Lim­ited chance of suc­ceed­ing

If Stein­hoff share­hold­ers want ac­tion to be taken against the di­rec­tors and au­di­tors, they must get the firm to do it

Financial Mail - - MONEY&INVESTING - Ann Crotty crottya@bdfm.co.za

The North Gaut­eng High Court’s re­cent dis­missal of at­tempts by African Bank’s BEE share­hold­ers to pro­ceed with le­gal ac­tion against the bank’s for­mer CEO, Leon Kirki­nis, his fel­low board mem­bers and Deloitte is grim news for any Stein­hoff share­hold­ers want­ing to hold the re­tail group’s di­rec­tors and au­di­tors to ac­count.

The court has con­firmed that in SA law share­hold­ers can­not sue for what’s re­ferred to as “re­flec­tive” losses.

“A loss claimed by a share­holder as a re­sult of a wrong done to the com­pany is merely a re­flec­tion of the loss suf­fered by the com­pany,” says the court. In law the shares are merely a right of par­tic­i­pa­tion in the com­pany on the terms set down by the mem­o­ran­dum of in­cor­po­ra­tion. As far as the court is con­cerned, while the value of the shares has been re­duced sig­nif­i­cantly the share­hold­ers still hold all the shares.

This may seem like nit­pick­ing legalese to share­hold­ers whose re­tire­ment plans have suf­fered a hefty set­back but, as the court pointed out, the in­abil­ity to sue is the corol­lary of the lim­ited li­a­bil­ity sta­tus.

Lim­ited li­a­bil­ity, which has been a ma­jor driver in the eco­nomic growth of the past two cen­turies, es­sen­tially al­lows a com­pany to shift risk away from share­hold­ers to cred­i­tors, em­ploy­ees and so­ci­ety at large.

But it also comes with lim­ited rights for the share­holder. Those lim­ited rights do not stretch to su­ing for the loss of value of their shares. Es­sen­tially, as it is only the com­pany that has suf­fered, it is only the com­pany that can sue.

In the African Bank case, which was ruled on in Au­gust, the court dis­missed the em­pow­er­ment share­hold­ers’ claims, point­ing out that the com­pany has a le­gal per­son­al­ity dis­tinct from its share­hold­ers, “ac­cord­ingly, a loss to the com­pany which causes a fall in its share price is not a loss to the share­holder”.

For Stein­hoff share­hold­ers des­per­ate for some rec­om­pense for the es­ti­mated R200bn loss in the value of their in­vest­ments or merely keen to see some of the well-paid key play­ers held to pub­lic ac­count, the African Bank judg­ment makes for chill­ing read­ing.

Mak­ing it even more chill­ing is that much of this year’s crit­i­cism of Stein­hoff’s gover­nance echoes what was said about Kirki­nis and his board just three years ago, prov­ing that share­hold­ers and as­set man­agers in search of fast prof­its are slow learn­ers. Stephanie Gi­ampor­caro, an as­so­ciate pro­fes­sor at the UCT Grad­u­ate School of Busi­ness, says in con­nec­tion with the African Bank melt­down that there was “a CEO who be­lieved too much in his own abil­i­ties and a board that failed to ex­er­cise the nec­es­sary care and skill in over­see­ing what he was do­ing.”

She says: “In hind­sight, many as­set man­agers were also far too ea­ger to be­lieve what Kirki­nis was telling them.

And they con­tin­ued to be­lieve him un­til it was too late.”

The le­gal ac­tion by Hlu­misa In­vest­ment Hold­ings fol­lowed the head­line-grab­bing col­lapse of the African Bank share price in Au­gust 2014. The JSE moved quickly to sus­pend the shares and the un­der­ly­ing bank­ing busi­ness was promptly put un­der cu­ra­tor­ship by the SA Re­serve Bank.

The em­pow­er­ment share­hold­ers launched the le­gal ac­tion in 2015. They al­leged the di­rec­tors con­tra­vened sev­eral sec­tions of the Com­pa­nies Act and that this re­sulted in the busi­ness be­ing car­ried out reck­lessly “or with gross neg­li­gence”. This in turn re­sulted in sig­nif­i­cant losses to African Bank, which caused the share price to drop.

Hlu­misa was seek­ing R2bn in dam­ages. “We in­vested R264m of our own funds and rein­vested R700m in div­i­dends over an eight-year pe­riod,” Hlu­misa chair Des­mond Lockey told the me­dia. Ex­pected re­turns bumped the claim up to R2bn.

This means that if Stein­hoff’s share­hold­ers want some ac­tion to be taken against the di­rec­tors and au­di­tors they will have to per­suade the com­pany to launch that ac­tion.

This takes us to the rather bizarre sit­u­a­tion that it is down to the board of di­rec­tors to make the de­ci­sion on whether or not the com­pany is go­ing to take ac­tion against the di­rec­tors and au­di­tors. Al­ter­na­tively, the share­hold­ers can try to launch a de­riv­a­tive ac­tion on be­half of the com­pany.

Adding to the po­ten­tial le­gal com­plex­ity, which might have been part of the plan, was the De­cem­ber 2015 trans­fer of the pri­mary list­ing to the Frank­furt Stock Ex­change and head of­fice to Am­s­ter­dam.

How­ever, the ap­pli­ca­tion of Dutch law could ben­e­fit share­hold­ers, ac­cord­ing to an or­gan­i­sa­tion be­hind one of the four class ac­tions launched against Stein­hoff and its au­di­tors. Ar­mand Ker­sten, head of Europe re­la­tions at Dutch share­holder as­so­ci­a­tion VEB, says the sit­u­a­tion works in share­hold­ers’ favour. “It be­comes ever clearer that the Dutch ac­tion(s) have trac­tion and show ac­tual progress.”

As for any Stein­hoff share­hold­ers who think crim­i­nal ac­tion might be the way to go, they pre­sum­ably have for­got­ten about SA’S very own ver­sion of Jarndyce vs Jarndyce, Charles Dick­ens’s in­ter­minable le­gal case at the cen­tre of the novel Bleak House.

The SA lit­i­ga­tion re­lates to fi­nan­cial ser­vices group Tigon. Six­teen years af­ter the com­pany’s col­lapse the lo­cal courts look no closer to suc­cess­ful pros­e­cu­tion of Gary Por­ritt and Sue Ben­nett on more than 3,000 charges of fraud, rack­e­teer­ing and con­tra­ven­tions of the Com­pa­nies Act, the Stock Ex­changes Con­trol Act and the In­come Tax Act.

All in all it’s dif­fi­cult not to sus­pect that the large and pre­sum­ably ex­pen­sive team for­mer Stein­hoff CEO Markus Jooste had in tow at par­lia­ment was as much for show as for fight­ing off le­gal ac­tion.

Robert Tsha­bal­ala

Leon Kirki­nis: Many as­set man­agers were far too ea­ger to be­lieve what he was telling them

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