Supreme Court of Appeal ruling on nominee shareholders

By 4th May 2019 May 28th, 2019 Commercial Law

In Smyth and Others v Investec Bank Ltd and Another 2018 (1) SA 494 (SCA), the Supreme Court of Appeal (SCA) dismissed an appeal brought by the Appellants (David John Smyth and 40 others) against a judgment of the Gauteng Division of the High Court, Pretoria, in favour of Investec Bank Ltd and Randgold & Exploration Company Ltd (the Respondents).

The legal issue

The issue in the appeal was whether the remedy provided for in Section 252 of the Companies Act 61 of 1973 (the Act) is available to beneficial owners of shares in a company who have elected to hold their shares through nominees.

The Court held that if the Appellants, being minority shareholders, wished to avail themselves of Section 252 (being a statutory remedy for minority shareholders who allege that they have been prejudiced by an act or omission of the company), they should have terminated the nomination of their nominees so that their names were entered directly into the company’s register, rather than the register reflecting the names of their nominees. This conclusion was based on the legal position that Section 252 is available only to ‘members’ of a company, and that ‘members’ of a company are those persons reflected in the company’s share register.

The Court was of the view that for as long as the nominees’ names remained in the register of members, the beneficial owners lacked legal standing in the subject matter of the litigation.

Background to the case

What was the case all about? A dispute concerning two settlement agreements concluded by Randgold & Exploration Company Ltd during January 2010. The first agreement was between Randgold and JCI Ltd. The second agreement was concluded between Randgold and Investec Bank Ltd. Both agreements related to claims instituted by Randgold against JCI Ltd, and Investec and Investec Bank UK, following an elaborate fraudulent scheme that Randgold alleged, was perpetrated against it.

The Applicants in the main application in the High Court (the Appellants in the SCA) sought a declaratory order to the effect that the two agreements were unfairly prejudicial to them as minority shareholders, as contemplated in Section 252 of the Act. They also sought consequential relief – calling for Investec to purchase their shares in Randgold at a value to be determined by the Court, in order to relieve them of the consequences of the conduct complained of. 

Appellants’ argument & Court’s finding

In short, the Appellants argued that in the context of Section 252 of the Act, the word “member” should include a beneficial owner. The Appellants contended that an expansive interpretation of the word ‘member’ should be adopted to avoid absurdity or to give effect to the true purpose of Section 252.

In response, the SCA reiterated that an absurdity must be ‘utterly glaring’ for a departure to be justified. The SCA found no absurdity in interpreting the word ‘member’ in the way in which the Respondents contended.

Furthermore, the Court held that “it would be wrong for courts to ignore the clear language of a statute under the guise of adopting a purposive interpretation as doing so would be straying into the domain of the legislature”.

It found that the Appellants lacked locus standi and dismissed the appeal with costs.