THE SUPREME COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT

Reportable
Case no:  142/2017
In the matter between:

COMMISSIONER FOR THE SOUTH AFRICAN
REVENUE SERVICE                                                                            APPELLANT

and

THE EXECUTORS OF ESTATE LATE SIDNEY
ELLERINE                                                                                            RESPONDENT

Neutral citation:
CSARS v The Executors of Estate Late Sidney Ellerine
(142/2017) [2018] ZASCA 39 (28 March 2018)

Coram:
Navsa, Wallis and Mbha JJA, Davis and Hughes AJJA

Heard:
6 March 2018

Delivered:
28 March 2018

Summary: Eighth Schedule to the Income Tax Act 58 of 1962 – valuation of
preference shares for the purposes of determination of a capital gain.

ORDER
___________________________________________________________________

On appeal from: Gauteng Tax Court, Johannesburg (Victor J sitting as a court of
first instance):

1. The appeal is upheld with costs, including the costs of two counsel.
2. The order of the Tax Court of 11 October 2016 is set aside and replaced with the
following order:
‘The deceased was entitled, on the date of his death, to convert the preference
shares to ordinary shares and the preference shares must be valued, for the
purposes of paragraph 40 read with paragraph 31(3) of the Eighth Schedule to
the Income Tax Act, on this basis.’

___________________________________________________________________

JUDGMENT
___________________________________________________________________

Davis AJA (Navsa, Wallis and Mbha JJA and Hughes AJA concurring)

Introduction
[1] This case concerns the valuation of preference shares for the purposes of
determining a capital gain in terms of paragraph 40 read together with paragraph
31(3)(a)(i) of the Eighth Schedule to the Income Tax Act 58 of 1962 (the Act).

[2] The issued preference shares were held by the late Sidney Ellerine
(‘deceased’). They formed part of the share capital of Sidney Ellerine Trust (Pty) Ltd

(‘the company’) which, in total, consisted of 600 ordinary shares of R1 each and
112 000 7 per cent redeemable non-cumulative preference shares of R1 each.

[3] The deceased held all of the redeemable preference shares issued by the
company. The registered and beneficial owners of the ordinary shares were as
follows:
200 owned by the trustees of The Kevin Murray Ellerine Trust;
200 owned by the trustees of The Bradley Charles Ellerine Trust;
100 owned by the trustees of The Linda Caron Ellerine Trust;
100 owned by the trustees of The Maxine Tamar Ellerine Trust.

[4] The preference and ordinary shares enjoyed one vote for each share in
general meetings of shareholders so that the deceased held the overwhelming
majority of the voting rights in the company. Appellant assessed respondent’s
liability for capital gain, determining that the deceased was entitled, by using his
voting power, to convert these preference shares to ordinary shares. Appellant
assessed the value of the preference shares in the amount of R 563 376 418, on the
basis that the shares represented 99.47 per cent of the share capital of the company
and thus should be valued at 99.47 per cent of the value of the company.

[5] Respondent submitted that the terms of special condition 5.8 of the
Memorandum read together with Articles 4.2 and 34 of the Articles of Association of
the company precluded the deceased from converting these preference shares to
ordinary shares, without the voting support of at least 75 per cent of the ordinary
shareholders; hence the preference shares should be valued at their fair value of R1
per share.

[6] The only issue before the Tax Court was whether the rights that attached to
the preference shares and which entitled the holder thereof to convert them should
be taken into account in the determination of the market value.

[7] After interpreting the relevant provisions of the Memorandum and Articles of
Association, the Tax Court concluded that, on the date of his death, the deceased
was not entitled to convert the preference shares to ordinary shares, in that, at least
75 per cent of the holders of each class of shares had to agree to the conversion.
The court held that, contrary to special condition 5.8 of the Memorandum, the
conversion would result in an amendment to the terms applicable to these
preference shares as provided for in Article 34 of the Articles of Association and
consequently their rights. However, without the prior written approval of at least 75
per cent of the holders of each class of shares, Article 34 could not be amended. It
was common cause that no such approval had been obtained.

[8] On this basis the Tax Court held that the deceased at the time of his death
was not entitled to convert the preference shares to ordinary shares. The preference
shares had to be valued accordingly for the purposes of paragraph 40 read together
with paragraph 31 (3) of the Eighth Schedule to the Act.

