CASE NOTE: A THEORETICAL RETRIAL OF
STEIN V BLAKE IN THE CONTEXT OF THE
COMPANIES ACT 71 OF 2008, AS AMENDED –THE
REFLECTIVE LOSS PRINCIPLE REVISITED
AMRISHA RANIGA
LLB, School of law, University of Witwatersrand
I. INTRODUCTION
It is trite law that a company is a separate legal entity1, distinct
from its shareholders and as such the company, and not its
shareholders, is the legal and beneficial owner of any assets of
the company.2 An extension of the separate-entity principle is
the ‘proper plaintiff rule’ where the company is the prima facie
1
Salomon v Salomon & Co Ltd [1897] AC 22 (HL), Giora Shapira
‘Shareholder Personal Action in Respect of a Loss Suffered by the Company:
The Problem of Overlapping Claims and “Reflective Loss” in English
Company Law’ (2003) 37 Int’l L. 137 at 137.
2
Macaura v Northern Assurance Co Ltd [1925] AC 619; Sarah Worthington
‘Shares and Shareholders: Property, Power and Entitlement: Part 2’ (2001)
22(10) Comp.Law 307 at 308.
Amrisha Raniga – Stein v Blake: The Reflective Loss Principle Revisited
proper plaintiff to sue for damages in respect of any wrong
alleged to have been done to it.3
However, conduct which merits a derivative action on behalf
of the company may simultaneously result in a shareholder
sustaining damages in his personal capacity, being a diminution
in the value of his shares. Can a shareholder bring a personal
action against the wrongdoer for the recovery of such a loss?
The shares are, after all, assets in the hands of its holder4 and
thus a diminution of value is by definition a personal loss.5 The
possibility of a personal action has been met with judicial
hostility as it has been perceived to be an attempt to circumvent
the proper plaintiff rule.6 This was the approach adopted in the
seminal case of Prudential Assurance Co Ltd v Newman
3
Foss v Harbottle (1843) 2 Hare 461 contained in Jan J Roestorf NO and
one other v Johns 2012 JDR 1176 (KZD) para 6; Pearlie KOH ‘Allowing
Recovery for reflective Losses’ (2011) 23 SALJ 863 at 863.
JS McLennan ‘Companies, Shareholders and Reflective losses’ (2005) 17
SA Merc LJ 195 at 196.
4
5
Christensen v Scott [1996] 1 NZLR 273 para 280 as contained in Charles
Mitchell ‘Shareholders’ claims for reflective loss’ (2004) 120 (Jul) LQR 457479 at 459.
David Milman ‘Shareholder remedies and the scope of the reflective loss
(or no reflective loss) principle (2005) 4 Co.L.N. 1-5 at 2
6
Amrisha Raniga – Stein v Blake: The Reflective Loss Principle Revisited
Industries Ltd7 which is the founding authority on the ‘reflective
loss principle’ (hereinafter referred to as “the Principle”).
The Principle only becomes relevant in circumstances where
there is an overlap between the claim of a company and the
claim of a shareholder.8 Where the shareholder has a claim,
which is distinct and separate from the claim of the company,
the Principle finds no application.9 The Principle has been
articulated by Cheung10 as“[W]here the company and the shareholder have
co-existing causes of action against the defendant
wrongdoer arising out of the same set of facts, the
shareholder in a personal action cannot, in general,
recover loss which is merely “reflective” of the loss
suffered by the company.”11
The immediate rationale behind the Principle is to prevent
the harm of double recovery by the shareholder through the
7
[1982] 1 All ER 354 at 366-367.
8
KOH op cit note 3 at 865.
9
Johnson v Gore Wood & Co [2002] 2 AC 1 contained in McLennan op cit
note 4 at 198
Rita Cheung ‘The No Reflective Loss Principle: A View from Hong Kong’
(2009) 20(7) I.C.C.L.R 223-229
10
11
Ibid at 223
Amrisha Raniga – Stein v Blake: The Reflective Loss Principle Revisited
company and then again by way of a personal action.12 But what
if there is no risk of double recovery and the continued
application of the Principle will lead to ‘an unwarranted and
technical obstruction of justice’13 or there are compelling policy
considerations
militating
towards
disapplication
of
the
Principle? This note seeks to conduct a theoretical retrial of the
English case of Stein v Blake14, in which judgment was
delivered by Millett L.J in the Court of Appeal in England on 13
October 1997, with such retrial being conducted within the
milieu of the oppression remedy in s163 of the South African
Companies Act15 and restricted to the Principle.
Part I offers an exposition of the factual background of Stein
and identifies the main legal issue in the judgment of the Court
of Appeal which forms the subject matter of this note. It should
be noted that a discussion of the judgment handed down by Lord
Woolf MR, relating to the basis of application to set aside leave,
is beyond the scope of this note and shall not be addressed.
12
McCrae v Absa Bank Limited 2009 JDR 0782 (GSJ) para 1 and 24
13
McLelland v Hulett and Others 1992 (1) SA 456 (D) at 467H.
14
Stein v Blake and Others [1998] 1 All ER 742 (hereinafter referred to as
“Stein”)
15
Act 71 of 2008, as amended (hereinafter referred to as the “Act”).
