Cool Foods Ltd is a successful soft drink and snack foods manufacturer in South Africa. Cool Foods Ltd has an authorised share capital of 4 million shares of R100 each. Only 3 million of the shares were issued. The company has five directors, Mrs Fanta, Mr Coke, Prof Crinkle Cut, Ms Tonic and Dr Fizzer. They also appointed Mr Fanta, the husband of Mrs Fanta, as the company secretary and 123 Auditors Inc, the company of Ms Gin, the life partner of Ms Tonic as the company’s external auditors.
Cool Foods Ltd considered purchasing new premises, Erf 8991/77 (one hectare) for the erection of a new snack food factory in Kyasand. The erf was registered in the name of Hangover Trust. During a meeting of the board of directors, four of the five directors voted in favour of the acquisition of the erf. Only Dr Fizzer, who is also a shareholder, casted a dissenting vote. The purchase price of the erf amounted to R5 million. This board meeting was held online during lockdown.
Cool Foods Ltd experienced a dramatic decline in the demand for their snack foods due to the lockdown and an increase in health awareness in the country. Their sales dropped with 30 per cent and the company was then required to sell some of their assets. The board of directors furthermore decides not to build a factory on Erf 8991/77. A board resolution was made to get an estimate of the value of the property in order to sell it for the best price possible. A sworn appraiser was appointed who valuated the erf at R1 million. Upon perusal of the property plans, it was discovered that the erf was 0.3 hectare smaller than initially thought. It also came to the attention of the board that the beneficiaries of Hangover Trust are Mr Brandy and Ms Gin, the life partner of Ms Tonic.
Mrs Fanta, Mr Coke and Prof Crinkle Cut held a board meeting without Ms Tonic and without notice to Dr Fizzer. At the board meeting they decided to issue a further 250 000 as ordinary shares and 250 000 as preferential shares. They allocated 50 000 ordinary shares to their children. They also decide that they must approve a series of loans to the general public to purchase shares in the company to improve the BEE rating of the company.
Dr Fizzer is concerned about the appointment of Mr Fanta as the company secretary as he heard that a person cannot be appointed company secretary if she or he is disqualified from appointment as director in terms of s 69(8) of the Companies Act. He also heard that Mr Fanta is an insolvent.
You and Dr Fizzer are close friends and attended the same braai. He informed you about the troublesome situation concerning Cool Foods Ltd as identified above. He knows that you are currently busy with an LLB and asks for your advice. He suffered substantial losses and intends to recover damages from the company and/or other directors.
Based on the situation described, Dr Fizzer may have several potential claims against Cool Foods Ltd and/or the other directors. Here are a few areas of concern that Dr Fizzer should consider:
1. Breach of Fiduciary Duty: The directors of Cool Foods Ltd have a fiduciary duty to act in the best interests of the company. By voting in favor of the acquisition of the erf despite knowing the decline in sales and the need to sell assets, the directors may have breached their fiduciary duties.
2. Oppression of Minority Shareholder: Dr Fizzer is a dissenting shareholder who voted against the acquisition of the erf. This may be considered oppressive if the actions of the majority shareholders adversely affect the rights and interests of the minority shareholder.
3. Mismanagement of Company Assets: The directors' decision to appoint a sworn appraiser who undervalued the erf and the subsequent discovery that the property was smaller than initially thought may be evidence of mismanagement of the company's assets. Dr Fizzer could argue that this mismanagement led to financial losses for the company.
4. Breach of Director's Duties: Mr Fanta's appointment as the company secretary, despite being an insolvent and potentially disqualified person under the Companies Act, may be a breach of his duties as a director. Dr Fizzer could argue that this appointment was improper and detrimental to the company.
5. Improper Issuance of Shares: The decision to issue additional shares without notice to all directors and without the presence of Ms Tonic and Dr Fizzer may be considered improper. Dr Fizzer could argue that this action diluted his ownership and voting rights and was not in the best interests of the company.
To pursue these claims, Dr Fizzer should consult with an attorney specializing in corporate law. They can provide advice on the specific legal remedies available and help determine if there is a viable case for recovery of damages.
Based on the information provided, here are the problematic issues and potential actions that Dr Fizzer can consider:
1. Acquisition of the Erf 8991/77:
- Four out of the five directors voted in favor of acquiring the property, but Dr Fizzer dissented as a shareholder.
