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Court blow for Steinhoff shareholders

Could prompt changes in law.
The judge acknowledged that a class action would secure ‘the prospect of redress’ for thousands of shareholders, but found the applicant did not have a ‘triable’ case. Image: Moneyweb

A recent court ruling has closed a door for disgruntled Steinhoff shareholders.

“If politicians want shareholders to be able to hold directors to account they will have to change the law,” said one legal expert in response to last week’s decision by the South Gauteng High Court in a Steinhoff-related matter.

The court’s decision prevents a Steinhoff shareholder from launching a class action intended to get compensation for the losses suffered by thousands of individual investors as a result of the R185 billion collapse in value of the group’s shares in late 2017 and early 2018.

The decision means that the first shareholder class action to apply for certification before a South African court has come to an abrupt, and possibly permanent, end.

The court’s ruling is being hailed as a victory by the 42 respondents – including Steinhoff, its directors, auditors and financial advisors – but is likely to incur the wrath of parliamentarians who have been tracking Steinhoff-related developments since early 2018.

Widespread impact

In an unprecedented move, reflecting the widespread impact of the collapse in the Steinhoff share price, representatives from the company as well as a number of regulators were called before parliament in January 2018 to explain the events behind the collapse. The same parties have been called back to provide updates on a regular basis to parliamentarians, who have exhibited increasing signs of frustration at the apparent lack of accountability at senior corporate level.

On December 5, 2017, Steinhoff issued a press release informing shareholders that information had come to light concerning “accounting irregularities” and also that CEO Markus Jooste had resigned, and that publication of the 2017 results was being postponed indefinitely. Over the next few weeks the share price plummeted from over R50 to around R2.

Read: Jooste profited from Steinhoff land deal in 2007, filings show

Retired pensioner Dorethea de Bruyn, who bought Steinhoff shares for R80 000 between 2013 and 2016, was hoping the court would grant her the authority to represent thousands of individual Steinhoff shareholders in a class action case against the parties alleged to have contributed to the ‘accounting irregularities’.

Read: Steinhoff’s former CEO rebuffs demand for return of R850m in pay

De Bruyn’s lawyers, who are being financed by parties who will be paid a percentage of any funds recovered, opted to use Section 218(2) and Section 20(6) of the Companies Act. The former section reads: “Any person who contravenes any provision of this act is liable to any other person for any loss or damage suffered by that person as a result of that contravention.”

Section 20(6) also encourages the view that individual shareholders have claims against directors.

It reads: “Each shareholder of a company has a claim for damages against any person who intentionally, fraudulently or due to gross negligence causes the company to do anything inconsistent with this act.”

Ruling trumps arguments

Sadly for De Bruyn the court found that a ruling in a 177-year old English case trumped her legal arguments.

“That shareholders should seek redress, given the scale of their losses, is unsurprising,” said Judge David Unterhalter in the South Gauteng High Court last week.

“That this is sought to be done by way of a class action entails some novelty.

“The premise of the application for certification is that many retail investors, who have suffered losses important to them, will not be able to bring their cases to court, if these claims are brought by each shareholder. Like Ms De Bruyn, their claims are too modest to justify the cost of complex litigation.

“A class action, however, would secure access to the courts and the prospect of redress for thousands of individual shareholders who lack the resources of institutional investors,” said Unterhalter on page six of his 100-page ruling.

Ninety three pages later, the judge confirms De Bruyn does not have a ‘triable’ case, which is why he could not grant the necessary certification.

The rule that dictated that De Bruyn’s case was not ‘triable’ was set all the way back in England in 1843 in the Foss v Harbottle matter. The essence of that ruling was that the shareholders suffered losses because the company was wronged by its directors, therefore it was only the company that was able to sue the directors.

It is explained in Henochsberg on the Companies Act 71 of 2008 that the Foss v Harbottle rule is the consequence of the fact that the corporation is a separate legal entity; other consequences are limited liability and limited rights: “The company is liable for its contracts and torts, the shareholder has no such liability,” states Henochsberg.

Expectations of the law

“I am aware that this conclusion [not to certify De Bruyn’s application] will disappoint the expectations of Steinhoff shareholders that the law must be able to compensate them for losses,” said Unterhalter, explaining that the action relied upon by De Bruyn’s lawyers – largely Section 218(2) and Section 20(6) of the Companies Act – doesn’t allow for such compensation.

But in what may be an attempt to encourage further action by De Bruyn or other frustrated shareholders, Unterhalter suggests there is still hope.

“This does not mean the shareholders are without remedy. It is for the Steinhoff companies to hold the Steinhoff directors and Deloitte liable for any breach of duty to the companies that caused loss. If the Steinhoff companies will not do so, the Companies Act makes generous provision in S.165 for shareholders to require the Steinhoff companies to commence legal proceedings,” said Unterhalter.

That so-called ‘generous provision’ has only been tested once. In United Manganese vs Mbethe, the aggrieved shareholders lost on a technicality in the Supreme Court of Appeal.

Read: The winners in the Steinhoff mess

An additional discouragement for shareholders tempted to pursue a Section 165 derivative action is that, if successful, any compensation is paid to the company. This is of little use to many of Steinhoff shareholders who dumped their shares in the aftermath of the December 2017 meltdown.

Furthermore, to launch a class action based on Section 165 shareholders will have to persuade a court that the company is not already taking the necessary action against the directors.

Meanwhile, parliamentarians may want someone to explain why Section 20 of the Companies Act does not allow shareholders to make claims against directors; and if that is always in the best interests of corporate accountability.