The nature of the appeal
[9] The dispute in this case thus turned on the resolution to two questions:
1. Could the holder of the deceased’s preference shares convert these shares into
ordinary shares without an amendment to Article 34 of the Articles of Association,
which, when read with special condition 5.8, required the written approval of 75 per
cent of the holders of each class of shares in the issued share capital of the
company.
2. Whether, in terms of Article 4.2, conversion of the deceased preference shares to
ordinary shares could take place without the approval of 75 per cent of the holders of
the ordinary shares.

[10] An analysis of these arguments requires an examination of the relevant
provisions of the company’s articles as well as special condition 5.8.

The background
[11] The material parts of this case are set out in a statement of agreed facts.
Since 1969 the deceased had been the registered owner of the issued preference
share capital of 112 000 7 per cent redeemable non-cumulative preference shares of
R1 each. These shares conferred upon the holder, being the deceased, the right to
vote 99.47 per cent of the votes at general meetings of the company.

[12] The company, in which the deceased enjoyed the controlling interest, held 40
per cent of the issued share capital in another company, Ellerines Brothers (Pty) Ltd
(EB), an investment holding company, which owned the bulk of the family
investments. The remaining 60 per cent of EB shares were held by Eric Ellerine
Trust (Pty) Ltd (EET) a company controlled by the deceased’s brother Eric Ellerine.
The dispute concerning the value of the preference shares necessitates an
examination of key provisions of the company governance structure.

[13] On 12 May 2006 two special resolutions were unanimously adopted by the
company in terms of which an amendment was made to the company’s
Memorandum and Articles of Association, which amendments were then registered
under the Companies Act 61 of 1973.

[14] In terms of Special Resolution 1, it was resolved to amend the company’s
Memorandum of Association by the inclusion of special conditions in terms of s 53(a)
of the Companies Act in a new paragraph 5 of the Memorandum of Association. This
dealt with restrictions on the disposal of shares of the company prior to a certain
event, described as ‘a distribution event’, being 10 November 2033, the hundredth
anniversary of Eric Ellerine’s birth.

[15] A new paragraph 5.2 was inserted to define the term ‘dispose’ as including to
sell, alienate, transfer, exchange, pledge, encumber or otherwise dispose of
(including but not limited eiusdem generis by way of repurchase, donation, dividend

or by way of the terms of a will). ‘Disposal’ bore a corresponding meaning, unless a
contrary intention appeared.

[16] A further part of special resolution 1 was the inclusion of clause 5.8 which
provided:
‘This special condition and also the provisions of articles 29 and 34 of the company’s
Articles of Association may be amended only by way of the passing and registration of a
special resolution which shall be of no force or effect unless the prior written approval of at
least 75% (seventy five percent) of the holders of each class of shares in the issued share
capital of each of the company and Eric Ellerine Trust (Proprietary) Limited is obtained for so
long as Eric Ellerine Trust (Proprietary) Limited holds any shares in Ellerine Bros
(Proprietary), or any successor in title thereto.’

[17] Special Resolution 2 provided that the existing Articles of Association dated
13 December 1968 be abrogated in their entirety and be replaced with a fresh set of
Articles of Association dated 12 May 2006. These were in force at the time of the
deceased’s death.

[18] Turning to the rights of a preference shareholder, Article 34, headed
‘Redeemable Non-Cumulative Preference Shares’, provided in Article 34.1 that a
number of rights, privileges and conditions attached to these preference shares,
including that they conferred the right to a preferential dividend at the rate of 7 per
cent per annum on the capital, paid out of the profits of the company resolved to be
distributed in respect of each financial year, but not to an entitlement to any further
profits.

[19] As is typical in these provisions, article 34.2 limited the right of preference
shareholders to have a preferential right to repayment of capital paid but with no
further rights to participate in or receive assets or capital.

[20] Article 34.3 provided that holders of the preference shares would have the
right to attend and vote at all meetings of the company. At each such meeting,

whether on a show of hands or on a poll, every holder of a preference share, in
person or represented by proxy at any such meeting, ‘shall have one vote for each
preference share of which he is a holder’.

