Technology Corporate Management (Pty) Ltd and Others v De Sousa and Another (613-2017) [2024] ZASCA 29 (26 March 2024)

This case involves a dispute between shareholders of Technology Corporate Management (Pty) Ltd (TCM), a company initially founded by two friends, Luis de Sousa and Andrea Cornelli, who shared a vision of creating a successful business in the computer repair services industry. Over the years, TCM expanded significantly, both in terms of its operations and shareholder structure. This expansion included the introduction of new shareholders, notably Iqbal Hassim, who was brought in to enhance the company's Black Economic Empowerment (BEE) profile, a critical factor for securing contracts in South Africa.

The relationship between the original founders began to deteriorate around 2007, leading to a series of disputes that culminated in legal action. The core of the dispute revolved around allegations by Luis de Sousa (and to a lesser extent by Jose Manuel Garcia Diez, another shareholder who had joined the company early in its history) that the company's affairs were being conducted in a manner that was unfairly prejudicial, unjust, or inequitable to them. Specifically, Luis de Sousa claimed that he had been unfairly excluded from the management and operations of TCM, contrary to the expectations set when the company was founded. This exclusion was said to have been exacerbated by his dismissal from employment at TCM, which he contended was both procedurally and substantively unfair.

The case also involved complex issues related to the company's financial management and accounting practices, particularly concerning the valuation of inventory, the treatment of the Supplies Division (a segment of the business dealing with the importation of spare parts and equipment), and the payment of bonuses and retention agreements. Luis de Sousa and Jose Manuel Garcia Diez argued that these practices contributed to the unfair prejudice they experienced, alleging that they were designed to diminish the value of their shareholdings and to benefit other shareholders, particularly Iqbal Hassim, at their expense.

The legal proceedings were marked by a series of applications, amendments to the particulars of claim, and interlocutory matters that significantly prolonged the trial. The Supreme Court of Appeal was tasked with reviewing the judgment from the Gauteng Division of the High Court, Johannesburg, which had found in favor of Luis de Sousa and Jose Manuel Garcia Diez, ordering TCM to purchase their shares at a value to be determined by a referee.

The Supreme Court of Appeal's judgment focused on whether the High Court had correctly found that the conduct of TCM's affairs was unfairly prejudicial to Luis de Sousa and Jose Manuel Garcia Diez. The Appeal Court scrutinized the basis of their claims, including the alleged legitimate expectation of continued involvement in the company's management, the fairness of Luis de Sousa's dismissal, the refusal to negotiate the sale of their shares, and the alleged lack of probity in the company's financial management. The Appeal Court ultimately overturned the High Court's judgment, concluding that the plaintiffs had not established that they were subjected to unfair prejudice as defined under the relevant sections of the Companies Act.

The ratio decidendi of the Supreme Court of Appeal's judgment in this case revolves around the interpretation and application of Section 252 of the Companies Act 61 of 1973, which deals with the remedy available to a member of a company who complains that the affairs of the company are being conducted in a manner unfairly prejudicial, unjust, or inequitable to them or to some part of the members of the company. The core legal principles underlying the decision can be summarized as follows:

1. Legitimate Expectations and Quasi-Partnership: The court clarified that for a claim of unfair prejudice based on exclusion from management to succeed, there must be a legitimate expectation grounded in the company's arrangements or understandings among shareholders. Such expectations must be reasonable, and any informal arrangements or understandings must be considered in light of formal agreements like shareholders' agreements that explicitly regulate the rights and obligations of shareholders. The introduction of new shareholders and formal agreements can fundamentally change the governance and expectations within a company, negating any previous informal understandings.

2. Fairness of Dismissal and Its Impact on Shareholder Status: The court examined whether the dismissal of a shareholder from employment, which subsequently affects their status or involvement as a shareholder, constitutes unfair prejudice under Section 252. The court determined that the fairness of the dismissal, especially when adjudicated by a competent labor tribunal like the CCMA, is relevant to whether such dismissal can be considered as causing unfair prejudice to the shareholder in their capacity as a member of the company.

3. Locked-In Shareholders and Negotiations for Exit: The court addressed the issue of whether shareholders being "locked in" and unable to sell their shares, due to the terms of the shareholders' agreement or the refusal of other shareholders to negotiate an exit, constitutes unfair prejudice. The court held that the mere inability to exit the company does not automatically constitute unfair prejudice under Section 252, especially in the absence of other unfair prejudicial conduct.

