This is an appeal against part of the judgment of the High Court
granting a spoliation order, and other consequential relief, in an
application at the instance of a shareholder on behalf of a company.
The facts leading to the application before the court a quo are as follows:
The
first respondent (Grandwell Holdings (Private) Limited), a private
foreign company, entered into a commercial arrangement with the
Government of Zimbabwe for the purpose of mining diamonds in the
Chiadzwa area in Manicaland Province.
In 2009, the third
appellant (Marange Resources ((Private) Limited), a wholly owned
subsidiary of the second respondent (Zimbabwe Mining Development
Corporation), and Grandwell Holdings (Private) Limited signed an
agreement.
The agreement resulted in the incorporation of the
second respondent, Mbada Diamonds (Private) Limited, a private company,
owned 50 percent by the first respondent, and 50 percent by the third
appellant. Mbada Diamonds was to mine diamonds at Chiadzwa on special
grants granted to Marange Resources (Private) Limited.
Marange
Resources (Private) Limited and Zimbabwe Mining Development Corporation
are companies controlled by the Government of Zimbabwe. This extended
Government's influence to the operations of Mbada Diamonds, through
Marange Resources (Private) Limited, which has a 50 percent shareholding
in Mbada Diamonds.
In 2015, the Government of Zimbabwe, through
the first appellant (Minister of Mines and Mining Development), crafted a
policy to merge all diamond mining companies at Chiadzwa into one
single entity, the fourth appellant (Zimbabwe Consolidated Diamond
Company).
The parties engaged, with a view of agreeing over this initiative. Meetings were convened from about March 2015.
Grandwell
Holdings was hesitant, but said it was not opposed in principle. It
required a blueprint on the merger to enable it to decide whether or not
Mbada Diamonds should join the merger. Communication between parties to
the proposed merger continued in good faith. According to Grandwell
Holding's chairman, David Kassel, Grandwell Holding's engagement was
bona fide.
The engagement continued till the events of 22 February 2016.
According
to paragraphs 43 and 44 of the first respondent's founding affidavit,
the shareholders of Mbada Diamonds held a meeting to resolve on whether
or not Mbada Diamonds should join the proposed merger of diamond mining
companies. That meeting ended with what the first respondent called a
deadlock as the shareholders could not agree on whether or not to join
the merger without further information.
Marange Resources
(Private) Limited (the third appellant) was willing to join the merger
on the available information. Grandwell Holdings, though not opposed to
the merger, was taking a cautious approach. It wanted a blueprint with
information which could help it make a decision on that issue. It had
placed it on record, that, it was, in principle, not opposed to the
merger.
According to paragraph 39 of its founding affidavit, it
was not taking a position of non-cooperation, as it would “seek to
accommodate Government requirements wherever reasonably possible.”
It
was therefore not a deadlock as to whether or not Mbada Diamonds could
eventually join the merger. The difference between the shareholders was,
therefore, merely on their then current positions.
On 22
February 2016, the Government, through the Secretary for Mines and
Mining Development, wrote to Mbada Diamonds advising it, among other
things, that it had discovered that the special grants entitling it to
mine diamonds had expired, and that, with no title, Mbada Diamonds had
to cease all mining activities with immediate effect and vacate the
mining site.
Mbada Diamonds was given 90 days to remove all its
equipment and other valuables. Any further access to the mining site
would be upon request to the first appellant (Minister of Mines and
Mining Development).
On the same day, the first appellant called a
press conference to announce the new development, that, Mbada Diamonds,
and other diamond mining companies, no longer had valid special grants
or other rights on the basis of which they could continue with their
mining operations. The first appellant further announced, that, those
companies should cease operating and vacate the mining locations within
90 days. The first appellant specifically directed those companies to
remove all their machinery, equipment, and other related materials from
the mining locations.
On 27 February 2016, the first respondent
brought an urgent chamber application in the court a quo seeking an
interdict and a spoliation order.