Amrisha Raniga – Stein v Blake: The Reflective Loss Principle Revisited
Furthermore, the court’s consideration of whom fiduciary duties
are owed to by a director is also beyond the scope of this note.
Part II offers a deconstruction of the Principle through selected
policy and factual considerations which ought to have arisen in
Stein. It advocates for a pragmatic approach according to the
courts judicial discretion in certain circumstances. Part III
advocates for the disapplication of the Principle in the context of
the oppression remedy and argues that to do otherwise would
take away from the very purpose of the remedy. An in-depth
discourse on the remedy is beyond the scope of this note. Part
IV delivers an equitable judgment to the retrial of Stein by
utilising the remedy.
II. STEIN V BLAKE: THE CASE
a) Background
The Plaintiff (hereinafter referred to as “Stein”) and Defendant
each held a 50% shareholding in a group of companies. In
addition, the Defendant was the sole director thereof. The
Defendant misappropriated assets in the group of companies by
causing it to be sold and transferred at an under-value to various
companies which were under his control (the “impugned
Amrisha Raniga – Stein v Blake: The Reflective Loss Principle Revisited
conduct”). Subsequently, all but one of the companies within the
group went into liquidation.
Stein brought a personal action for the recovery of the
personal loss he suffered, being the diminution in the value of
his shares. In relying on the Principle in Prudential, the court a
quo dismissed Stein’s application citing that Stein, as a
shareholder, did not have an independent claim and the claim
ought to have been constituted by way of a derivative action.
Leave to appeal against this judgment was granted to Stein upon
filing of a second renewed application, which the Defendant
sought to set aside.
b) Court of Appeal Judgment
A challenging and controversial question before the court was
whether Stein should be permitted to proceed with his claim for
damages which in effect was reflective of the loss suffered by
the company. Millet LJ rejected Stein’s skeleton argument,
which pleaded that the Director was in breach of a fiduciary
duty owed to him personally, and stated that although there may
be circumstances in which a director would owe a fiduciary duty
to a shareholder, the present circumstance was not one such
Amrisha Raniga – Stein v Blake: The Reflective Loss Principle Revisited
exception.16 In affirming the Principle enunciated in Prudential,
Millett LJ was of the view that Stein’s loss was a reflection of
the loss suffered by the company as the assets were owned by
the company which in turn led to a diminution in the value of
Stein’s shares.17
The judge further held that Stein’s claim could have been
allowed if he was induced to dispose of his shares at an undervalue, thus representing a separate and distinct loss: but Stein
still had his shares.18 He rejected Stein’s reliance on an
expression taken from Heron International19 that ‘[the
shareholder is] deprived of the opportunity of realising [his]
shares to greater advantage’.20 The latter case involved a failure
by the directors to inform the shareholders of an impending
take-over bid, thus inducing the shareholders to dispose of their
shares at an undervalue. However no wrong was done to the
company, its creditors or its assets and there was no risk of
16
Stein supra note 14 para 727D-E.
17
Stein supra note 14 para 727 i and 728A-C.
18
Ibid para 727F-G.
19
Heron International v Lord Grade [1983] B.C.L.C. 244.
20
Ibid at 262.
Amrisha Raniga – Stein v Blake: The Reflective Loss Principle Revisited
double recovery.21 The judge also noted that to permit Stein’s
claim would result in double recovery.22 His ultimate objection
was the prejudice to the creditors if Stein’s action was allowed
to succeed as some of the companies were in liquidation and
permitting the claim would allow Stein ‘the very same
extraction of value from the [companies] at the expense of
[their] creditors that the first defendant is alleged to have
obtained by fraud and deceit.’.23
III. DECONSTRUCTION OF THE REFLECTIVE LOSS
PRINCIPLE THROUGH SELECTED POLICY
It has been opined by Suet Lin24 that when consideration is
given to the question whether reflective loss is recoverable by a
shareholder for the diminution in the value of his shares, there
are “a myriad of interests” that must be taken into account, all of
which are competing. These interests may be that a wrongdoer
should not be exposed to double jeopardy, the remaining
21
Stein supra note 14 para 728G-J.
22
Ibid para 727G.
23
Ibid para 730A-B.
Joyce Lee Suet Lin ‘Barring Recovery for Diminution in Value of Shares
on the Reflective Loss Principle (2007) 66 Cambridge L.J 537 at 553.
24
Amrisha Raniga – Stein v Blake: The Reflective Loss Principle Revisited
shareholders and creditors should not be prejudiced by recovery
by the claimant shareholder at their expense and the company
should not be deprived of its cause of action which is regarded
as its asset.25
The position in England has been succinctly stated in
Johnson26 where it was held that a shareholder is barred from
claiming such loss. This would be the case as “[it] is a matter of
principle, no discretion is involved”27 even if the company has
settled a claim for less than it should have or did not pursue the
claim.28 The court in Stein also submerged itself into the strict
approach as it had regrettably only focused on whether there
was a separate and distinct loss.
IV. THE
STATUS
OF
THE
COMPANY
AND
STULTIFICATION
A policy consideration in the application of the Principle is
whether the company is in liquidation29 as this would influence
25
Ibid at 554.
26
Johnson supra note 9.
27
Ibid at 62.
28
Gardner v Parker [2005] BCC 46 para 70.
29
McCrae supra note 12 para 32C.
