Sekepe Investments (Pty) Ltd and Others v Government Employees Pension Fund and Another

The appellants and the first respondent (GEPF) were shareholders in Magae Makhaya Housing (RF) (Pty) Ltd (MMH), a company incorporated to develop low-cost housing projects. The shareholders concluded a shareholders' agreement with clause 10 providing for the financing of MMH through shareholder loans in proportion to shareholdings: Sekepe Investments (55%), GEPF (25%), and the remaining shareholders (10% each). The GEPF concluded separate loan agreements with the appellants to lend them money (up to R500 million total, including GEPF's own shareholder loan) to enable them to meet capital calls made by MMH. In September 2017, MMH's board (with GEPF representation) resolved that shareholder funding was required and issued utilisation notices to the GEPF calling for advances under the loan agreements. The GEPF failed to advance the loans despite demands from the appellants' attorneys in October 2017. The appellants launched an application in the high court seeking specific performance: (1) payment of shareholder loans to MMH under the shareholders' agreement; and (2) enforcement of payment of loans due to the appellants under the loan agreements. The high court (Rabie J) dismissed the application. The appellants appealed with leave of the high court.

• Whether the appellants had standing to bring the application or whether a derivative action under s 165 of the Companies Act 71 of 2008 was required
• Whether the conditions precedent in clause 7 of the loan agreements had been satisfied to trigger the GEPF's obligation to advance the loans
• Whether there was compliance with clause 16 of the loan agreements regarding provision of financial statements and reports
• Whether the GEPF was in breach of its obligations under clause 10 of the shareholders' agreement to make shareholder loans to MMH
• Whether the requirement for simultaneous payment of shareholder loans excused the GEPF from its obligation

The appeal was upheld with costs, including the costs of two counsel. The order of the high court was set aside and replaced with an order that the application succeeds with costs and prayers 1-17 of the notice of motion are granted.

The binding legal principles established by this case are: (1) Shareholders enforcing their own rights under loan agreements or shareholders' agreements have standing to do so without needing to bring a derivative action under s 165 of the Companies Act, even where the company will ultimately benefit from the enforcement. The fact that proceeds will accrue to the company does not alter the standing of shareholders to enforce their rights. (2) Under a shareholders' agreement, obligations to fund a company by way of shareholder loans create duties owed by each shareholder not only to the company but also to every other shareholder, and are therefore enforceable by shareholders inter se. (3) A party asserting non-compliance with conditions precedent must do more than reproduce contractual terms; they must depose to specific facts establishing what was not provided or what conditions were not met. (4) A party cannot rely on its own breach or failure to perform to excuse its obligations under an agreement, particularly when the inability of other parties to perform simultaneously is caused by the first party's default. (5) A round-robin shareholder resolution can constitute the separate agreement required for shareholder loans where a shareholders' agreement contemplates further agreement on the terms of such loans.

The court made several obiter observations: (1) The court noted the unusual nature of the loan structure whereby the GEPF would lend to the appellants solely for them to on-lend to MMH, describing the appellants as "nominal shareholders" and questioning why the GEPF would use this indirect funding mechanism in addition to direct shareholder funding. However, the court accepted that none of the parties alleged the arrangements were shams and therefore proceeded on the basis they were valid. (2) The court observed that the appellants' obligation to use loan advances only for capital calls to MMH, while benefiting MMH, did not derogate from the appellants' rights to the advances in the first instance, noting that the appellants would bear obligations to pay interest and repay the loans "albeit on terms that few commercial lenders would accept." (3) The court commented on the GEPF's conduct as "opportunistic in its endeavour to find a basis not to advance the loans," particularly in raising compliance issues for the first time in response to the application that had never been raised previously. (4) Regarding the environmental, social and governance reports, the court noted it was "hard to see" why such reports would make sense given the appellants' sole purpose was to channel money to MMH.

This case is significant for South African company law and shareholder rights in several respects: (1) It clarifies the distinction between shareholders enforcing their own rights versus seeking to vindicate the company's rights, determining when a derivative action under s 165 of the Companies Act is required. (2) It establishes that shareholders can have standing to enforce both their contractual rights under loan agreements and their rights under shareholders' agreements, even where the ultimate beneficiary is the company. (3) It affirms that shareholders owe duties not only to the company but also to fellow shareholders under shareholders' agreements, and those duties are enforceable inter se. (4) The judgment demonstrates the court's approach to interpreting conditions precedent in commercial agreements, requiring parties defending non-performance to establish with specificity what conditions were not met rather than merely reciting contractual provisions. (5) It illustrates how parties cannot rely on their own breach or non-performance to excuse their obligations when the non-performance of others is caused by the first party's default.