The first respondent alleged,
that, when the first appellant issued a press statement, Mbada Diamonds
operations were forcibly stopped by armed police assisted by some of
Mbada Diamonds senior employees. It alleged, that, after the first
appellant's announcement, the police, and officials from the first
appellant, moved into Mbada Diamond's processing plants and shut them
down. Mbada Diamonds security team was disbanded and evicted from site
and other employees were forcibly evicted both from their work stations
and their on-site residences. Security systems were paralysed.
The
first respondent also alleged, that, Marange Resources (Private)
Limited, the other shareholder of Mbada Diamonds, was in support of the
initiative to consolidate the mining companies into a single entity and
was therefore acting in concert with the first appellant to despoil the
second respondent (Mbada Diamonds).
The evidence on record does
not support the allegation that Marange Resources (Pvt) Ltd directly
participated in despoiling Mbada Diamonds.
It merely proves
Marange Resource's willingness to join the merger before receiving
further information while Grandwell Holdings needed further information
before it could decide on whether or not Mbada Diamonds should join the
merger.
It was on these facts that the first respondent sought an
interim order declaring, that, the conduct of the appellants, in
removing Mbada Diamonds representatives from its mining site and
effectively assuming control of Mbada Diamond's mine, constitutes an act
of spoliation.
The first respondent also sought an order
directing the appellants to vacate Mbada Diamond's mining site with
immediate effect and interdicting the appellants from interfering with
Mbada Diamonds operations.
Mbada Diamonds, through an affidavit
signed by its Chief Executive Officer, Luciyano, supported the first
respondent's application.
The application was opposed by the
appellants, who raised several preliminary points, including that the
first respondent, as a shareholder of Mbada Diamonds, had no locus
standi to institute an action on behalf of the company.
The appellants argued, that, Mbada Diamonds should have made the application to enforce its rights.
The
first respondent argued, that, it was entitled to institute proceedings
on behalf of the company through a derivative action. The appellants
argued that derivative action was not available to the first respondent.
The
court a quo dismissed the preliminary point raised by the appellants
and held, that, derivative action was available to the first respondent.
The court a quo held, that, it would have been futile for the first
respondent to seek a resolution to sue the appellants given the stance
Marange Resources (Private) Limited had already taken towards the
intended merger.
The court a quo found, that, since Marange
Resources (Private) Limited was acting in concert with the other
appellants, it would have been futile for the first respondent to have
called for a meeting to resolve that Mbada Diamonds should vindicate its
rights. The court a quo held that the circumstances of the case
justified the procedure adopted by the first respondent.
In any
event, the court a quo also found that the first respondent, as a
shareholder of the second respondent, had a direct interest in the
second respondent, and, therefore, had the necessary locus standi to
institute the proceedings.
On the merits, the court a quo held
that the appellants committed an act of spoliation on the second
respondent (Mbada Diamonds). The court therefore granted the application
for spoliation.
The first appellant was aggrieved by that decision and appealed to this court on the following grounds:
1.
The court a quo erred in not finding, that, to the extent the first
respondent had alleged facts which went beyond the question of
spoliation, and, rather, sought to assert a right to mine, and
consequently, of possession; the appellant was entitled to demonstrate
the absence of the same, and that, upon the court a quo accepting the
absence of such rights, the first respondent could not be granted the
relief of spoliation.
2. The court a quo erred in finding, that,
the shareholder's derivative action was available to the first
respondent when the founding affidavit had not made out a case for the
same, and that, in any event, the first respondent had locus standi in
judicio to institute the proceedings.
3. The court a quo further
erred in finding, that, the first respondent had peaceful and
undisturbed possession of the mining concessions, in its capacity as
project manager, and that, therefore, it was entitled to spoliatory
relief in its personal capacity when the founding affidavit did not make
such allegation and relief was not sought on that basis.
4. The
court a quo further erred in finding, that, the appellant had committed
an act of spoliation against the fifth respondent when, in the
circumstances, the appellant was not found to have done anything to
evict the fifth respondent from mining concessions.