Amrisha Raniga – Stein v Blake: The Reflective Loss Principle Revisited
the assessment as to potential prejudice to creditors as well as
whether there is a risk for double recovery. If there is no risk of
double recovery and no prejudice to the creditors and remaining
shareholders, the continued application of the Principle would
amount to an ‘unwarranted and technical obstruction to the
course of justice’.30
The concern relating to prejudice to the creditors is especially
relevant in the context of insolvency31 as ‘the company coffers
must be filled first before the spoils of litigation are put in the
pocket of the shareholder’.32 It has been argued that a share
merely entitles a shareholder to a residual value of the company
upon its dissolution33 and permitting his claim for what
represents reflective loss will effectively be permitting the
shareholder to receive repayment of his capital in competition
with the creditors.
30
McLelland supra note 13 para 467B-H.
31
When a company is solvent and a going concern there is no question of
prejudice to the creditors as repayment of their debts are not in jeopardy.
32
Johnson supra note 10 para 499A, Shapira op cit note 1 at 138.
Victor CS Yeo ‘Creditors and the Principle of Reflective Loss’ (2007) 19
SAcLJ 385 at 390; Worthington op cit note 3 at 311.
33
Amrisha Raniga – Stein v Blake: The Reflective Loss Principle Revisited
However, the concern that there will be prejudice to creditors
prematurely presupposes that the liquidator will in fact proceed
with a claim against the wrongdoer. I respectfully submit that an
evaluation of the status of the company cannot satisfactorily
take place without having due regard to and making provision
for the possible decisions the liquidator may reach.
As stated in Part I, all but one of the companies in Stein were
in insolvent liquidation at the time of the plaintiff’s claim.
Millett LJ can be criticised for the superficial manner in which
he addressed the insolvent status of the companies in the group
by simply stating that ‘the decision whether or not to bring proceedings
in the name of the company concerned is a matter exclusively for the
liquidator….and no-one else”34
And:
“if … the plaintiff were to recover for the lost value of
his shareholding from the first defendant, this would reduce
his ability to meet any judgment which might thereafter be
obtained by the liquidators…to the prejudice of their
creditors.’35
Millet LJ is partially correct that the decision whether to
pursue a claim on behalf of the insolvent company is the sole
34
Stein supra note 14 para 766 D-E.
35
Ibid para 730 A-B.
Amrisha Raniga – Stein v Blake: The Reflective Loss Principle Revisited
jurisdiction of the liquidator. Although the liquidator is
conferred with a statutory power to bring proceedings in the
name of the company, that power is subject to and requires the
authority of the general body of creditors.36 Satchwell J
observed in McCrae37 that it could subsequently transpire that
the liquidator is precluded from pursuing any claim on the
instructions of the general body of creditors.38 This will
eliminate the potential mischief of double recovery and equity
will dictate that the personal claim be permitted to proceed.
McLennan39 opined that practical considerations which may
induce the general body of creditors to make such a decision.
The company may have been forced into insolvent liquidation
due to the impugned conduct; there may be funds available in
the company to sue the wrongdoer, albeit very limited; the
general body of creditors needs to be persuaded to authorize the
liquidator to bring proceedings. The creditors would however
need to bear in mind that a lengthy and acrimonious court battle
lies ahead as the wrongdoer has indicated that he has every
36
Section 386 (3) read with 386(4) of the Companies Act 61 of 1973.
37
McCrae supra note 13.
38
Ibid para 34.
39
McLennan op cit note 4.
Amrisha Raniga – Stein v Blake: The Reflective Loss Principle Revisited
intention of vehemently opposing any claim against him. The
creditors should also note that notwithstanding the strong
prospects of success on the merits, litigation is ultimately a risk
as if judgment is not in favour of the liquidator, the creditors
ought to be prepared to furnish a pro rata contribution towards
the costs and the limited funds which the company did have
available would have been depleted.40
McLennan argued that creditors “will most certainly decide
to cut their losses and abandon any thought of litigation”.41 The
court in Stein prematurely dismissed the personal action on the
presupposition that there will eventually be a reflective loss. As
is evident from the practical exposition of McLennan, most
creditors will be weary to throw good money after bad money
when authorising liquidators to pursue claims. A more
appropriate solution would have been for the court to order a
stay of proceedings pending the decision of the liquidator or
alternatively judgment with a stay of execution.42
40
Ibid at 200.
41
Ibid.
42
KOH op cit note 3at 869, Christensen supra note 6 at 280.
Amrisha Raniga – Stein v Blake: The Reflective Loss Principle Revisited
McLennan likened the practical exposition alluded to above
to the factual matrix of the court in Ghiles43 wherein the
defendant, a former director and shareholder, diverted corporate
opportunities to a competing company set up by him in
contravention of a restraint of trade agreement. As a direct result
thereof the company was placed under liquidation. The
liquidator instituted a damages claim against the defendant and
his newly formed company. However, this claim came to a
grinding halt when the defendant entered a defense dishonestly
denying that he was in breach of any duty to the company and
succeeded in obtaining an order for security for costs. Due to the
dire financial state in which the company was left by the
defendant’s wrongdoing, it simply had no funds to provide
security for costs. Persistent in his bid to obtain compensation,
the remaining minority shareholder instituted a personal action
for, inter alia, the complete diminution in the value of his
shares. The defendant raised a reflective loss defense and,
contrary to his denial in defense to the claim brought by the
company, his defense team argued that he breached his duty to
the company and not the plaintiff.
