PROTECTING THE CULPRITS
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.