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Legal alert: Misrepresentation and the fiduciary duty of good faith
25 Oct 2022
In the case of CDH Invest NV (CDH) v Petrotank South Africa Pty Ltd (Petrotank), the Supreme Court of Appeal (SCA) held that failure by company directors to disclose the true purpose of a proposed resolution amounted to a breach of their fiduciary duties under the Companies Act (the Act) to act in good faith and to exercise their powers as directors for a proper purpose.
The facts in this case, briefly, are that CDH and Amabubesi Investments Pty Ltd (Amabubesi) established an incorporated joint venture in the form of Petrotank. Petrotank was held 60/40 in favour of CDH. In terms of a MOU entered into between the parties, CDH was entitled to appoint three directors (one of whom would be the MD of Petrotank) and Amabubesi was entitled to appoint two directors onto the board of Petrotank.
The MOI of Petrotank erroneously recorded the authorised share capital of Petrotank as 1000 shares instead of 100 000 shares.
In an apparent attempt to rectify this error, the MD of Petrotank circulated, to the entire board of Petrotank, a resolution that sought to achieve the necessary rectification. However, instead of seeking to increase the share capital from 1000 shares to 100 000 shares (which would have been sufficient to rectify the error) the resolution sought, without explanation, to increase the share capital to 1000 000 shares.
One of the Amabubesi appointed directors objected to the proposed resolution. However, notwithstanding this, the CDH appointed directors, without the knowledge of the Amabubesi appointed directors, passed the resolution.
The SCA noted that the Act does permit a majority of the directors to pass a round robin resolution in order to avoid a formal meeting of directors. However, our courts have continuously emphasised the importance of giving proper notice of a meeting to directors. The purpose of a notice is not only to inform directors of the date of the meeting but the reason for the meeting as well. There is, therefore, no difference between the importance of a notice where a physical meeting is called and where a round robin resolution is circulated.
In circulating the round robin resolution for the increase of the share capital, the MD stated that the “matter to be decided” was contained in the proposed resolution itself. The directors offered no reason for the increase of the share capital to 1000 000 shares instead of 100 000 shares. The true reason for the increase of the share capital to 1000 000 shares was, as it was eventually established, that the company intended to conduct a rights issue. However, this reason was not disclosed in the notice. The resolution was, therefore, contrary to the claimed purpose.
The SCA concluded that “the only inference one can draw is that, in passing the resolution contrary to the stated purpose, CDH’s nominees on Petrotank’s board misrepresented ‘the matter to be decided’: i.e. [the] purpose they had in mind when introducing the resolution was different from that which appeared in the email”. On this basis, the SCA held that the conduct of the CDH directors amounted to a misrepresentation and, by extension, their conduct was a breach of their statutory fiduciary duty to act in good faith and for a proper purpose.
This decision of the SCA emphasises, once again, the importance of directors always being conscious of their fiduciary duties in carrying out their duties as directors. It must also be borne in mind that failure to comply with fiduciary duties can attract personal liability under the Act.
See also:
- A reflection on conflict of interest and misappropriation of corporate opportunity under modern company law in South Africa
- Drafting of share buyback agreements – Important considerations
- Notifiability of a merger in South Africa
- The approval of a scheme of arrangement by shareholders