43
Ghiles v Rhind [2003] 1 BCLC 1 (CA).
Amrisha Raniga – Stein v Blake: The Reflective Loss Principle Revisited
The court a quo held that the foregoing damages claim could
not succeed as it was reflective of the company’s loss. In
contrast, the Court of Appeal found that the discrepancy in his
defense to the company’s claim (combined with his successful
application for security for costs) and then against the minority
shareholder revealed that he had perjured himself in order to
defeat both claims. The court correctly felt that if the
defendant’s defense is successful he will be rendered liable to
nobody.44 It was recognised that if the approach in Ghiles was
correct, then the need for creditor protection is not always an
absolute consideration and can be displaced.45
In my view, the strict approach of the is a clear reflection of
the injustice that results when the Principle is strictly applied
whilst the Court of Appeal’s decision epitomises the paramount
importance of allowing a court discretion so that the end result
is one that is equitable and does not unfairly deny a claimant
justice. McLennan46 correctly opined that the ultimate
consideration of the Court of Appeal in Ghiles was not that the
44
Para 20 at 8C-D.
Blackman et al ‘Commentary on the Companies Act (Volume 1): Chapter
IX ‘Remedies of Members (ss252-268) at 68-8.
45
46
McLennan op cit note 4.
Amrisha Raniga – Stein v Blake: The Reflective Loss Principle Revisited
company could not provide security for costs but rather that the
company simply did not have money to finance its litigation
against the defendant and thus there was no risk of double
recovery.47 However, the disablement of the company must have
been directly caused by the wrongdoer, failing which the
Principle would be applicable.48 To do otherwise would open
the floodgates for litigation.49The requirement that there be
direct cause has also received judicial recognition.50
In Stein, the facts are inconclusive as to whether the
companies were placed into liquidation as a direct result of the
defendant’s actions and whether there were any funds available
for litigation. Thus no final determination can be made in this
regard. If the liquidator in Stein had subsequently elected not to
proceed or to settle, there would not have been any prejudice to
the creditors as the creditors could have been in no worse-off a
position as a result of the personal claim being permitted than
when the liquidator, through the general body of creditors,
47
Ibid at 200.
Jonathan Mukwiri ‘The No Reflective Loss Principle’ (2005) 26(10)
Comp.Law. 304-307.
48
49
Ibid at 305.
50
Gardner supra note 28 para 47.
Amrisha Raniga – Stein v Blake: The Reflective Loss Principle Revisited
elected not to pursue a claim; there was therefore no risk of
double recovery. A personal action by a shareholder in this case
ought to proceed.
V. IS THE RIGHT UNIQUE TO THE SHAREHOLDER?
It is regrettable that the policy consideration, whether the
company was in liquidation, was not canvassed before the court
in Stein, as it goes to the root of the inquiry as to whether one
should proceed by way of personal action or derivative action.
As will be seen below, the policy also supports the
disapplication of the Principle to the oppression remedy. The
test is whether the loss suffered by the shareholder plaintiff is
unique to that shareholder or is it felt by all shareholders?51 If
the answer is in the affirmative, the correct proceeding is a
personal action as opposed to a derivative action.
MacIntosh52 opined that the “corporation” will be injured
when all shareholders are affected equally, with none
51
Blackman et al op cit note 45 at 71.
Jeffrey MacIntosh ‘The Oppression Remedy: Personal or Derivative’
(1991) 70 Can.Bar.Rev.29.
52
Amrisha Raniga – Stein v Blake: The Reflective Loss Principle Revisited
experiencing any special harm. The harm in respect of a
personal action has a differential impact on the shareholder
plaintiff. This position was adopted by the court in Pasnak53
that“unless [the shareholder] can show that he
was affected in a peculiar way, that is, in a
manner distinct from the other shareholders by
the alleged oppressive behaviour of [a director],
he must seek leave to commence a derivative
action against [the director] in [the company’s]
name”54
In Gopal55, the court held that when there is a
misappropriation of a corporate opportunity it is generally
required that a derivative action is brought on behalf of the
company. However, where a shareholder is the recipient of such
opportunity, the oppression remedy is better suited as the
remaining shareholder is said to be sufficiently differently
affected.56
53
Pasnak v Chura, 2004 BCCA 221.
54
Ibid para 27.
55
Gopal v Burke, 2007 BCSC 1930.
56
Ibid para 15.
Amrisha Raniga – Stein v Blake: The Reflective Loss Principle Revisited
In Stein, the impact of the misappropriation of the assets were
certainly unique to Stein as the remaining shareholder was
himself the wrongdoer who benefited from the impugned
conduct at the expense of Stein. Although this point was not
explicitly relied upon by the Plaintiff in his skeleton argument,
the fact that he pleaded that the defendant was a 50%
shareholder combined with the fact that assets were transferred
to a company related to the defendant ought to have opened the
door for the court to raise this conclusive policy consideration
which would have, in my view, swung the pendulum in Stein’s
favour. It is the court’s blanket approach to the Principle that
prevented it from seeing this glaring policy concern and leads
one back to the argument I propose that the courts ought to be
given a judicial discretion to balance the various policy
considerations so that the end result is an equitable one.
a) Risk of multiplicity of actions
A genuine attempt was made by the court in McCrae57 to
formulate a non-exhaustive list of factors to be considered when
assessing the Principle. One such factor was whether there are a
57
McCrae supra note 13.