[21] Article 34.4 provided that the company shall ‘by resolution of the directors to
that effect, be entitled to redeem the whole or any part of the preference shares for
the time being issued and outstanding out of any monies which may lawfully be
applied for such purpose at par, upon giving the holder of the Shares to be
redeemed not less than 1 (one) month’s prior written notice, provided that no such
notice may be given so as to expire prior to the occurrence of the Distribution
Event….’

[22] The determination of whether a conversion of preference shares to ordinary
could take place without the consent of ordinary shareholders is further affected by
Article 4.2, which provides:
‘All or any of the rights, privileges or conditions for the time being attached to any class of
Shares for the time being part of the share capital of the company may (unless otherwise
provided by the terms of issue of the Shares of that class) whether or not the company is
being wound up, be varied in any manner with the consent in Writing of the holders of not
less than 3/4 (three-fourths) of the issued Shares of that class, or with the sanction of a
resolution passed in the same manner as a special resolution of the company at a separate
general meeting of the holders of the Shares of that class….’

[23] Article 7.1.10, which specifically dealt with the conversion of shares, provides:
‘7.1 The company may from time to time by special resolution -
7.1.10 convert any shares in the capital of the company to Shares of a different class and in
particular (but without derogating from the generality of the foregoing) convert ordinary
Shares or Preference Shares to redeemable preference Shares.’

The key issue for determination
[24] Appellant was required in terms of the Eighth Schedule to the Act to make a
determination of the capital gains resulting from the deemed disposal of the

deceased’s preference shares. Paragraph 40 (1) of the Eighth Schedule provides
that  ‘a deceased person is treated as having disposed of his/her assets … for an
amount received or accrued equal to the market value of those share at the date of
the person’s death’.

[25] The market value of the shares in a company, not listed on a recognised
exchange, must be determined as the value equal to the price that could have been
obtained upon the sale of the shares between willing buyer and a willing seller
dealing at arm’s length in an open market.1

[26] As noted, appellant valued the preference shares at the date of the deceased
death in the amount of R563 376 418. By contrast, respondent contended that the
value of the preference shares as at the date of the deceased’s death was equal to
the par value of the shares, namely R112 000.

[27] The essence of appellant’s case is set out in its Rule 10 Statement as follows:
‘The nominal value of the 112,000 preference shares does not reflect the market value of
the shares, as the voting rights attached to the shares entitled the deceased to convert his
preference shares into ordinary shares at any stage after 9 May 2006, this by virtue of article
7.1.10 of the Articles adopted on 09 May 2006 by the Company, and notwithstanding the
provisions of Special Condition 5.8.’

[28] Respondent contended that the value of the preference shares must be
determined on the basis that the holder was precluded from converting these shares
to ordinary shares without obtaining the prior written approval of at least 75 per cent
of the ordinary shareholders and at least 75 per cent of the holders of each class of
shares in EET. This argument is based firstly upon special condition 5.8 read with
Article 34 and, secondly, on a reading of Article 4.2. Respondent accepted that,
apart from these arguments, the deceased would have been able to convert his
preference shares into ordinary shares in terms of Article 7.1.10.

1 Paras 31 (3) of the Eighth Schedule to the Act.

The argument based upon special condition 5.8
[29] Respondent was constrained to accept that , on a plain reading of the words
‘articles 29 and 34… may be amended…’ ,there was no need to amend article 34 in
order for preference shares issued by the company to be converted to ordinary
shares. On this reading, special condition 5.8 would not be engaged by such a
conversion and the restrictions it embodies would not apply to it.

[30] Its argument was based on an interpretation of the purpose of special
condition 5.8 as protecting the shareholders of ‘each class of shares’ (which
included both the ordinary shares and the preference shares), from amendments to
the terms of the preference shares which might impact upon their rights as
shareholders. On the basis of this purpose of the special condition, the word
‘amended’ had to be interpreted to mean that, if the rights attached to the preference
shares of the deceased as provided for in Article 34 were amended, special
condition 5.8 applied. A conversion of the preference shares to ordinary shares
would, on this argument alter the ‘rights’, privilege and conditions of the deceased’s
preference shares as provided for in Article 34 and hence Article 34 would have
been amended.