- Despite the decision to purchase the property, the board later decided not to build a factory on it due to declining sales and a change in business circumstances.
Action: Dr Fizzer can raise concerns regarding the acquisition process and the subsequent decision not to use the property. He may want to investigate whether the acquisition was in the best interest of the company and consider seeking clarification from the other directors.
2. Undervaluation of the property:
- The sworn appraiser valued the property at R1 million, considerably less than the initial price of R5 million. Additionally, it was discovered that the property was smaller than initially thought.
- The beneficiaries of Hangover Trust, the property owner, are Mr Brandy and Ms Gin.
Action: Dr Fizzer should raise concerns about the undervaluation of the property and the potential conflict of interest with the beneficiaries of Hangover Trust. He may want to seek legal advice to understand if any wrongdoing or breach of fiduciary duty has occurred in relation to the property valuation.
3. Issuing additional shares and loans:
- Mrs Fanta, Mr Coke, and Prof Crinkle Cut held a board meeting without Ms Tonic and without notice to Dr Fizzer. They decided to issue an additional 250,000 ordinary shares and 250,000 preferential shares, allocating 50,000 ordinary shares to their children.
- They also decided to approve loans to the general public for purchasing shares in the company to improve the BEE rating.
Action: Dr Fizzer should question the validity of the board meeting held without proper notice and the allocation of shares to directors' children. He may want to investigate if these actions were taken in accordance with the company's articles of association and relevant legal requirements. He should also review the loan approval process to ensure it was carried out properly and transparently.
4. Appointment of Mr Fanta as the company secretary:
- Dr Fizzer has concerns about Mr Fanta's appointment as the company secretary due to his alleged disqualification as a director and possible insolvency.
Action: Dr Fizzer can investigate Mr Fanta's eligibility for the position of company secretary based on the Companies Act and the company's own rules. If it is found that Mr Fanta is indeed disqualified or insolvent, Dr Fizzer should raise this issue with the other directors and seek legal advice on the appropriate steps to take.
In summary, Dr Fizzer should consider seeking legal advice to assess potential breaches of fiduciary duty, conflicts of interest, and corporate governance issues within Cool Foods Ltd. Depending on the advice received, he may have a basis for seeking damages from the company and/or other directors.
Based on the information provided, the situation at Cool Foods Ltd presents several potential legal issues. Here's an overview of the main concerns and some advice for Dr Fizzer:
1. Acquisition of Erf 8991/77:
- Four out of the five directors voted in favor of acquiring the property, with only Dr Fizzer dissenting.
- The board meeting was held online during lockdown.
Advice: While virtual board meetings are permissible, it is essential to ensure that all directors are given reasonable notice and an opportunity to participate. Dr Fizzer may want to challenge the validity of the decision if proper procedures were not followed.
2. Decline in sales and decision to sell assets:
- Due to the decline in demand, the company decides not to build the snack food factory on Erf 8991/77 and aims to sell the property.
- The sworn appraiser valued the property at R1 million, lower than the purchase price of R5 million.
Advice: Dr Fizzer may want to question the decision to sell the property at a substantial loss. Further investigation is needed to determine if the relevant procedures and considerations were followed by the board in making this decision.
3. Appointment of Mr Fanta as company secretary:
- Dr Fizzer is concerned about Mr Fanta's appointment as the company secretary, given his potential disqualification as a director and insolvency.
Advice: Dr Fizzer should investigate whether Mr Fanta's appointment is in violation of Section 69(8) of the Companies Act, which disqualifies certain individuals from being appointed as directors or company secretaries. If Mr Fanta is indeed disqualified, it could be a breach of corporate governance and may provide grounds for legal action.
4. Issuance of additional shares and BEE loans:
- Some directors decide to issue additional ordinary and preferential shares without the presence of Ms Tonic and without notice to Dr Fizzer.
- They also plan to approve loans for the public to purchase shares to improve the company's BEE rating.
Advice: Dr Fizzer should review the company's Memorandum of Incorporation and shareholders' agreement to determine if such decisions require unanimous approval or notice to all directors. Any breach of corporate protocols may justify legal action.
In conclusion, Dr Fizzer should consult with a qualified legal professional who specializes in corporate law and seek advice specific to his circumstances. This summary provides only a general overview and does not substitute for legal advice tailored to the specific details of the case.