Amrisha Raniga – Stein v Blake: The Reflective Loss Principle Revisited
limited number of shareholders whose identities are known and
whether the plaintiff can be singled out from a mass of
unforeseeable plaintiffs.58 The court undoubtedly had in mind
the risk of multiplicity of actions when it identified this factor.
A public company could have thousands of shareholders at a
given point in time and thus the opening of the floodgates to
litigation is a very real concern if a reflective loss claim is
permitted to proceed. In Stein, all the companies were private
companies and there were merely two shareholders, one of
which was the wrongdoer. Thus the consideration of multiplicity
of actions can be laid to rest. Furthermore, in applying the
foreseeable plaintiff doctrine59 to Stein, a compelling argument
can be made that it was reasonably foreseeable by the Defendant
that Stein in particular, as the only other remaining equal
shareholder, would be harmed by the impugned conduct.60
b) Is the underlying transaction a trigger event?
58
Ibid para 32.
59
Hay or Bourhill v Young 1943 AC 92 100.
60
Neethling, Potgieter & Visser Law of Delict 5ed (2006) at 179.
Amrisha Raniga – Stein v Blake: The Reflective Loss Principle Revisited
It will be recalled that the court in Stein rejected the Plaintiff’s
reliance on the Heron International Case which involved a
takeover. Stein and Heron International are distinguishable as
the shareholders in the latter had parted with their shares, thus
representing a separate and distinct loss which was not reflective
of the company’s loss. They are by the same token similar as a
closer analysis of both cases reveals that the underlying
transactions in both cases (disposal of all or the greater part of
the undertaking in Stein and a takeover in Heron International)
represent fundamental transactions and both would have
invoked a shareholder’s appraisal rights61 in SA, representing an
exit mechanism for the company. In terms of the appraisal
remedy, upon the occurrence of a trigger event, after a
shareholder had complied with certain procedural requirements
and thus rendered eligible to perfect his appraisal rights, he has a
right to be paid fair value by the company in return for his
shares.62 This appraisal remedy is in line with the DTI’s policy
61
Section 164 of the Act.
62
Ibid.
Amrisha Raniga – Stein v Blake: The Reflective Loss Principle Revisited
objective of preventing the locking-in of minority shareholders63
when certain trigger transactions fundamentally alter the
company.64
Seeing that the entire Act has had a fundamental policy shift
in its shareholder activism and protection and that it has gone
even further than the UK and USA in empowering minority
shareholders,65 and seeing that the prevention of locking-in of
shareholders is a key policy concern, a purposive interpretation
dictates that the Principle should most certainly have no role to
play in trigger events. The appraisal remedy does not even
require that the solvency and liquidity test be applied prior to the
company effecting payment66 to a shareholder who has
perfected his appraisal rights, and is thus indicative of the
legislature’s preference for shareholder protection over creditor
protection in these circumstances.
63
Explanatory summary of bill, 2007 (GN 166 GG 29630 of 12th February
2007) at 5 and also Carl Stein & Geoff Everingham The New Companies Act
Unlocked (2011) at 298.
64
Section 112 of the Act.
65
Carl Stein op cit note 63 at 23.
66
Section 164(19) of the Act.
Amrisha Raniga – Stein v Blake: The Reflective Loss Principle Revisited
Shareholder protection in the disposal of an undertaking is
further evinced by the metamorphosis of the predecessor (s228
of Act 61 of 1973) of the current provision on the disposal of
undertakings by a company (s112 of the Act read with s115). An
amendment of the previous provision by the legislature elevated
the requirement of a general resolution to a special resolution of
shareholders for disposals of an undertaking, and confirmed that
the intention of the legislature was to protect shareholders, so
much so, that the Turquand rule67 was made inapplicable to
s228 by the courts.68 A historical perspective and purposive
interpretation69 thus reinforces the submission that it is
reasonably justifiable for the plaintiff to be paid the diminution
in the value of his shares/fair value in competition with any
67
The rule which derives from the seminal case of Royal British Bank v
Turquand (1856) 5 E & B 248 (119 Er 474) states that a third party
contracting with the company in good faith is entitled to assume that the
internal formalities and procedures have been complied with. One such
internal formality is the passing of a resolution.
68
Farren v Sun Services SA Photo Trip Management (Pty) Ltd 2003(2) All
SA 406 (C); Stand 242 Hendrik Potgieter Road Ruimsig (Pty) Ltd and
Another v Gobel NO and Others 2011 (5) SA 1 (SCA).
See generally JS McLennan ‘s228 of the Companies Act and the Turquand
Rule- Farren v Sun Services SA Photo Trip Management (Pty) Ltd 2005
THRHR 304-308 and Basil Wunsch ‘section 228 of the Companies Act and
the Turquand Rule’ (1992) TSAR 545.
69
Amrisha Raniga – Stein v Blake: The Reflective Loss Principle Revisited
creditors in the context of trigger events to the appraisal remedy
as it is in keeping with the glaring intention of the legislature to
protect shareholders.
