PRO­TECT­ING THE CUL­PRITS

Financial Mail - - EDITORIALS -

You’d be for­given for think­ing, in light of three re­cent events, that in­vestors’ rights have been dis­pensed with al­to­gether, and the deck is heav­ily stacked in favour of pow­er­ful ex­ec­u­tives who’ve run their com­pa­nies into the ground.

First, two weeks ago judge David Un­ter­hal­ter dis­missed a bid to cer­tify a class ac­tion law­suit by in­vestors against Stein­hoff, its au­di­tors and di­rec­tors. It would have been prece­dent-set­ting, the first such class ac­tion against er­rant di­rec­tors.

That hope has now likely been scotched. In his rul­ing Un­ter­hal­ter said that while a “class ac­tion would be ap­pro­pri­ate”, this par­tic­u­lar route wouldn’t work. Rather, “it is for the Stein­hoff com­pa­nies to hold the Stein­hoff di­rec­tors and Deloitte li­able for any breach of duty to the com­pany that caused loss”.

In other words, share­hold­ers can’t sue di­rec­tors or au­di­tors di­rectly — even in the case of SA’S largest fraud, where pro­fits were in­flated by R106bn. Un­ter­hal­ter re­lied, in part, on the de­fin­i­tive Bri­tish case on the sub­ject, Foss v Har­bot­tle, de­cided in 1843.

But, in­vestors will ask, if they can’t get resti­tu­tion through a class ac­tion here, where can they?

Michael Katz, an au­thor of the Com­pa­nies Act, agrees in­vestors should have ac­cess to class ac­tions.

“It’s a way to make share­holder reme­dies come alive, be­cause oth­er­wise many couldn’t af­ford to sue for loss. But the Stein­hoff judg­ment doesn’t rule it out — it just said the wrong party sued. It is the com­pany that should sue the for­mer di­rec­tors and au­di­tors,” he says. If di­rec­tors fail to bring an ac­tion, Katz says, share­hold­ers can force them, by means of a de­riv­a­tive ac­tion un­der the Com­pa­nies Act.

Un­ter­hal­ter is one of SA’S sharpest le­gal minds. But prac­ti­cally, this in­ter­pre­ta­tion is con­vo­luted and un­help­ful. Af­ter all, if share­hold­ers have to force a com­pany to sue for­mer di­rec­tors, and it wins, any dam­ages will be paid to the com­pany, which wasn’t in­clined to help the in­vestors in the first place.

The sec­ond in­ci­dent is equally un­help­ful.

As luck would have it, last week the Supreme Court of Ap­peal ruled that African Bank em­pow­er­ment share­holder Hlu­misa wasn’t en­ti­tled to re­cover dam­ages from the bank’s di­rec­tors, in­clud­ing for­mer CEO Leon Kirki­nis, for the same rea­son. “The du­ties owed by di­rec­tors … are owed to the com­pany, not to in­di­vid­ual share­hold­ers,” it ruled.

Equally, Hlu­misa couldn’t sue au­di­tor Deloitte for sign­ing off in­cor­rect fi­nan­cial state­ments, be­cause “the duty of the au­di­tors is owed pri­mar­ily to the com­pany” — not to share­hold­ers.

The third in­ci­dent in­volved the other ma­jor cor­po­rate fraud of re­cent years, at sugar com­pany Ton­gaat Hulett. Here, as­sets were over­stated by at least R12bn, and in­vestors were fooled into think­ing pro­fits were better than they were. Since the com­pany first copped to the prob­lem, Ton­gaat’s share price has fallen 81% — a loss in value of R3.7bn.

Yet last week the JSE slapped the max­i­mum R7.5m fine on Ton­gaat for nu­mer­ous “in­cor­rect, false and mis­lead­ing” fi­nan­cial state­ments. But who ends up pay­ing for this: the ex­ec­u­tives who fid­dled the ac­counts and the au­di­tors who turned a blind eye — or the share­hold­ers, who were mis­led and have al­ready taken a beat­ing?

It’s a rhetor­i­cal ques­tion, ob­vi­ously.

A fine might help the JSE look tough, but in re­al­ity it’s like ar­rest­ing the vic­tim of a mug­ging for loi­ter­ing around a crime scene. A far better, but tougher, re­sponse would have been for the JSE to fine the in­di­vid­u­als who caused the loss.

Like with the case of Stein­hoff and African Bank, the real cul­prits are get­ting the eas­ier ride.

In the case of Stein­hoff, there is an­other op­tion: a class ac­tion law­suit lodged in Am­s­ter­dam, where the re­tailer is reg­is­tered. It is this law­suit that many of SA’S in­sti­tu­tions, in­clud­ing Al­lan Gray, are sup­port­ing, prob­a­bly bet­ting on get­ting a better re­sult.

Share­holder ac­tivist Theo Botha says the whole thing makes a laugh­ing stock of the no­tion of cor­po­rate ac­count­abil­ity. “Our law is way be­hind and doesn’t re­flect the re­al­i­ties of our so­ci­ety. In the case of Stein­hoff, it’s as­tound­ing that a 177-year-old Bri­tish case is still guid­ing our think­ing to­day,” he says.

For Botha, if the law doesn’t as­sist share­hold­ers to claim di­rectly from those who cheated them, SA can’t claim to have an in­vestor-friendly cli­mate in which ac­count­abil­ity for wrong­do­ing is pos­si­ble.

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