Lazarus Mbethe v United Manganese of Kalahari (Pty) Ltd

The appellant, Mr Lazarus Mbethe, was the chairperson and a director of the respondent, United Manganese of Kalahari (Pty) Ltd, a major manganese ore producer. In 2012, Mbethe introduced the board to Zastrospace (Pty) Ltd, a mobile crushing and screening contractor, promoting it as benefiting the local Kuruman community. The respondent contracted with Zastrospace during a period of high global demand for manganese ore. By the end of the first quarter of 2014, the market deteriorated and on 19 November 2014, the board resolved to terminate the Zastrospace contract due to diminished need for such services. Mbethe, aggrieved by this decision and perceived management deficiencies, launched an application seeking leave to institute derivative proceedings in the name of the respondent under section 165(5) of the Companies Act 71 of 2008. His demands included: (1) challenging the shareholders' agreement as conflicting with the Act and King III; (2) interdicting committee meetings and restraining the CEO Mr Kriek; (3) restraining Mr Ramaite from acting on committees; (4) interdicting Mr Ramaite from acting as deputy CEO and declaring Mr Letshalo as duly appointed; and (5) reinstating the Zastrospace contract. The court a quo dismissed the application, finding Mbethe failed to establish the statutory requirements.

• What is the nature and extent of the onus on an applicant seeking leave to bring a derivative action under section 165(5) of the Companies Act 71 of 2008?
• What constitutes acting 'in good faith' for purposes of section 165(5)(b)(i) of the Companies Act?
• Is the absence of a collateral purpose a self-standing requirement of good faith, or does it relate to other requirements such as whether the issue is 'of material consequence to the company'?
• What is the standard of proof required to satisfy the requirements of section 165(5)(b)?
• Does the court retain a residual discretion to refuse leave even where the statutory requirements are satisfied?
• Are there alternative remedies available to the applicant that would affect whether granting leave is in the best interests of the company?

The appeal was dismissed with costs, including costs of two counsel.

An applicant for leave to bring derivative proceedings under section 165(5) of the Companies Act 71 of 2008 must prove each of the requirements in section 165(5)(b) on a balance of probabilities. The requirement of 'good faith' in section 165(5)(b)(i) involves a subjective test (the applicant's actual state of mind) subject to objective control (inferences from objective facts). The absence of a collateral purpose is not a self-standing requirement of good faith; rather, evidence of a collateral purpose is relevant to determining whether the proceedings involve a serious question 'of material consequence to the company' under section 165(5)(b)(ii), and may also constitute cogent evidence of absence of good faith. The court retains a controlling discretion whether to grant leave even where the statutory requirements are satisfied. The availability of alternative remedies (such as those under sections 20(4) and 163 of the Act) is a relevant consideration in determining whether granting leave is 'in the best interests of the company' under section 165(5)(b)(iii). Although the three requirements in section 165(5)(b) are conjunctive, they are not to be considered in isolation but are interrelated.

The court noted, obiter, that the court a quo erred in concluding that where the requirements of section 165(5) are satisfied, there is no residual discretion in the court not to grant relief. The use of the word 'may' in the phrase 'the court may grant leave only if...' confers both authority and discretion on the court. The court also observed that the importation from Australian law of absence of collateral purpose as a self-standing requirement of good faith was unjustified given the differences between section 237(2) of the Australian Corporations Act 2001 and section 165(5) of the South African Companies Act, particularly the presence in the South African statute of the requirement that proceedings involve a serious question 'of material consequence to the company'. The court noted that if the legislature had intended a presumption to operate in relation to good faith (as it did in section 165(7) regarding best interests), it would have said so expressly.

This is the leading South African case on derivative actions under section 165 of the Companies Act 71 of 2008. It establishes the authoritative framework for assessing applications for leave to bring derivative proceedings. The judgment clarifies that: (1) applicants must prove all requirements on a balance of probabilities, not a lower threshold; (2) the good faith test is subjective but subject to objective control; (3) absence of collateral purpose is not a self-standing requirement of good faith but relates to whether the issue is of material consequence to the company; (4) all three requirements in section 165(5)(b) are conjunctive but interrelated; (5) courts retain residual discretion to refuse leave even where requirements are met; and (6) availability of alternative remedies is relevant to whether the action is in the company's best interests. The case provides important guidance on balancing protection of minority stakeholders' rights against protection of companies from frivolous or vexatious claims.