a resolution. The court found that since the requisition and subsequent resolution to remove Blamey were initiated by a single shareholder, Rocky Park, this did not comply with section 65(3)’s stated requirement of ‘two shareholders’, rendering the resolution unlawful and invalid. The court also noted that while section 71(1) allows for the removal of directors by ordinary resolution, it does not override the procedural requirements set out in section 65(3).
In the application for leave to appeal the judgment, it was argued that as the meeting was called in terms of section 61(3) there was no need for the resolution to be proposed by two shareholders (i.e. that the provisions of section 65(3) do not apply). Such argument was dismissed by the court who found that:
Section 61 deals with the issue of shareholders meetings and no more. It says nothing of shareholders resolutions. The issue of shareholders resolutions is the focus of section 65 of the Companies Act. Section 65(3) deals with the issue of resolutions proposed by shareholders. And, it lays down peremptory requirements that have to be met for the proposed resolutions to be lawful and valid.
In this case, section 61 was used for the calling of a shareholders meeting. It had to be complied with by Rocky Park if it, as a shareholder, wanted to call a shareholders meeting. Rocky Park could not, even if it wanted to, invoke section 61 to propose a resolution for consideration at the meeting. Section 61 is simply not amenable for that purpose. Apart from the fact that the wording of the two sections – 61 and 65 – are clear in this regard, i.e. in regard to the distinct subject matter that each of them deals with, section 57(2) concerns the governance of companies. It clarifies that section 65 does not apply where a profit company has only one shareholder: it specifies that where there is ‘only one shareholder’ in a profit company then sections 59 to 65 do not apply. In all other circumstances, those sections apply. By specifying ‘only one shareholder’ the court held that legislature reveals an intention to exclude all situations where there is more than one shareholder in a profit company. As there are two shareholders here, by dint of application of sections 57(2) and 65(3) the resolution had to be proposed by both shareholders.
Outcome
The court set aside the resolution passed at the shareholders meeting removing Blamey as a director of Holdings. The judgment underscores the importance of adhering to statutory procedures in corporate governance, particularly concerning the removal of directors.
Be cautious in the resolutions proposed in a demand for a shareholders meeting in terms of section 61(3) as you may not be able to call for such resolution on your own. A resolution proposed in a section 61(3) demand must be made by at least two shareholders.
The consequence of this judgment is that one shareholder, even though it holds the majority of the voting rights, may not be in a position to propose a resolution to the shareholders, effectively stymying their shareholder rights.
The court’s finding that the requirements of section 65(3) must be read with section 61(3), can lead to iniquitous consequences and may yet be open to future challenge.
