Communicare v Khan

The first and second appellants were companies whose articles of association required one-third of their directors to retire by rotation each year. The articles also provided that directors were members of the companies for the duration of their office. At annual general meetings held on 27 October 2009, four directors were due to retire and elections were to be held for their successors. However, the retiring directors were excluded from voting in the election of successors on the basis that their retirement had to occur before a vacancy could be declared and the election could take place. As a consequence, before the election took place, the retiring directors were deprived of their status as members and were not permitted to vote. The respondents, who were members of the companies, challenged the validity of the elections on the grounds that the exclusion of the retiring directors from voting was contrary to the articles of association. The respondents sought to enforce their right to vote and have their votes properly counted in the context of all members entitled to vote.

• Whether the respondents had locus standi to challenge the validity of resolutions passed at annual general meetings of the appellants
• Whether the right to vote at a general meeting constituted a personal membership right or a corporate right for purposes of the rule in Foss v Harbottle
• Whether, on a proper interpretation of article 15 of the articles of association, retiring directors were entitled to vote as members in the election of their successors
• Whether the exclusion of retiring directors from voting rendered the election of directors invalid
• Whether the respondents' voting rights were adversely affected by the exclusion of the retiring directors from voting

The appeal was dismissed with costs, including the costs of two counsel where employed and the costs in the application for leave to appeal, on the same basis. The order of the Western Cape High Court declaring the election of directors at the annual general meetings on 27 October 2009 invalid and setting it aside was upheld.

The binding legal principles established by this case are: (1) A member's right to vote at a general meeting and have their vote counted is a personal membership right, not a corporate right. Each member has a special interest in the observance of this right, distinct from the general interest which members have in the observance by the company of its articles. (2) Personal membership rights can be enforced by individual members against the company and are not susceptible to correction, condonation or ratification by a majority of members at a general meeting. The rule in Foss v Harbottle does not apply to prevent enforcement of personal membership rights. (3) A member's voting rights are adversely affected not only when they are denied the right to vote, but also when votes of other members entitled to vote are invalidly excluded, as this diminishes the effect of the member's vote in determining the result. (4) Articles of association must be interpreted purposively to achieve sensible and businesslike results and to avoid interpretations that would undermine the apparent purpose of the provisions or lead to unbusinesslike consequences.

The court made several non-binding observations: (1) The court acknowledged the difficulty that may arise in particular cases in distinguishing between personal membership rights and corporate rights (or 'constitutional powers'). (2) The court noted without deciding that s 165(1) of the Companies Act 71 of 2008 appears not to have abolished personal actions by members at common law to enforce rights vesting in members under the articles. (3) The court observed that the principle of majority rule is essential to the proper functioning of companies and informs the reluctance of courts to intervene in matters concerning internal management. (4) The court commented on Professor Blackman's academic criticism that application of the rule in Foss v Harbottle to matters for which it was not intended 'rides roughshod over the members' rights under the company contract by allowing de facto departures from the constitution'. (5) The court noted that the desire to curtail intracorporate litigation underlying the MacDougall line of cases was founded on the need to prevent litigation concerning irregularities likely to occur in the conduct of company meetings.

This case is significant in South African company law for clarifying the distinction between personal membership rights and corporate rights in the context of the rule in Foss v Harbottle. It establishes that a member's right to vote at a general meeting and have their vote properly counted is a personal right that can be enforced against the company by an individual member, and is not subject to majority control or ratification. The case demonstrates the court's willingness to intervene to protect personal membership rights even where the rule in Foss v Harbottle might otherwise preclude intervention in matters of internal management. It also provides guidance on the interpretation of articles of association, emphasizing a purposive approach that favours businesslike results and avoids disruption to corporate governance processes. The case is important for understanding members' enforcement rights under s 65(2) of the Companies Act 61 of 1973 (and by extension s 165(1) of the Companies Act 71 of 2008) and the scope of personal actions by members.