5. The court a
quo further erred in entitling, authorising, and empowering the fifth
respondent's security personnel, with all its chain of command, to
remain at the mining concessions until resolution of a matter that was
resolved on 22 February 2016 when the relevant statutory functionary
exercised his discretion against the further extension/renewal of the
special mining grants in question.
The second, third and fourth
appellants (Zimbabwe Mining Development Corporation, Marange Resources
(Pvt) Ltd and Zimbabwe Consolidated Diamond Company) were also aggrieved
by the decision of the court a quo and appealed to this Court on the
following grounds:
1. The court a quo erred in finding, that, the
appellants had committed acts of spoliation against the first and
second respondents in the absence of evidence, or even an allegation,
that the appellants evicted the said respondents and in the face of
evidence from the sixth respondent to the effect that its actions and
presence at the mining site were for purposes of preventing unlawful
mining activities as well as securing State property.
2. The
court a quo erred in finding, that, the first respondent had been
despoiled when no evidence had been placed before it, or even alleged,
regarding any peaceful and undisturbed possession of the mining site or
spoliation by the appellants.
3. The court a quo erred in
finding, that, the first respondent had locus standi and/or that the
shareholder's derivative action was available to the first respondent in
the absence of evidence that the second respondent was unwilling or
unable to institute the proceedings.
4. The court a quo erred in
concluding, that, the appellants (including the first appellant) were
effectively a single economic unit when their relationship is defined by
law and each acted or exercised its rights as provided by law.
Having
read the record and considered the submissions made by counsel for the
appellants and the first respondent, I find that, although the appeal is
premised on many grounds, only two issues arise for determination:
1.
Whether or not the first respondent had locus standi to bring the
application on behalf of the second respondent through derivative
action, or, whether or not derivative action was available to the first
respondent.
2. Whether or not the appellants despoiled the second respondent.
I will consider and determine the first issue.
Whether or not derivative action was available to the First Respondent
Counsel
for the first appellant challenged the first respondent's right to
institute the application in the court a quo on behalf of the second
respondent, a company which, in terms of the law, is entitled to enforce
its own rights.
Counsel for the second, third, and fourth appellants agreed with counsel for the first appellant's submissions.
It
was argued for the appellants, that, the first respondent did not have
the right to institute action on behalf of the second respondent without
evidence that the second respondent was unable to institute the
proceedings to protect its interests.
On the other hand, counsel
for the first respondent argued that its right to institute the
application arose from derivative action, since the second respondent
was not able to act on its own behalf.
The issue is, therefore, on when a shareholder of a company can institute proceedings on behalf of a company.
It
is a trite principle of Company Law, that, a company should itself
enforce its rights when it is wronged. This was considered as the rule
in Foss v Harbottle [1843] 2 Hare 461, 67 ER 189.
The rule in
Foss v Harbottle [1843] 2 Hare 461, 67 ER 189, is that, the proper
plaintiff in an action in respect of a wrong alleged to be done against a
company is prima facie the company itself. Thus, as a general rule,
where the company is wronged, the proper plaintiff to institute an
action to remedy the wrong is the company itself. No other person has
the right to institute an action on behalf of the company, if the
company is able to vindicate its rights.
However, the rule, as
explained in Foss v Harbottle [1843] 2 Hare 461, 67 ER 189, is not
inflexible and can be relaxed, where necessary, in the interest of
justice.
GIBSON, South African Mercantile and Company Law, 8th Ed…, states the following:
“But,
the rule in Foss v Harbottle is not universal. It is subject to
exceptions. It does not apply where the interests of justice require the
rule to be dispensed with (Russell v Wakefield Waterworks Co. (1875) LR
20 Eq 474).
So, where a wrong has been done
to a company, a court will allow dissentient members to bring an
action, in their own names, against those responsible, where the latter
hold and control the majority of the shares in the company and will not
allow any action to be brought in the name of the company.”…,.
