Company Shareholding: Of the importance of observing pre-emptive rights of shareholders and Legal Compliance in Agreements

Legal Issues

In the case of E.S. Saks (as plaintiff) v. S. Hassamal (as defendant) 2015 SCJ 405 issued on 13 November 2015, His Lordship G. Angoh gave a ruling on the legality of a share sale agreement on the basis that it was contrary to the pre-emption clauses set out in the constitution of the relevant company and the Companies Act.

The facts of the case are as follows.

In virtue of an unsigned document, Mr Seymour has offered to sell the shares held by him in a company called Shibani Knitting Co. Ltd to Mr Hassamal in consideration of 1 million United States Dollars. Mr Seymour claimed that Mr Hassamal had a balance of 910,000 United States Dollars together with interest to settle and was asking the court for specific performance of that unsigned agreement on the remaining balance.

In his address to the Court, the lawyer for Mr Hassamal raised a plea in limine litis which was based on the ground that the unsigned agreement is illegal, based on a ‘cause illicite’ contrary to the Civil Code and therefore, the case for Mr Seymour had to be dismissed.

As explained in a previous article, a plea in limine litis is an objection in any point of law which needs to be addressed at the outset of a trial. Examples of such objections are that the court has no jurisdiction in a particular matter or that the prescribed delay to bring a case was not observed.

Pre-emptive rights of shareholders

In its defence, counsel for Mr Hassamal explained that, within the Shibani Knitting Co. Ltd, any shareholder who intends to sell or transfer his shares must necessarily do so by taking into account the pre-emptive rights of the other shareholders otherwise such transfer or sale would be null and void. The Companies Act 2001 has a general rule which provides that any change in ownership of company shares should be subject to existing shareholders’ pre-emptive rights.

For our readers’ understanding, pre-emptive right is normally a privilege extended to existing shareholders of a company that will give them the right to purchase additional shares in the company so that each one of them maintains his or her percentage ownership of a company by buying a proportionate number of shares of any future issue of the shares.

In the present matter, it was clear that Mr Seymour did not follow this particular rule as set out in the constitution of the company and the law.

In support of his ruling, His Lordship observed that the transaction of Mr Seymour was an illegal one and referred to the case of Barosah N v Seelochun V [2008 SCJ 248] where it was ruled that a transfer of shares made in complete disregard of the pre-emptive rights of the existing shareholders was illegal.

Effect of Illegality of Agreements

The second limb of the submissions of the lawyers revolved about the legality of the unsigned agreement and mention was made of one of the essential conditions for the validity of contracts. This being that there must be a “cause licite dans l’obligation”.

Articles 1131 and 1133 provide as follows: “L’obligation sans cause, ou sur une fausse cause, ou sur une cause illicite, ne peut avoir aucun effet. La cause est illicite quand elle est prohibitée par la loi, quand elle est contraire aux bonnes mœurs ou à l’ordre public”.

Judge Angoh ruled that “…the substance of the contract is rooted on elements of illegality, namely in blatant breach of the law and of the company’s Memorandum of Articles and Association. In view of the above, it is beyond dispute that the plaintiff (Mr Seymour) cannot proceed with his claim against the defendant (Mr Hassamal) on the basis of an agreement which is grounded “sur une cause illicite””

The case for Mr Seymour was set aside.

The above shows that ignorance of the law when entering into agreements in company matters can defeat what might otherwise appear as a legitimate cause. And that a person may, unless he is extremely careful when engaging in share transactions, unwittingly find himself at variance with the law.

 

  • Published in print edition on 20 November 2015

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