[31] Whatever debate may be developed with regard to the context urged upon
this court by respondent’s counsel, ‘consideration must be given to the language
used in the light of the ordinary rules of grammar and syntax’.2 While the intention of
the speaker is a vital component of the interpretive inquiry, the basic unit of meaning
remains the sentence employed.

[32] In the present case the sentence in Article 34 which commences ‘the
Preference Shares shall be subject to the following rights privileges and conditions’,
refers to the preference shares and not to a particular holder of these preference
shares. To the extent that there may be any doubt about this construction, Article
34.6 makes it clear that the entire article concerns the rights attached to the

2 Natal Joint Municipal Pension Fund v Endumeni Municipality 2012 (4) SA 593 (SCA) at para 18

preference shares as opposed to the rights of a particular holder thereof, in
particular where it provides: ‘no further shares ranking in priority to or pari passu with
the preference shares shall at any time be created without the consent or sanction of
the holders of such last preference shares which may be issued and outstanding
given in accordance with Article 4.2 unless such further shares be created and
issued for the purpose of redeeming out of the proceeds of the issue thereof the
preference shares mentioned in this Article 34 or such of the said shares as shall for
the time being be issued and outstanding’.

[33] Any interpretation regarding a company’s articles must be located within the
context of the nature of articles of association which confer rights or impose
obligations on person who are members. There is, in short, a recognized distinction
between contracts made by a company with members in their private capacity and
those made in their capacity as members3. Respondent appears to contend that
without any clear language nor authority to support its argument, a contract was
concluded between the company and the deceased in his personal capacity. There
is no foundation for this submission.

The Article 4.2 argument
[34] Respondent contended that, if the deceased’s preference shares were
converted to ordinary shares, the rights attaching to the existing ordinary shares
would be varied as a consequence thereof. The variation for which it contended was
a drastic drop in the value of those shares. For this reason, article 4.2 would be of
application and hence the conversion would require the approval of 75 per cent of
the holders of the ordinary shares.

[35] English law appears to support the view that a variation of rights occurs when
the rights which attach to the shares are varied and not when they become
commercially less valuable. Where additional preference shares and ordinary shares

3 Rosslare (Pty) Ltd v Registrar of Companies 1972 (2) SA 524 (D & CLD) at 528 A-B, LAWSA (first
re-issue) Vol 4 Part 1 at para 73 in respect of the 1973 Companies Act. The position remain the same
under the Companies Act 71 of 2008. LAWSA (second edition) Vol 4 Part at para110

had been issued, it was held that the rights of preference shareholders had not been
varied. White v Bristol Aeroplane Co Ltd [1953] Ch 65 at 74 – 80. When the voting
power of certain ordinary shareholders had been diminished as a result of
subdivision of other ordinary shares it was held that there had been no variation of
rights. Greenhalgh v Arderne Cinemas Ltd [1946] 1 All ER 512 (CA)4.

[36] In the present case, the deceased through the preference shares enjoyed
sufficient voting power to ensure a conversion of the preference shares to ordinary
shares. While the voting rights of the respective class of shareholders would not
have changed, by means of the conversion, the value of the existing issued ordinary
shares would have declined in value by way of the increased number of the ordinary
shares pursuant to the conversion. However, to fall under the scope of rights being
“varied” it would then have been necessary to interpret the phrase to mean that the
shares of the ordinary shareholders were now commercially less valuable. The
balance of the voting power would not be changed nor would there be any alteration
of the rights, privileges and conditions attaching to the ordinary shares as a class5.

[37] A further problem which confronts respondent’s argument is the express
wording of Article 7.1.10 which, as is clear from the text thereof, provides that any
class of shares, by special resolution, can be converted to shares of a different
class, absent any other provision in the articles to the contrary. It is clear that the
deceased, by virtue of holding the overwhelming majority vote could have converted
the preference shares to ordinary shares. This article is not qualified by a reference
to article 4.2, both of which were part of the original articles of the company. Had it
been intended to impose a qualification upon the position as set out in article 7.1.10,
express language would have been required to make this position clear. The

