Technology Corporate Management (Pty) Ltd and Others v De Sousa and Another

Technology Corporate Management (Pty) Ltd (TCM) was founded in 1987 by Luis de Sousa and Andrea Cornelli as a computer repair services company. They each held 50% of shares and managed the business jointly. The company grew substantially, adding shareholders Jose Diez and Tony da Silva (who were later given 10% stakes each) and in 2004, Iqbal Hassim acquired 25.1% through a BEE deal, reducing Luis and Andrea to 30% each. A shareholders agreement was concluded in 2005 regulating their relationships and management structure, with Andrea as CEO/Chairman. From 2007 onwards, the relationship between Luis and Andrea deteriorated. Luis complained of being excluded, sidelined and humiliated. In February 2009, Luis was suspended and dismissed following disciplinary charges. The CCMA found his dismissal substantively and procedurally fair. Jose resigned in April 2013. Luis and Jose launched proceedings under s252 of the Companies Act 61 of 1973 claiming unfair prejudice through: (i) exclusion from management; (ii) failure to negotiate exit and purchase their shares; (iii) being "locked-in"; (iv) various financial irregularities showing lack of probity. The High Court (Boruchowitz J) upheld their claim after an 80-day trial, ordering TCM to purchase their shares at a value to be determined by a referee. The defendants appealed.

• What constitutes 'unfairly prejudicial, unjust or inequitable' conduct under s252 of the Companies Act 61 of 1973
• Whether TCM remained a quasi-partnership/small domestic company giving rise to legitimate expectations of participation in management
• Whether exclusion from employment/management constitutes unfair prejudice to a shareholder
• The effect and admissibility of a CCMA award on fairness of dismissal in subsequent s252 proceedings
• Whether shareholders locked-in by transfer restrictions suffer unfair prejudice absent other wrongdoing
• Whether failure to make an offer to purchase shares or negotiate an exit constitutes unfair prejudice
• Whether loss of trust and confidence due to lack of probity constitutes unfair prejudice
• Whether a company should bear costs of defending unfair prejudice proceedings
• What constitutes a fair trial and effect of judicial interventions limiting cross-examination
• The appropriate remedy and form of buy-out order under s252

Appeal upheld with costs including costs of two counsel. High Court judgment set aside and replaced with order dismissing plaintiffs' claim with costs including two counsel. Various interlocutory costs orders varied: costs of 2 October 2012 adjournment to be costs in cause; plaintiffs to pay costs of withdrawn amendment application and Rule 35(3) notice including two counsel; each party to bear own costs of s163 application and recusal application.

The binding legal principles are: (1) The existence and effect of informal arrangements or understandings between shareholders must be assessed at the time unfair prejudice is alleged, not when the company was formed - such arrangements can be superseded by formal agreements. (2) A shareholder agreement concluded with legal advice setting out rights and obligations will generally govern the relationship between shareholders; equity will only intervene where exercise of strict legal rights under such agreements is contrary to good faith. (3) Being locked-in and unable to dispose of shares does not constitute unfair prejudice in the absence of other unfairly prejudicial conduct - it does not create a unilateral right of exit. (4) There is no obligation on majority shareholders to negotiate purchase of minority shares or make offers to purchase outside the terms of the company's articles/shareholders agreement, unless the minority has suffered unfair prejudice from other conduct. (5) CCMA arbitration awards are admissible in subsequent civil proceedings and provide prima facie proof of the findings made, which can be rebutted by evidence showing the award was wrong. The rule in Hollington v Hewthorn should be confined to criminal convictions. (6) Unfair prejudice requires objective unfairness affecting the shareholder in their capacity as shareholder - not merely as employee, and not merely because company could have been managed better. (7) Company funds should generally not be used to defend disputes between shareholders unless the company has its own independent interest to protect. (8) Before ordering a company to purchase shares, the court must consider the impact on the company's financial position and viability.

Wallis AJA made several important observations obiter: (1) On the role of expert witnesses: experts must be independent and impartial, owing duties to the court not their client. Contingency fee arrangements for experts are problematic and may undermine independence. Mr Geel's approach of assuming information from his client was accurate without verification was criticized. (2) On case management and fair trials: While active judicial case management is now expected and necessary, judges must exercise great patience before curtailing cross-examination, ensure both sides are treated equally, and avoid expressing prima facie views in ways that affect one party's ability to present their case. Civility between bench and bar is essential. The Court expressed concern about the length and cost of unfair prejudice cases, echoing English warnings about such cases becoming "notorious for their length, unpredictability of management, and enormous and appalling costs." (3) On remedies: When making buy-out orders, courts should consider not only the shareholders but impact on employees, creditors, customers and the broader public interest in viable businesses continuing. The date of valuation requires careful consideration - it may be unfair for excluded shareholders to benefit from growth occurring after their exclusion. (4) On pleadings: Parties should be held to their pleadings and not permitted to expand issues through the "back door" of claiming evidence is merely corroborative. (5) The judgment contains implicit criticism of the manner in which the High Court trial was conducted over 80 days, with numerous interlocutory disputes, though express findings on fair trial were avoided as the appeal succeeded on merits.

This judgment provides comprehensive guidance on unfair prejudice claims under s252 of the Companies Act 61 of 1973 (applicable also to s163 of the 2008 Act): (1) It clarifies that informal understandings/arrangements between shareholders in small domestic companies can be superseded by formal shareholders agreements, changing the nature of the company and legitimate expectations. (2) It confirms there is no automatic right for a locked-in minority shareholder to exit and require purchase of shares merely due to loss of trust/confidence, absent unfair prejudice from other conduct. (3) It establishes that CCMA awards are admissible and carry prima facie weight in subsequent civil proceedings concerning the same dismissal (limiting Hollington v Hewthorn to criminal convictions). (4) It emphasizes that unfair prejudice requires proof of conduct that is objectively unfair - not merely disagreement with management decisions or belief the company could be run better. (5) It clarifies when companies should/should not bear costs of defending shareholder disputes. (6) It provides guidance on the role of expert witnesses, particularly emphasizing independence and objectivity. (7) It addresses fair trial considerations including judicial case management, limitations on cross-examination, and civility between bench and bar. The judgment is a leading authority on shareholder oppression/unfair prejudice in South African company law.