Mbethe v United Manganese of Kalahari (Pty) Ltd (42213_2014) [2016] ZAGPJHC 8; 2016 (5) SA 414 (GJ) (11 February 2016)

Lazarus Mbethe, in his capacity as a director and Chairman of United Manganese of Kalahari (Pty) Ltd, as well as in his representative capacity for Majestic Silver Trading 40 (Pty) Ltd (MST), Pitsa Ya Setsha ba Holdings (Pty) Ltd (PYS), and as a trustee of the Kalahari Community Trust (KCT), sought to institute a derivative action in the name of the respondent company. This action was based on a demand made by Mbethe that the company had refused to comply with, as per section 165(5) of the Companies Act, 2008.

United Manganese of Kalahari was formed as a Special Purpose Vehicle for Black Economic Empowerment (BEE) purposes, which was a precondition for the granting of prospecting and mining rights on 10 March 2008. Shares were allocated between MST, with BEE objectives (51%), and a Russian-based company, Renova Manganese Investments Ltd (49%). The KCT was founded to benefit the local Kuruman community, with MST's shareholding allocated among several entities, including KCT with an 8% share.

The company, established in 2005, began mining operations in 2008, becoming a multibillion-rand entity. Concerns were raised about the management and contracts awarded by the company, particularly the lucrative iron ore crushing contracts to mobile operators, which were seen as not benefiting the community as intended. Zastrospace, a company introduced to the respondent by Mbethe and led by his friend, was awarded a crushing contract worth millions, which was later terminated for commercial reasons. This termination is a central issue in the case.

Mbethe made several demands to the company, including the reinstatement of the Zastrospace contract and investigations into the conduct of certain directors and the management of the company. After the company refused these demands, Mbethe sought legal action to enforce them.

The court had to consider whether Mbethe had the standing to bring the proceedings, the merits of the demands, and whether they were made in good faith. The court found that while Mbethe had standing as a director, the demands, particularly regarding the Zastrospace contract, were not in the best interest of the company and were not pursued in good faith. The court highlighted concerns about the actual benefit of the Zastrospace contract to the community and questioned the motivations behind the demands.

The application for a derivative action was dismissed, with costs awarded against the applicant, except for the costs related to an interlocutory application regarding the appointment of an investigator and attorneys, which were awarded to Mbethe.

This case underscores the complexities of corporate governance, the responsibilities of directors, and the challenges of balancing commercial interests with community benefits and BEE objectives within the South African legal and regulatory framework.

The ratio decidendi of this case revolves around the interpretation and application of Section 165 of the Companies Act, 2008, concerning the right of a director to bring a derivative action in the name of the company. The core legal principles underlying the decision are as follows:

1. Standing and Locus Standi: A director of a company has the standing to bring a derivative action on behalf of the company if the company refuses to act on a demand that the director believes is in the best interest of the company. However, the director must demonstrate that the action is pursued not only in their capacity as a director but also in the best interest of the company.

2. Good Faith Requirement: For a derivative action to be permissible, the applicant must act in good faith, as stipulated by Section 165(5)(b)(i) of the Companies Act. Good faith encompasses both an honest belief in the existence of a valid cause of action with a reasonable prospect of success and the absence of any collateral purpose that would amount to an abuse of the court's process.

3. Merits of the Demand: The demands that form the basis of the derivative action must have merit, meaning there must be a legally cognizable cause of action that is in the best interests of the company. The court will not grant leave for a derivative action if the demands are not substantiated by evidence that demonstrates their potential benefit to the company.

4. Interest of the Company: The proposed derivative action must be in the best interests of the company, involving a serious question of material consequence to it. The applicant must show that the action sought to be enforced would likely benefit the company, align with its objectives, and not jeopardise its legal standing or operations.

In this case, the court found that the applicant, Lazarus Mbethe, did not satisfy the requirements for a derivative action under Section 165(5) of the Companies Act. Specifically, the court determined that the demands, particularly regarding the reinstatement of the Zastrospace contract, were not pursued in good faith, did not have merit, and were not in the best interest of the company. The court highlighted that the application appeared to be motivated by a collateral purpose related to the Zastrospace contract, rather than a genuine concern for corporate governance or the company's welfare. This decision underscores the importance of the good faith requirement and the need for a derivative action to be grounded in the genuine interest of the company, free from personal motivations or collateral purposes.

In its reasoning process, the court referred to several cases to elucidate the principles and requirements for a derivative action under Section 165 of the Companies Act, 2008, particularly focusing on the good faith requirement and the interpretation of what constitutes the best interests of the company. However, in the detailed summary provided, specific case law references with neutral citations were not explicitly mentioned for all cases.

One case that was specifically referenced for its discussion on the good faith requirement and the interpretation of derivative actions under similar legislative frameworks is:Swansson v RA Pratt Properties Pty Ltd (2002) ACSR 313 (2002) NSWSC 583.

This Australian case was cited to illustrate the two interrelated factors that courts consider in determining whether the good faith requirement of a statutory derivative action is satisfied: (1) whether the applicant honestly believes that a good cause of action exists and has a reasonable prospect of success, and (2) whether the applicant is seeking to bring the derivative suit for a collateral purpose that would amount to an abuse of process.

For principles related to the fiduciary duties of directors and the importance of acting in the best interests of the company, the court referenced Da Silva v CH Chemicals (The specific neutral citation for this case was not provided) However, it is a South African case that discusses directors' fiduciary duties to act in good faith and in the best interests of the company.)

It's important to note that while these cases were used to support the court's reasoning, the primary legal framework for the decision was based on the interpretation of South Africa's Companies Act, 2008, specifically Section 165, which governs derivative actions. The court's decision emphasizes the necessity for applicants of derivative actions to demonstrate that their application is made in good faith, is in the best interest of the company, and is based on a legally cognizable cause of action.