The Plaintiff in Stein should not have been denied the same
outcome as the shareholder in Heron International merely
because the shareholder did not part with his shares in the
former. Companies usually seek a target company as they wish
to acquire some valuable assets in the target. This may be
achieved either by a scheme of arrangement, disposal of an
undertaking or a take-over. All three methods trigger a
shareholder’s appraisal rights70, although not all the methods
involve the shareholder disposing of his shares.
One may accept that the risk of double recovery is
extinguished when a shareholder has parted with his shares, but
there is an inherent risk in wrongdoers ‘cherry picking’ a
method that does not entail a transfer of shares as part of its risk
management strategy. Transaction advisers would have the
reflective loss consideration on their fundamental transaction
check-list when advising clients on which method to adopt in
70
S164 (2) (b) of the Act.
Amrisha Raniga – Stein v Blake: The Reflective Loss Principle Revisited
order to achieve their goal of acquiring assets, whatever the
form may be.
If the court’s concern for double recovery is so grave then
equity dictates that the company’s claim for derivative action
should be in respect of recovery of the assets whilst the
shareholders claim against the director should be that he is
compelled to purchase the plaintiff’s shares in accordance with a
pre-emptive right. He should argue that the fair value should be
adjusted to reflect the value of the shares immediately prior to
the wrongdoing. This equitable result will achieve a purpose of
the act to balance rights and obligations of shareholders and
directors.71
As will be seen below, the wide ambit of the oppression
remedy permits a court to order that either the company or the
defendant purchases Stein’s shares. It has been argued that there
is an overlap between the oppression remedy and the appraisal
remedy thus allowing a shareholder to make an election between
the two especially where the deliberate inactivity of the
company acting through its directors is unjust to the minority.72
71
72
S7 (i) of the Act.
Adetoun Teslimat Adebanjo Remedies For Dissenting Shareholders: A
Comparison Of The Current Option Of Personal Action And The Proposed
Amrisha Raniga – Stein v Blake: The Reflective Loss Principle Revisited
The factual matrix of Stein can be said to fall squarely within
such overlap.
An enquiry as to whether an underlying transaction
constitutes a trigger event is an additional policy consideration
that will strongly advocate for a claimant being permitted to
proceed with a personal action notwithstanding the presence of
elements of reflective loss. In fairness to the court in Stein, no
consideration could be given to this factor as there was no
equivalent appraisal remedy in the UK.
V. OPPRESSION REMEDY: DISAPPLICATION OF THE
PRINCIPLE
The jurisprudence on this complex topic has not had as much
legal activism in SA as it has had elsewhere and the courts have
been inconsistent in their approach to it. The court cases that
have emerged on the topic are in their single digits73. The policy
document74 issued by the DTI is completely muted in respect of
Appraisal Remedy Under The Companies Bill Of 2008 (unpublished LLM
thesis, University of South Africa, 2008) at 18 and 35.
73
McCrae supra note 13, Golf Estates (Pty) Ltd v Malherbe And Others 1997
(1) SA 873 (C), Jan J Roestorf NO supra note 4, Kalinko v Nisbet & Others
2002 (5) SA 766 (W), McLelland supra note 14, Paverley v Davidson 2002
JDR 0461 (T), SA Enterprise Case.
74
South African Company Law For The 21 st Century, Guidelines For
Corporate Law Reform’ (GN1183 in GG26493 of 23 rd June 2004).
Amrisha Raniga – Stein v Blake: The Reflective Loss Principle Revisited
the Principle and the Act gives no indication as to whether the
Principle is applicable within the prism of the statutory
shareholders remedies. This uncertainty is regrettable as it is
contrary to the policy objective of the Act to have a simple,
comprehensive and accessible legal framework75 which includes
not leaving matters of fundamental importance to the common
law. Nevertheless, it will now be up to the courts to make a
determination.
In South Africa, in one of the early cases on the matter, a
pragmatic approach was adopted by the court in McLelland76
where the court affirmed that the mischief sought to be
prevented by the Principle is double recovery and where no such
risk existed, and the shareholder was left with a diminished
patrimony, the continued application of the Principle would
amount to an unwarranted and technical obstruction of justice.77
In contrast, shortly thereafter, in affirming the decision in
Prudential, a strict approach was adopted by the court in Golf
Estates (Pty) Ltd78 where the court debarred the plaintiff’s claim
75
Ibid at 29.
76
McLelland supra note 14.
77
Ibid at 467H.
78
Golf Estates (Pty) Ltd supra note 73.
Amrisha Raniga – Stein v Blake: The Reflective Loss Principle Revisited
citing the reason that the plaintiff’s claim was ‘merely a
reflection of the loss suffered by the company’.79 These two
cases thus reflect the inconsistent approach of the SA courts to
the Principle.
It is noteworthy that not a single of the South African cases
relating to the Principle were decided within the context of the
oppression remedy. This begs the question whether the Principle
has any application at all within the prism of the remedy. The
legislature has explicitly included as a ground for the oppression
remedy where ‘the powers of a director… of the company… have been
exercised in a manner that is oppressive or unfairly prejudicial to, or that
unfairly disregards the interests of the applicant.’ 80
This explicit
inclusion of a ground for oppression remedy in the form of
‘managerial misconduct’81 is indicative of the availability of the
remedy notwithstanding the existence of damage to the
company. An improper exercise of a power by a director always
injures the company and, at times, could simultaneously
prejudice shareholders and have an unfair disregard for their
79
Ibid at 879-80 and 881H-I.
