Roodt Inc South Africa
Block A 7 Eton Road Sandhurst Johannesburg
Tel +27 11 685 0000
Johannesburg Office
UK Office

The disposal of the greater part of a company's undertaking or assets.

A contract that disposes of the whole or the major part of a company's business or assets is invalid unless approved by a special resolution of the shareholders.

As a general principle of company law, the management of the company's business is in the hands of the board of directors, not the shareholders.

However, certain fundamental decisions need either to be made by the shareholders collectively (such as a decision to alter the company's articles of association) or need the approval of the shareholders.

An example of the latter is a decision to dispose of the whole or the greater part of the company's business or assets. Section 228 of the Companies Act 1973 states that -

Notwithstanding anything contained in its memorandum or articles, the directors of a company shall not have the power, save by a special resolution of its members, to dispose of-

the whole or the greater part of the undertaking of the company; or

the whole or the greater part of the assets of the company.

The logic of this statutory provision is that the directors' power to manage the business does not extend to disposing of the business.

This section can be a trap for the unwary.

A company may enter into a contract with an outsider, which seems to both of the parties to be straightforward and uncontentious. Then, before the contract has been performed or payment made, it may come to light that in fact the contract falls within the scope of section 228, and is therefore unenforceable unless and until the company's shareholders approve it by way of a special resolution, which essentially involves a resolution supported by at least 75% of the votes at a shareholders' meeting.

What exactly is meant by "the whole or the greater part of the undertaking of the company" or "the whole or the greater part of the assets of the company"? Clearly, if the company were to sell its only business, lock-stock-and-barrel, this would fall within section 228. But what of less obvious disposals?

The difficulty in this regard is illustrated by the decision of the Durban High Court in Marble Gold 210 (Ply) Ltd v Beam Joint Venture Structures (Ply) Ltd [2009J JOL 24607.

In this case, the Marble Gold company had entered into a joint venture agreement with companies B, C and D.

The business of the joint venture was going to be to tender for engineering projects and share the profits between the joint venture parties.

To give effect to the joint venture, company A was formed, and Marble Gold and companies 8, C and D each took a 25% shareholding in company A.

Company A then tendered for and was awarded an engineering contract valued at some R53 million.

Marble Gold then signed a further agreement with companies 8, C and D in which Marble Gold purported to withdraw from the joint venture and transferred its shares in company A to companies 8, C and D.

One of the issues before the Court was whether, when Marble Gold disposed of its shares, it was disposing of the "greater part" of its "undertaking" or "assets" as envisaged in section 228 of the Companies Act, quoted above.

If the answer to that question was affirmative, then the contract in which it disposed of the shares in company A was invalid, since it had not been approved by a special resolution of Marble Gold's shareholders, and the transfer of the shares would have to be reversed. What is the criterion for determining whether a particular disposal was a disposal of the greater part of the company's undertaking?

The knee-jerk answer seems to be that if the value of the assets disposed of is more than half of the value of the company's assets, then it is a disposal of the greater part of the company's assets.

However, the Durban High Court ruled that this is not the proper criterion, and that the correct criterion is (emphasis added) - "whether the enterprise retained by the company after the disposal is materially different from the enterprise it owned [prior to the disposal]."

The evidence placed before the court in this case showed that Marble Gold had stopped soliciting other work so as to be able to carry out its obligations under the joint venture agreement and, when it withdrew from the joint venture agreement, it stopped trading altogether. In the result, the court held that Marble Gold's withdrawal from the joint venture constituted a disposal of the greater part of its undertaking or asset and that the enterprise retained by it after that disposal was materially different from the enterprise it owned at the date of the disposal.

The court held that section 228 did not prohibit such an agreement from being entered into, but prohibited it from being implemented unless the shareholders approved or ratified it by way of a special resolution.


Copyright 2019 Roodt Inc.  Designed and Developed by Fyre Interactive home | newsletter| contact us