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BCLR Step Ahead Newsletter No. 3/2012

Traditional healer's certificate

Legal clarity regarding mining safety stoppages

The recusal of a judicial officer - the application of the test of reasonable apprehension of bias

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The effects of the Safety at Sports and Recreational Events Act, 2010

Series of articles for entrepreneurs entitled "Law & the Entrepreneur" published by BCLR in:

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A fundamental difference between partners and shareholders

Mutual trust between the partners is the essence of a partnership. After all:

  • each partner is jointly and severally liable for debts contracted by the partnership; and
  • every partner has the power to enter into contracts, within the scope of the partnership business, which
    bind the partnership and hence bind every partner.

Consequently, it would be lunacy to enter into a partnership with someone in whom you did not have a high level of trust and confidence.

In law, each partner owes every other partner a fiduciary duty, requiring him or her to act in the utmost good faith toward co-partners.

By contrast, a company is a more impersonal business structure. Directors owe the company a fiduciary duty
and are obliged to act in the interests of the company and not in their personal interests. Shareholders, however, owe no fiduciary duty, either to the company, or to each other. Consequently, a shareholder, when exercising his powers as a shareholder to vote at a general meeting, is entitled to act selfishly, in other words, in a manner designed to advance his personal interests.

Thus, for example, at a meeting of shareholders at which the company’s directors are being elected, a shareholder is entitled to vote for himself, even if he knows that there are other persons, more experienced and more qualified than himself, who are standing for election.

These principles can be varied by agreement. There is no reason why a company’s articles of association, or a shareholders’ agreement, cannot stipulate that shareholders owe a fiduciary duty to one another and to the company and that they must at all times act in the best interests of the company and behave toward each other in the utmost good faith. In a small company, with relatively few shareholders, it may well be sensible to have an agreement which spells this out.

There are some reported judgments in which the courts have held that, even though an agreement of this kind was never reduced to writing and indeed, was never even verbally agreed to, it was nonetheless tacitly agreed. For example, in Ebrahimi v Westbourne Galleries Ltd 1973 AC 360 two partners transferred the partnership business to a company in which they were directors and equal shareholders. The House of Lords ruled that there was a tacit understanding that they would continue to run the business as though they were partners. The two individuals in question could have saved themselves their huge legal costs if they had taken the trouble, when they formed the company, to put this understanding in writing.

Indeed, many legal wrangles could be avoided if, at the start of their business dealings, the parties took the trouble (with the guidance of their attorneys) to write down at least the fundamental terms of their business relationship. Even if they are not entering into partnership, it would often be entirely appropriate and good business sense to stipulate that each will act toward the other in the utmost good faith.

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