80
Section 163 (1) (c) of the Act.
Stephen Griffin ‘Shareholder Remedies and the No Reflective Loss
Principle-Problems Surrounding the Identification of a Membership Interest’
(20120) 6 J.B.L.461 at 471.
81
Amrisha Raniga – Stein v Blake: The Reflective Loss Principle Revisited
interests. The oppression remedy serves as an ideal illustration
of the often seen overlap between the claims of a company and
those of its shareholders82
A similar provision is found in s241 (2)(c) of the Canada
Business Corporations Act83 and thus parallels may be drawn
between the 2 provisions.84 The Canadian Court of Appeal in
Goldex Mines85 implicitly acknowledged that the Principle may
very well bar a shareholder’s reliance on a personal action
where merely an indirect harm is suffered by the general body
of shareholders which is reflective of a company’s loss. 86 The
oppression remedy thus requires something more than indirect
harm. It requires a shareholder to prove that he has suffered a
unique harm which has not been suffered equally by all
shareholders. As stated in Part II above, the court in Gopal held
that a shareholder plaintiff is deemed to be ‘sufficiently
differently affected’ where a shareholder has benefited from the
82
Suet Lin op cit note 24 at 557.
83
Canada Business Corporations Act, RSC 1985, C-44.
84
Meskin (ed) et al Henochsberg On The Companies Act 71 Of 2008 (2011)s163 ‘Relief from oppressive or prejudicial conduct or from abuse of juristic
personality of company’.
85
Goldex Mines Ltd v Revill (1974), 7 O.R. (2d) 216 (C.A).
86
Ibid para 22 and 26.
Amrisha Raniga – Stein v Blake: The Reflective Loss Principle Revisited
impugned conduct.87 Thus, the connection between the ability to
prove a unique harm and the preference for the oppression
remedy as opposed to derivative action must be re-emphasised.
Even in the UK, where a strict approach has been adopted to
the Principle, Suet Lin88 pointed out that the predecessor to s994
of the UK Companies Act89 had been utilised by minority
shareholders without the court requiring a derivative action to be
brought on behalf of the company. She was of the view that“While a successful derivative suit would mean that
the company recovers its assets, it may result in the
wrongdoers, who often are the majority shareholders in
the company, recovering indirectly in their capacity as
majority shareholders, which makes the derivative
action route less than ideal.’90
In lambasting the notion that prejudicial conduct could only
give rise to a claim in favour of the company to the exclusion of
the shareholders, she opined that the two claims could stand
together harmoniously.91 Judicial support for this view was
87
Gopal supra note 55 para 14-15.
88
Suet Lin op cit note 24.
89
Section 459 of the United Kingdom Companies Act, 2006 (c. 46).the UK
Companies Act 1985.
90
Suet Lin op cit note 24 at 557.
91
See also KOH op cit note 3at 885-6.
Amrisha Raniga – Stein v Blake: The Reflective Loss Principle Revisited
found in the case of Atlasview Ltd92 in an extract worth quoting
in full:
“it would ….fly in the face of common sense to
suggest that the court in exercising its discretion under
[the oppression remedy] would necessarily decline any
relief in such a case, and would require the minority
shareholders instead to bring a derivative action,
seeking payment to be made to the company in respect
of the entire loss it had suffered: by that route, the
defendant transferee would be having to make a
payment to the transferor company, the bulk of which
they would then recover in their capacity as majority
shareholders. That hardly seems like a desirable route
for compensating those who have in fact suffered the
loss. For these reasons, the ‘reflective loss’ argument
does not provide a bar to any of the relief sought in the
petition. The fact that the impugned conduct might give
rise to a cause of action at the suit of the company does
not mean that it is incapable also of giving rise to unfair
prejudice.”93
In Stein, a criticism that may respectfully be levelled against
the court is that it was quick to hold that a derivative action
ought to be brought on behalf of the company but failed to even
address the fact that in doing so would indirectly benefit the
defendant in his capacity as a 50% shareholder. This is a
92
Atlasview Ltd v Brighview Ltd [2004] 2 BCLC 191.
93
[62]-[63] as contained in KOH op cit note 3 at 886-887.
Amrisha Raniga – Stein v Blake: The Reflective Loss Principle Revisited
compelling argument that ought to have persuaded the court to
deliver judgement in favour of Stein and to then adjust the order
to prevent double recovery and prejudice to the creditors. It
must be noted that Stein’s claim was not based on and did not
plead prejudicial conduct nor does it appear as though Stein
relied on the defendant’s indirect benefit from a derivative
action in his skeleton argument.
In the final analysis, the Principle finds no application in the
oppression remedy, in my view, as conduct by a wrongdoer
which gives rise to a claim in favour of the company could
simultaneously be unfairly prejudicial to a shareholder. KOH94
opined that to then adopt a strict application of the Principle in
the context of the oppression remedy will ‘denude the statutory
remedy of much of its intended purpose and utility’95. He
preferred a pragmatic approach such that the risk of double
recovery and creditor protection was addressed by adjusting the
order appropriately.96 The mere fact that the impugned conduct
could give rise to a derivative action was no reason to strike out
94
KOH op cit note 3.
