Siyakhula Sonke Empowerment Corporation (Pty) Ltd and Another v Redpath Mining (South Africa) (Pty) Ltd and Another [2024] JOL 64621 (GJ)Directors may issue shares to raise capital (Hogg v Cramphorn Ltd [1967] Ch 254). Share issues tainted by self-interest and improper purpose of diluting shareholders are unlawful (Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821; Punt v Symonds & Co Ltd [1903] 2 Ch 506 and Piercy v S Mills & Co Ltd [1920] 1 Ch 77). This area of law was developed in the United Kingdom and confirmed in South Africa (CDH Invest NV v Petrotank South Africa (Pty) Ltd and Others 2019 (4) SA 436 (SCA)).
In Siyakhula the issuing of shares to raise funds resulted in the dilution of an existing shareholder. Siyakhula Sonke Empowerment Corporation (the first applicant) duly represented by Mr Arendse (the second applicant) (together, the applicants) opposed two rights offers approved by Redpath Mining (South Africa) (Pty) Ltd (the first respondent) on 3 November 2021 and in March 2022. The applicants contended that the rights offers were unlawful, invalid, and stood to be set aside. The applicants claimed that the first respondent’s directors breached their duties and that the rights offer contravened s 163 of Companies Act 71 of 2008 (the Act). Further, the applicants averred that the two rights offers constituted integrated transactions contemplated under s 41(3)–(4) of the Act and infringed the requirement of shareholder approval by special resolution.
The first applicant and first respondent signed a strategic BEE transaction on 26 October 2006, complying with the Broad-Based Black Economic Empowerment Act 53 of 2003. The first respondent was to extend monthly payments to the first applicant, as a result, the first applicant derived a financial value of 26% equity in the first respondent.
By late 2020, the first respondent cancelled the monthly payment of R 225 000 to the first applicant after being informed that the payments were unlawful dispositions since the first respondent was factually insolvent. In response, the applicants discredited the first respondent and Redpath Africa Limited (RAL) (the second respondent) (the respondents) to its stakeholders by making several prejudicial accusations, including allegations of racism, fraud, misconduct, and asset stripping.
By September 2021, the allegations by the applicants caused despondency and irreparable harm to the first respondent, resulting in a cash shortfall of R 40 million. The first respondent attempted, but failed, to secure alternative debt funding from the second respondent and/or any other financial institution, resulting in a negative cash flow of R 83 million. This left the first respondent with only the option of equity funding of R 40 million. Accordingly, the second respondent offered to purchase the 26% stake in the first respondent, including the shareholding of the first applicant (which the first applicant rejected), and transfer it to RSAEEC (the third respondent).
On 19 October 2021, the respondents’ directors scheduled the first rights offer meeting to be held on 27 October 2021. The applicants objected to the meeting, as contemplated, and claimed that it would unlawfully dilute the first applicant as a shareholder in the first respondent. Consequently, the meeting was rescheduled to 3 November 2021, and the applicants used the previous reasons, as in October 2021, to oppose the meeting. Despite the applicants’ objection the directors of the respondents unanimously voted for the approval and adoption of the first rights offer, resulting in the applicants challenging the rights offer in court on 7 December 2021.
While the above application was pending, the respondents adopted the second rights offer and the first respondent issued additional shares that only the second respondent applied to take up all the shares, and again the applicants objected. The first and second rights offers were central to the contention in court.
The High Court of South Africa Gauteng, Johannesburg, per Senyatsi J, grappled with the question of whether directors can issue shares to raise essential funding in circumstances where there are no alternative funding options, despite such offers diluting the shareholding of existing major or minor shareholders. The court inquired whether the primary purpose of the first respondent was to dilute the shares of the first applicant as a scheme to grant the second respondent control to ensure that the first respondent would guarantee smooth voting in the future. The applicants relied on s 41(3)–(4) of the Act, which requires a special resolution to approve share issues or granting of further rights to shares. The court correctly held that the purpose of s 41(3) is to disable the board of directors from diluting shareholders by issuing further shares. The court held that it is incorrect to interpret s 41(3) as a catch-all prohibition without considering circumstances, such as company survival. The court held that the first respondent did not issue shares solely to dilute the shareholding of the first applicant because facts show that the first respondent failed to obtain funding on the open market and debt. The court held that the applicants portrayed determination to see the first respondent fail. The court held that the two rights offers, as contemplated, did not fall under the purview of s 41(3) of the Act. The court further held that the applicants failed to prove that the directors’ actions in the first respondents were oppressive and in breach of s 163 of the Act. The court correctly held that the burden of proof and the onus rested on the applicants, and they were supposed to make allegations that were supported by hard facts and not just speculation. The court correctly held that the claims of fraud and asset stripping peddled by the applicants were without factual basis and dismissed the application.
I submit that the court correctly applied the primary purpose rule in determining the dominant purpose of the issuing of shares. Accordingly, except where directors’ decisions are influenced by dishonest considerations or personal interests, their decisions should stand. However, if the primary or dominant purpose for which the decision was executed is improper, then in such a case the decision can be set aside by the court (Eclairs Group Ltd and another v JKX Oil and Gas Plc [2016] 3 All ER 641 [2015] UKSC 71 at para 17). In these circumstances, the primary purpose of the rights issues was to raise essential funding as a last resort. Despite the rights issues diluting the applicants’ shareholding in the first applicant, the share issues were essential for the survival of the first respondent. The decision is in line with s 158 of the Act as it promotes the spirit, purpose, and objects of the Act. As contemplated in s 7 of the Act, the decision –
Dr Justice Mudzamiri LLB (UFH) LLM (UJ) LLD (UFH) is a legal practitioner at Drake Flemmer & Orsmond (EL) Inc in East London.
This article was first published in De Rebus in 2025 (May) DR 48.