The
rule in Foss v Harbottle [1843] 2 Hare 461, 67 ER 189 does not, in
appropriate circumstances, prevent an individual member from suing
through derivative action.
Derivative action is an exception to the rule in Foss v Harbottle [1843] 2 Hare 461, 67 ER 189.
In
Zimbabwe, derivative action has been recognised in many cases: see L.
Piras and Sons (Private) Limited v Piras 1993 (3) ZLR 245 (S) and Lameck
Kufandada v Dairiboard Zimbabwe and Others HH564-15.
In L Piras and Sons (Private) Limited v Piras 1993 (3) ZLR 245 (S), GUBBAY CJ said the following:
“The
derivative action is an exception to the rule in Foss v Harbottle
(1843) 67 ER 189 and was expounded thus by Lord Denning MR in
Wallersteiner v Moir (No.2) [1975] 1 All ER 849 (CA) at 857D-F:
'It
is a fundamental principle of our law, that, a company is a legal
person, with its own corporate identity, separate and distinct from the
directors or shareholders, and with its own property rights and
interests to which alone it is entitled. If it is defrauded by a
wrongdoer, the company, itself, is the one person to sue for the damage.
Such is the rule in Foss v Harbottle.
The rule is easy enough to
apply when the company is defrauded by outsiders. The company itself is
the only person who can sue. Likewise, when it is defrauded by insiders
of a minor kind, once again, the company is the only person who can
sue.
But, suppose it is defrauded by
insiders who control its affairs, by directors who hold a majority of
the shares - who then can sue for damages?
Those
directors are themselves the wrongdoers. If a board meeting is held,
they will not authorise proceedings to be taken by the company against
themselves. If a general meeting is called, they will vote down any
suggestion that the company should sue them themselves. Yet, the company
is the one person who is damnified. It is the one person who should
sue. In one way or another, some means must be found for the company to
sue. Otherwise the law would fail in its purpose. Injustice would be
done without redress.
The nature, then,
of a derivative action, is that it is a device designed to enable the
court to do justice to a company controlled by its wrongdoers and
prevents a serious wrong from going unremedied. A shareholder is allowed
to appear as the plaintiff. He acts, not as representative of the other
shareholders, but as a representative of the company, to enforce rights
derived from the company. The action is brought by him, in his own
capacity, to vindicate the company's rights.”…,.
It is important to note, that, derivative action is available when certain requirements are met.
It
must be clear that the company has been prevented from instituting
proceedings by alleged wrongdoers in control of the company. It must be
alleged, and proved, that the wrong-doers (the majority shareholders or
the other shareholder in the case of equal shareholders) have refused to
institute the action and have prevented the company from instituting
action using their majority or equal votes.
In order for the company to institute proceedings on its own behalf, the shareholders must agree through a resolution.
Thus,
if the majority shareholder, using his majority vote, or the equal
shareholder, using his equal vote, blocks the attempt by the company to
institute action to remedy the wrong, the minority, or other equal
shareholder, is entitled to approach the court through derivative
action.
In this case, counsel for the first appellant submitted,
that, derivative action was not available to the first respondent
because there was no finding that the second respondent was prevented
from instituting proceedings and that there are no findings that the
second respondent refused or failed to act in its own interest.
Counsel
for the first appellant relied on the fact, that, the second respondent
itself responded to the application filed by the first respondent.
According to the first appellant, this shows that the second respondent
was capable of instituting the proceedings to safeguard its interests.
In
support of that, counsel for the second to fourth appellants submitted,
that, in order for the court to find whether or not derivative action
was available to the first respondent, the court ought to ask itself
whether there was any wrongdoing against the company by the majority
shareholders, or those in control of the company, before the party which
seeks to rely on derivative action can succeed.
On the other
hand, counsel for the first respondent submitted, that, derivative
action was justified on the basis, that, the seeking of a resolution for
the second respondent (Mbada Diamonds) to institute proceedings would
be a futile exercise since the third appellant (Marange Resources), the
other shareholder of the second respondent, would have made that
impossible.
