Round robin resolutions: take note to disclose true and proper purpose

By Jan-Hendrik Gous on 3 July 2019
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Section 74 of the Companies Act, No. 71 of 2008 ("Companies Act"), enables the board of a company to adopt so-called "round robin" resolutions.  Section 74(1)determines that "except to the extent that a company's memorandum of incorporation provides otherwise, a decision that could have been voted on at a meeting of the board of that company may instead be adopted by written consent of a majority of the directors, given in person, or by electronic communication, provided that each director has received notice of the matter to be decided". 

In the case of CDH Invest NV v Petrotank South Africa (Pty) Ltd & Others (438/2018) [2019] ZASCA 53, the Supreme Court of Appeal had to decide on the validity of such a round robin resolution adopted by the board of the company involved.

Facts of the case

In January 2013 a memorandum of understanding ("MOU") was concluded between CDH Invest NV ("CDH"), a Belgium company, and Amabubesi Investments (Pty) Ltd ("Amabubesi").   The MOU provided for the incorporation of Petrotank South Africa (Pty) Ltd ("Petrotank") as a partnership vehicle, and for CDH and Amabubesi to respectively hold 60 000 and 40 000 shares in Petrotank.  CDH and Amabubesi were furthermore entitled to respectively appoint three and two directors to Petrotank's board.

Notwithstanding the fact that 100 000 shares were issued pursuant to the MOU, Petrotank's memorandum of incorporation ("MOI") mistakenly recorded the company's authorised share capital as consisting of 1 000 shares.  One of the directors appointed by CDH noticed the error, and on 28 March 2014 sent an email to the other directors notifying them thereof.
  
The email mentioned the fact that "more shares are in issue than have been authorised" and that, "in order to  rectify this position", a "directors' resolution aimed at putting the Company on the right side of the Companies Act" was attached to the email and was to be signed by the directors.  The resolution contemplated an increase in the company’s authorised share capital from 1 000 to 1 000 000 shares.  The resolution furthermore required the MOI to be amended to reflect the increase in the authorised share capital.

After receipt of the aforesaid email and attached resolution, one of the directors appointed by Amabubesi however refused to sign the resolution, requesting that an investigation first be lodged into the error.  The three directors appointed by CDH nonetheless proceeded to sign the round robin resolution on 31 March 2014.  Amabubesi remained unaware of this fact and furthermore notified CDH on 4 April 2014 that the round robin resolution was incorrect given that it increased the company's authorised share capital to 1 000 000 shares instead of 100 000 shares, as was agreed in the MOU.  

Notwithstanding Amabubesi's further queries, the directors of CDH proceeded to cause an application to be made to the Companies and Intellectual Property Commission ("CIPC") to register the required amendment to the MOI.  On 4 July 2014 CDH was notified by the CIPC that the amendment to the MOI was accepted and placed on file. 

Amabubesi remained unaware of the adoption of the round robin resolution and subsequent amendment to the MOI until April 2015.  This was when CDH sought a court order in terms of section 61(12) of the Companies Act for a shareholders' meeting to be held, at which meeting a resolution was proposed to be passed to instruct Petrotank's board to make a pro rata rights offer of 98 835 ordinary no par value shares.

Amabubesi consequently lodged a counter-application to invalidate the adoption of the round robin resolution.  A declaration by the court that the round robin resolution was invalidly adopted would result in there being insufficient authorised share capital for the rights issue requested by CDH, and there would accordingly be no basis to convene the shareholders' meeting.

Decision of the High Court

The South Gauteng High Court upheld Amabubesi's counter-application and found that the round robin resolution was invalid because the directors who signed the resolution violated their fiduciary duties.  The court held that the relevant directors failed to act in good faith, in the best interests of the company, and for a proper purpose.  The court found that the directors misrepresented the true intent behind the adoption of the resolution, because they failed to offer any justification as to why the share capital was required to be increased to 1 000 000 shares as opposed to 100 000 as contemplated in the MOU.

Decision of the Supreme Court of Appeal

The Supreme Court of Appeal upheld the High Court's declaration of invalidity of the resolution.  The court considered the question whether a director is obliged to provide justification for a proposal by way of a round robin resolution to increase a company's authorised share capital.  The court considered whether a director can exercise this power without restraint and whether the need exists to explain the basis of the decision in a justifiable manner.

In arriving at its decision, the court focused on the notice requirement of section 74.  The section enables a board of directors to adopt a round robin resolution, "provided that each director has received notice of the matter to be decided".  The proviso ensures that directors are enabled to make an informed decision on the subject matter contained in the resolution. 
 
In this case the notice sent by the CDH director stated the problem merely to be that the company's issued share capital exceeded its authorised share capital.  No reason or motivation was provided for an increase in the authorised shares to 1 000 000 shares, instead of 100 000 shares as contemplated in the MOU.  The court found that the only inference to be drawn from CDH's failure to explain why such an increase to the share capital was required, is that in passing the resolution contrary to the stated purpose, CDH's nominated directors misrepresented the matter to be decided.  

The court held that the directors' misrepresentation did not conform to the standard of good faith required of directors in terms of section 76(3) of the Companies Act.

Analysis 
Directors should ensure that any action contemplated in a round robin resolution conform to the fiduciary duties imposed on them in terms of the Companies Act.  This is determined on the basis of whether the directors are acting in good faith, in the best interests of the company, and for a proper purpose.  

The intended purpose of a proposed round robin resolution should be clearly disclosed in the notice thereof.  Directors should ensure that there is no misrepresentation as to the actual purpose underlying the resolution.  Any misrepresentation will lead to a finding that the directors failed to comply with their fiduciary duties, which in turn will lead to a declaration of invalidity of the round robin resolution.



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