Grey Global Group Inc v Khumalo

In July 2003, Mr Bongani Khumalo (first respondent) bought 25.1% of shares in Grey Group South Africa (Pty) Ltd (second respondent) from Grey Global Group Inc (appellant) for R8 million. Payment was made via promissory note and a share certificate was delivered. The sale was conditional on a shareholders' agreement being concluded. The shareholders' agreement gave Khumalo a 'put right' - an option to sell his shares back to Grey Global after the fifth anniversary of the agreement at a price determined by formula. On 11 September 2008, Khumalo exercised the put right. The purchase price was determined in April 2009 as zero using the agreed formula. Khumalo contested this and refused to deliver the share certificate, arguing the option was conditional and no binding sale had occurred. Grey Global applied to the high court to compel delivery of the share certificate.

• Whether the exercise of a put option creates a binding contract of sale
• Whether clause 3.5 of the shareholders' agreement dealing with 'closing' and performance procedures imposed conditions on the sale or merely governed the mode of performance
• Whether obligations to deliver shares and pay the purchase price are conditions precedent to a sale or obligations arising from an already concluded sale

The appeal was upheld with costs including those of two counsel. The high court order was set aside and replaced with an order granting prayers 1 and 2 of the notice of motion (compelling Khumalo to deliver the share certificate).

When a put option in a shareholders' agreement is exercised, a binding contract of sale comes into existence immediately. Provisions prescribing the mode of performance of obligations (such as delivery of share certificates and payment of price) do not constitute conditions precedent to the sale. A condition in contract law requires an uncertain event not dependent on the will of parties, whereas obligations can be enforced by either party. The term 'closing' refers to the performance or consummation of contractual obligations, not a condition precedent to contract formation. Once an option is exercised, neither party can unilaterally reverse its effect.

The court noted that the agreement was drafted in America and referenced American authority (Black's Law Dictionary, Benavidez v Benavidez, McMillan Ltd v Warrior Drilling) on the meaning of 'closing', but emphasized that since the contract was governed by South African law, South African principles of contract interpretation applied. The court also observed that Khumalo's continued role as non-executive chairman after exercising the put right was explained by the practical position that since he had not delivered the share certificate, he retained his shareholding and accompanying duties; Grey Global chose not to request his resignation to avoid creating a dispute.

This case is significant in South African contract law for clarifying the distinction between conditions precedent and obligations governing mode of performance in sale agreements. It confirms that the exercise of a put option creates a binding contract of sale, and that provisions dealing with 'closing' or performance procedures do not make a sale conditional. The case applies fundamental principles of South African contract law, including the nature of options as irrevocable offers and the distinction between conditions (uncertain future events) and obligations (which can be enforced by either party). It provides important guidance on the interpretation of commercial shareholders' agreements, particularly those drafted using American terminology but governed by South African law.