Counsel for the first respondent further submitted,
that, the futility of the meeting was known as the first respondent
tried to call for the meeting with the other shareholder. Counsel for
the first respondent submitted, that, an attempt was made to call for a
shareholders meeting, but was declined by the other shareholder.
A
perusal of the record reveals, that, there is no evidence that an
attempt was made for the shareholders of Mbada Diamonds to convene a
meeting to decide whether or not Mbada Diamonds should institute
spoliation proceedings to protect its rights.
There are only two
shareholders of Mbada Diamonds, the first respondent (Grandwell
Holdings) and the third appellant (Marange Resources).
There is no evidence on record that the other shareholder actively prevented the company from instituting such proceedings.
On
record is a letter from the first and second respondents South African
legal practitioners threatening to institute proceedings on their
behalf.
Whether or not the first respondent attempted to call for
a meeting with the third appellant is a question of fact which must be
proved by evidence. In this case, it was not proved that an attempt was
made.
As a result, it was not established that the second
respondent was actively prevented by the third appellant from
instituting the proceedings a quo in its own name.
According to GOWER L.C.M. Principles of Modern Company Law…, for derivative action to be justified:
“It must be shown that the alleged wrongdoers control the company. The
clearest way of doing this will be to show that both the directors and
the general meeting have been invited to institute proceedings in the
name of the company and have refused to do so, and that the refusal was
because of the votes cast by the wrongdoers. However, the English
cases recognise that there is no point in formally asking the directors
to institute the proceedings if they are to be the defendants, and that
it is not necessary to convene a general meeting and to invite it to
resolve upon proceedings in the company's name, provided that the court
can be satisfied aliunde that the wrongdoers are in effective control.”…,.
It is therefore clear, that, derivative action can be relied on in two circumstances:
(i)
In the first situation, it must be proved that a meeting was called for
the shareholders to pass a resolution for the company to institute
proceedings. In the event that the other shareholders refused or
prevented the meeting from taking place, the other shareholders can rely
on derivative action to institute action on behalf of the company.
However, this is not what happened in this case.
No
attempt was made by the shareholders of Mbada Diamonds to convene a
meeting to pass a resolution for the company to institute the
proceedings.
The court a quo, conscious of there being no such evidence, at pages 12 to 13 of its judgment, said:
“In
casu, the position of the American courts, as stated by Gower above,
seemed to have been Mr Hashiti's point. He submitted, that, in the
absence of an invitation by Grandwell, to Marange, for a meeting to pass
a resolution to sue in the name of Mbada; that, in the absence of
evidence that such an invitation had been turned down; that, coupled
with Werksmans letter aforesaid, and Luciyano's affidavit, it could not
be said Mbada had been unable to bring the urgent chamber application by
itself, and that, therefore, the derivative action was not available to
Grandwell.
I recognise the force of the
respondent's argument. But, in my view, the position of the English
Courts seems to accord more with notions of justice and the spirit of
the derivative action. The law must not be rendered impotent.
In
casu, the Minister moved with exceeding speed. For six or seven years,
operations at Chiadzwa had gone on unhindered. But, on 22 February 2016,
in one fell swoop, things were turned upside down. Mining was abruptly
terminated; Mbada's personnel were forcibly expelled from site;
inadequate security had exposed the precious diamonds, the expensive
equipment, personal belongings, and more, to destruction and theft. The
situation was one of dire emergency. Werksmans letter of demand of 23
February 2016, sent by email, had been ignored. There had been no let-up
in the looting, forcing Grandwell, four days later, to run to the law.
Marange
itself had already passed a resolution to adopt the Minister's plans
for the consolidation of diamond mining companies, including Mbada, into
one single entity without agreement with Grandwell, its co-shareholder.
This was in spite of the outstanding details Grandwell had requested on
the proposed scheme.
Further, the evidence
showed that it was officials from Mbada, as the Minister's
representatives, with the assistance of the police, who had executed the
Minister's directives.
