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 ...
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.