4. Financial Management and Allegations of Lack of Probity: The court scrutinised allegations that the company's financial management and specific accounting practices were conducted in a manner that was unfairly prejudicial to the plaintiffs. The court found that criticisms of financial management practices, without evidence of intentional or reckless conduct that disadvantaged the shareholders, do not amount to unfair prejudice under Section 252.

5. Use of Company Funds in Shareholder Disputes: The court discussed the principle that company funds should not be used to finance legal disputes between shareholders, particularly where the company itself is not the subject of the dispute or does not have a direct interest in the outcome. However, the court also recognized that there may be circumstances where the company needs to defend its interests in litigation, even if the litigation primarily involves a dispute between shareholders.

In summary, the ratio decidendi of the judgment underlines the importance of formal shareholder agreements in defining the rights and expectations of shareholders, the relevance of labor law adjudications in disputes involving shareholder employment, the limitations on claims of being "locked in," and the careful consideration required when alleging unfair financial management practices as a basis for unfair prejudice under Section 252 of the Companies Act.

The fair trial issue

The judgment acknowledged that the fairness of a trial is distinct from any question of bias, clarifying that a trial is unfair where judicial conduct disrupts the presentation of the case on one side or otherwise prevents the court from properly appraising the case on its merits. The court further recognized that curtailing cross-examination can be an irregularity if it precludes counsel from asking questions on pertinent matters to the decision in the case. In particular, the court emphasized the importance of judicial tolerance of the technique of cross-examination, noting that interventions should only occur to elucidate a point or where questions are irrelevant or repetitious.

Moreover, the court found that in the case at hand, the premature termination of cross-examination constituted a prima facie irregularity that could entitle the party represented by the cross-examiner to relief from a higher court unless that court is satisfied that the irregularity did not prejudice the party.

The court ultimately decided the appeal on its merits and observed that the plaintiffs were firm in their stance that the trial was fair, thus suggesting there could be no prejudice to them in deciding the case on its merits. However, the court did caution that, in instances where judicial conduct during a trial may prevent one party from fully presenting their case, this may constitute unfairness even if unintended.

In light of the above, it can be deduced that the disallowance of proper questions in cross-examination may indeed constitute an irregularity warranting appellate intervention, especially if it affects the fairness of the trial and the right of a party to fully present their case. The appellate court has the authority to intervene if such an irregularity is apparent, especially if it leads to prejudice against one of the parties.

In its reasoning process, the Supreme Court of Appeal referred to several cases to support its legal analysis and conclusions. Below are some of the key cases cited, along with their neutral citations:

1. O’Neill v Phillips [1999] 2 All ER 961 (HL) - This case was referenced in relation to the concept of unfair prejudice and the expectations that shareholders might have regarding their involvement in the management of a company. It clarified the circumstances under which equitable considerations might make it unfair for those conducting the affairs of the company to rely upon their strict legal powers.

2. Ebrahimi v Westbourne Galleries Ltd [1972] 2 All ER 492 (HL) - Cited for the principles applicable to what might constitute a quasi-partnership and the relevance of equitable considerations in company law, particularly in the context of small, closely-held companies where the relationship between the members is akin to a partnership.

3. Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd [2001] NSWCA 97 - This Australian case was discussed in relation to the concept of a "locked-in" shareholder and the circumstances under which being unable to exit a company might constitute unfair prejudice.

4. Roshcon (Pty) Ltd v Anchor Body Builders CC and Others [2014] ZASCA 40; 2014 (4) SA 319 (SCA) - Referenced for the principles regarding simulated transactions and the distinction between the apparent and real intentions of the parties to an agreement.

5. Hamman v Moolman 1968 (4) SA 340 (A) - This case was mentioned in the context of the fair trial issue, specifically regarding the disallowance of proper questions in cross-examination and the potential for such disallowance to constitute an irregularity warranting appellate intervention.

6. S v Cele 1965 (1) SA 82 (A) - Cited for the importance of cross-examination in the trial process and the need for judicial restraint in curtailing the cross-examiner's ability to question witnesses.

These cases were instrumental in the court's analysis, helping to elucidate the legal principles relevant to the issues at hand, including unfair prejudice under company law, the expectations and rights of shareholders, the conduct of company affairs, and the standards for a fair trial.