In my view, the
spirit of the derivative action, being an exception to the rule in Foss v
Harbottle, is that 'the claims of justice would be found superior to
any difficulties arising out of technical rules respecting the mode in
which corporations are required to sue.'”
These are the reasons which swayed the court a quo to allow derivative action by Grandwell Holdings (the first respondent).
(ii)
The second situation, which basically reflects the English position, is
that, if it is proved that calling a meeting was an exercise in
futility, the other shareholder can institute proceedings on behalf of
the company without seeking a resolution that the company institute the
proceedings.
For the shareholder who seeks to rely on derivative
action to rely on this option, the court must be satisfied that the
majority shareholders, or equal shareholders, who are the wrongdoers and
would not want the company to institute proceedings, are in effective
control.
The second respondent is owned by the first respondent
and the third appellant in equal shares of 50 percent each. This means,
if a meeting was to be called to pass a resolution for the company to
sue, and, one shareholder votes against such a resolution, the company
could not sue in its own name. It can also be established, that, the
other shareholder was in effective negative control.
According to
evidence on record, Marange Resources was chaired by the Secretary of
Mines, who authored the letter of 22 February 2016. The same Secretary
also chaired the second and fourth appellants (Zimbabwe Mining and
Development Corporation and Zimbabwe Consolidated Diamond Company).
The
special grants, which enabled Mbada Diamonds to mine, belonged to
Marange Resources, which is wholly owned by the second appellant
(Zimbabwe Mining and Development Corporation).
The Zimbabwe
Consolidated Diamond Company (fourth appellant), which was to replace
Mbada Diamonds, and other diamond mining companies, into mere 50 percent
shareholders, is chaired by the Secretary of Mines.
The
Secretary's office was responsible for crafting Government policy. It
was responsible for the granting of special grants. It also was entitled
to make definitive orders on mining operations - as it did on
22 February 2016.
In view of the above, there is no doubt, that,
in spite of formal equality as between the two shareholders, power and
control were on Marange Resources side.
The Secretary's word was administratively final.
It
was also established, and proved, that the third appellant (Marange
Resources), as the other shareholder, opposed the application.
That
alone, made it pointless to call for a meeting to resolve that the
company institute application proceedings which the other equal
shareholder was opposing. There was clearly no chance that such a
resolution could be passed.
Therefore, derivative action was
justified, because, it would have been futile to call for a meeting to
resolve that the company should sue in its own name. Marange Resources
would clearly not have agreed that Mbada Diamonds should apply for an
order against its own Chairman and the Minister's decisions and conduct.
In
this case, the first respondent relied on an assumption that the third
appellant would have made it impossible for the resolution to be passed.
That assumption is supported by sufficient evidence that it would have
been futile to call for a meeting to resolve that Mbada Diamonds should
make the application.
The futility was clearly explained by the court a quo.
It entitled the first respondent to rely on derivative action.
There
was proof, that, the third appellant was fully entangled to the will of
its Chairman and the other appellant companies he chaired. There was
therefore evidence aliunde that it was impossible for the second
respondent to institute spoliation proceedings in its own name.
It
is clear, that, the right to institute proceedings using derivative
action is meant to remedy wrongdoing against a company by its directors,
or, majority or equal shareholders.
In this case, the court a
quo correctly relied on the futility of expecting the first respondent
to call for a meeting to resolve that the company should sue the
appellants for spoliation as the other equal shareholder's position on
the application was known. It was opposing the application. It clearly
would not have supported a resolution for the company to make an
application it was opposing.
The first respondent (Grandwell
Holdings) was therefore entitled to rely on derivative action to sue on
behalf of the second respondent (Mbada Diamonds).
Once it has
been found, that, the first respondent had locus standi to bring the
application, then, the second issue must be determined.
GUVAVA JA:
I fully concur with UCHENA JA's assessment of the facts leading up to
the institution of the proceedings a quo and his conclusion on the first
respondent's entitlement to sue by way of derivative action on behalf
of the second respondent.