95
Ibid at 887.
96
Ibid
Amrisha Raniga – Stein v Blake: The Reflective Loss Principle Revisited
a claim based on the oppression remedy as “enabling the court
in an appropriate case to outflank the rule in Foss v Harbottle
was one of the purposes of the section”.97
VI.
THE
RE-TRIAL
OF
STEIN:
AN
EQUITABLE
JUDGMENT
For purposes of Stein, the oppression remedy can be flagged as
ideal for three reasons. First, the factual matrix reflects a
deadlock scenario in terms of which the votes in general
meeting are equally divided98 between Stein and the defendant,
with the defendant having management dominance as the sole
director. Second, Stein has suffered a unique and differential
harm making the oppression remedy the proper remedy to
pursue. Third, a derivative action is inappropriate as the
defendant stands to benefit from the action in his capacity as a
50% shareholder.
97
98
Saul D Harrison & Sons Plc [1995] 1 B.C.L.C. 14 CA at 18.
Blackman et al op cit note 45 at 5; and MF Cassim in Farouk HI Cassim et
al Contemporary Company Law 2 ed (2012) at 760.
Amrisha Raniga – Stein v Blake: The Reflective Loss Principle Revisited
Section 163 (2) of the Act provides that “the court may make
any interim or final order it considers fit, including-…”. The
provision provides an open-ended list of remedies the court may
use to make an order. A common order that has been made
under the oppression remedy, but which has not been given
express statutory recognition in the list, is an order directing
either the company or the remaining shareholder(s) to purchase
the shares of a shareholder, though usually at a price reflecting
the value of the shares prior to the impugned conduct.99
Commenting in the context of the UK Companies Act where
the courts have been given as wide a discretion as in the SA Act,
Griffin100 opined that because a shareholder will effectively be
awarded a sum representing the diminution in the value of his
shares, such award is a reflection of the company’s loss and as
such the Principle clearly finds no application to the oppression
remedy.101
FHI Cassim et al op cit note 99 at 774 and Brenda Hannigan ‘Drawing
Boundaries Between Derivative Claims and Unfairly Prejudicial Petitions’
(2009) 6 J.B.L. 606-629 at 616.
99
100
Griffin op cit note 81.
101
Ibid at 467.
Amrisha Raniga – Stein v Blake: The Reflective Loss Principle Revisited
An order requiring the defendant to purchase the shares at a
price that reflects the value of the shares at a time prior to the
impugned conduct will be in keeping with Stein’s pre-emptive
rights. Hannigan102 opined that the disadvantage with such an
order is a disregard for the interests of the creditors103 . In Stein,
some of the companies within the group were in liquidation. In
such instance, the wide discretion of the court would permit it to
couple such a purchase order with an order for the defendant to
restore the misappropriated assets or the value thereof to the
company; thus protecting the interests of the creditors. Such a
combined order will ensure that the loss to the company is
restored, the director is held accountable, the creditors’ interests
are protected and the plaintiff is still able to exit the company,
albeit the value the plaintiff will receive for the shares has
elements of reflective loss.
104
This would serve as a strong
deterrent against engaging in the impugned conduct or other
similar conduct.
102
Hannigan op cit note 100.
103
Ibid at 617.
104
Hannigan op cit note 99 at 618.
Amrisha Raniga – Stein v Blake: The Reflective Loss Principle Revisited
The restoration order in favour of the company may not be
ideal in Stein as the wrongdoer is himself a remaining
shareholder who will benefit from corporate recovery for
himself. Notwithstanding the elements of reflective loss, the
oppression remedy was designed to specifically cater for such
impugned conduct which results in oppression to a minority
shareholder.
The outcome of the defendant being ordered to purchase
Stein’s shares is that the defendant would then be the sole
shareholder and director, making restitution by him to the
company unnecessary.105 Creditors are still free to pursue their
claims against the defendant. Seeing as the company is in
liquidation, it is only appropriate that a s424 enquiry106 be called
for by the creditors with a view of holding the director
personally liable for the debts of the company. This result
prevents the shareholder from being locked in to the company
and the creditors have a remedy available.
105
106
Ibid at 617.
Item 9(1) of the Transitional Arrangements provides that notwithstanding
the repeal of the 1973 Act, Chapter 14 of that Act continues to apply in
respect of the winding up and liquidation of companies. This includes s424
which permits a creditor to apply to court for a declaratory order that the
director be held personally liable for the debts of the company.
Amrisha Raniga – Stein v Blake: The Reflective Loss Principle Revisited
VII. CONCLUSION
The outcome of the court in Stein utilising the UK’s strict
approach resulted in Stein being denied justice. Such a rigid
approach should not be adopted by South African courts as it
could be had at the expense of fairness and justice,107
notwithstanding the advantages of predictability and efficiency
Koh.108 Compelling policy reasons such as those presented in
this note indicate the dire need for judicial discretion in
reflective loss scenarios. If the oppression remedy were utilised
in any event, the principle may not find application where a
unique harm is proved by the shareholder plaintiff. A doubtavoidance statutory provision is therefore called for in South
Africa which specifically makes provision for judicial discretion
and the adoption of a pragmatic approach.
107
Ibid at 864.
108
KOH op cit note 3.
Amrisha Raniga – Stein v Blake: The Reflective Loss Principle Revisited