4 For the distinction between variation of rights and shares that become commercially less valuable,
see White, supra at 74; and the minority judgment of Trollip JA in Utopia Vakansie-Oorde Bpk v Du
Plessis 1974 (3) SA 148 (A) at 181-182. Blackman, Jooste and Everingham Commentary on the
Companies Act Volume 1 at 5-286 argue that this distinction drawn in English law is equally
applicable in South African company law.
5 Blackman, Jooste and Everingham Commentary on the Companies Act Volume 1 5-288. see also
Gower and Davies Principles of Modern Company Law (8th ed) at 668.

express meaning given to article 7.1.10 finds further support in that the overall
consequence of these two articles is a congruence with the distinction between an
effect on rights, as opposed to a consequence of a diminished commercial value.
Article 4.2 deals with the former, while a conversion to ordinary shares in terms of
article 7.1.10 caters for a situation where only the latter result might follow. The
result is that the argument based on Article 4.2 fails.

Costs
[38] Both parties were agreed that the Tax Court wrongly made a cost order
against appellant. In terms of s 130(1)(a) of the Tax Administration Act 28 of 2011 a
tax court may grant a costs order in favour of a taxpayer if SARS’ grounds for
assessment or ‘decision’ are held to be unreasonable; suffice to say that no such
reason was given by the Tax Court as to its award of costs.

[39] In the result:
1. The appeal is upheld with costs, including the costs of two counsel.
2. The order of the Tax Court of 11 October 2016 is set aside and replaced with the
following order:
‘The deceased was entitled, on the date of his death, to convert the preference
shares to ordinary shares and the preference shares must be valued, for the
purposes of paragraph 40 read with paragraph 31(3) of the Eighth Schedule to
the Income Tax Act, on this basis.’

____________________
D Davis
Acting Judge of Appeal

APPEARANCES
For the Appellant:

A R Sholto-Douglas SC with N Bawa SC
Instructed by:

State Attorney, Bloemfontein

For the respondent:

P A Solomon SC with J Boltar
Instructed by

Werkmans Attorneys,

Symington & De Kok, Bloemfontein
SUPREME COURT OF APPEAL OF SOUTH AFRICA

MEDIA SUMMARY – JUDGMENT DELIVERED IN THE SUPREME COURT OF APPEAL

FROM

The Registrar, Supreme Court of Appeal

DATE

28 March 2018

STATUS

Immediate

Please note that the media summary is intended for the benefit of the media and does not form
part of the judgment of the Supreme Court of Appeal.

The Commissioner of SARS v The Executors of Estate Late Sidney Ellerine
(142/2017) [2018] ZASCA 39 (28 March 2018)

Today the Supreme Court of Appeal (SCA) upheld an appeal against an order of the Gauteng Tax Court,
Johannesburg. This matter concerns the valuation of preference shares for the purposes of determining a capital
gain in terms of paragraph 40 read  with paragraph 31(3)(a)(i) of the Eighth Schedule to the Income Tax Act 58
of 1962 (the Act).

The only issue before the Tax Court was whether the rights that attached to the preference shares and which
entitled the holder thereof to convert them should be taken into account in the determination of the market value.
After interpreting the relevant provisions of the Memorandum and Articles of Association, the Tax Court
concluded that, on the date of his death, the deceased was not entitled to convert the preference shares to
ordinary shares, in that, at least 75 per cent of the holders of each class of shares had to agree to the conversion.

The issues on appeal before the SCA were whether: (1) the holder of the deceased’s preference shares could
convert these shares into ordinary shares without an amendment to Article 34 of the Articles of Association,
which, when read with special condition 5.8, required the written approval of 75 per cent of the holders of each
class of shares in the issued share capital of the company - (2) Whether, in terms of Article 4.2, conversion of
the deceased preference shares to ordinary shares could take place without the approval of 75 per cent of the
holders of the ordinary shares.

The respondent contended that the value of the preference shares must be determined on the basis that the holder
was precluded from converting these shares to ordinary shares without obtaining the prior written approval of at

least 75 per cent of the ordinary shareholders and at least 75 per cent of the holders of each class of shares in
EET.

The SCA held that any interpretation regarding a company’s articles must be located within the context of the
nature of the Articles of Association which confer rights or impose obligations on person who are members. It is
clear that the deceased, by virtue of holding an overwhelming majority of the votes, could have converted the
preference shares to ordinary shares. In the result the appeal was upheld with costs, including the costs of two
counsel.