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COMMENTS   18

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Amazing to lay folk like me. Justice needs to be seen to be done. As far as I know Jooste is still alive, overweight and well in Hermanus. He too must be astounded at this development. It seems if you steal enough you get off without jail time. Curfew breakers who got a R5000 fine have been penalized more than Steinhoff directors who knowingly perpetrated fraud.

Why this doesn’t apply to Christo Wiese and old TT owner (who were not just share holders but also involved in the management of the company) !!!

If I buy a racehorse, and after the first race it becomes clear that the guy sold me a donkey, then it is tantamount to fraud and I have the right to demand my money back. Unless I bought the racehorse “voetstoots”.

Marcus Jooste did not only defraud the company, but he also defrauded shareholders directly. He signed documents that falsely represented the facts. He misstated the situation for personal gain. The financial statements are issued for use by creditors, clients, suppliers and investors. When the CEO issues documents that were intentionally falsified by him with the aim to defraud these parties, then he should be held liable in his personal capacity. He stole from the company directly, but he also stole from shareholders indirectly, and he would have been aware of this fact.

I am unable to see the bigger picture here. That is why I am not a judge, and why a judge comes to a different conclusion.

The people that bought shares , did so to make money. Unfortunately there is a risk involved here.

If I use your horse analogy. The risk is mitigated by “experts” that inspect the horse and these experts give you the assurance that in all material aspects you are in fact buying a horse.

Markus must go to jail, there is no doubt. The shareholders should go after Deloitte , the fraud was way to pervasive to have been overlooked.

The whole audit profession needs a massive overhaul. The conflict of interest is massive , at the very least audit partners should rotate annually

I consider that the audit profession, as a whole, has aided and abetted the criminals here, are therefore complicit and thus have also committed a crime.

Next to be considered is the judiciary.

I don’t see this necessary as if a blow to shareholders. This ruling will most probably stop more “shareholder litigations” right in their tracks.

As Steinhoff’s current management has shown, it is determined to get the company back on track again. More litigations will make the task a lot more difficult.

The Company’s Act as far as I know, allows the Directors of a Company to be held individually accountable for losses, due to misstatement of Financials and/or managing the Company in a reckless and negligent manner.

Well it appears that Jooste & co did indeed misstate the financials and did indeed manage the company in a reckless and negligent manner.

This makes no sense. Yes, the Company is a separate legal entity but it cannot act other than through actions and decisions by its board. So what is supposed to happen? The shareholders must replace the board in order to have the company sue the old board and service providers?

As to the politicians, if they want to see somebody suffer they should get law enforcement to do its job

Fraud and theft are criminal acts.

These were clearly malicious directors. All direct and indirect gains by the directors and board members during the time that the company was being run fraudulently should be expropriated to be returned to the company.

That will make a significant difference to the financial situation.

However, risk is part of investing. In effect, as a shareholder you own part of a company and at least to some degree, you are part of that company.

I wonder how that pans out for Christo Wiese who wanted to do the same for his preference shares.

At the end of the day, this sort of action should not be neccessary (and should not be allowed) if the mechanisms in place (including the justice system) are functioning. Directors should go to jail, ill-gotten gains should be expropriated, and creditors and shareholders should be compensated.

Sadly, this is South Africa.

I can see the courts reasoning for their ruling as shareholder meeting are there to appoint directors and as such remove directors in an orderly way and the company stands as an entity served by the directors. However when there is malfeasance by the siting directors and they remain directors then the company can’t litigate against them as the directors would block such a move.
Makes one question the real value of supposedly independent directors and what role they should be playing. Maybe what we need in this country is a Ralph Nader of sorts

Relief should have been requested based on Sec 163 of the Companies Act. Being withholding of information and oppressive behavior versus Minority Shareholders by the companies directors. Sec 163 gives Court the power the right to compensate losses by the shareholders. It was clear that fake Financial Statements were presented for years to the minority shareholders and as such were fraudulent mislead by the Steinhof directors and auditors.

Perhaps this summary is too short for the logic of the ruling to emerge.

If Section 20(6) as quoted doesn’t apply in this instance (and presumably a statutory provision overrides prior case law) then when would it apply ? It seems quite explicit, even out of context. Or is the problem that the wording ‘each shareholder’ precludes the possibility of a class action ?

I would think derivative action is fraught with difficulty because the losses to the company and losses to the shareholders are different things.

Is the full judgment available online somewhere ?

So the current directors were by and large also mebers of management when the creative bookkeeping happened. The shareholders (and as the article points out ex-shareholders probably have no rights) are now reliant on this crowd to sue the other directors. This does not sound like a recipe for success – the much lauded Companies Act may therefore be scrapped as it offers no shareholder protection or recourse.

The Foss v Harbottle case has been used numerous times to prevent shareholders suing a directors. The rule is deemed applicable as the loss is suffered by the company and not the shareholders.

However, are exceptions to this rule and a shareholder can sue directors via a derivative action. But exceptions need to be argued according to the cause of loss being owing to either of illegality, lack of authority of the directors, fraud or abuse of power by the directors. Claims based on anything else will most likely fail.

Nevertheless exceptions are very carefully considered and rejected (See Itzikowitz v Absa Bank Ltd (20729/2014) [2016] ZASCA 43 (31 March 2016) ) or allowed (Gihwala and Others v Grancy Property Ltd and Others (20760/14) [2016] ZASCA 35 (24 March 2016)).

I don’t see why the shareholders cannot sue the directors of Steinhoff should fraud be proved. Such an exception is due to the Courts being (or supposed to be) completely intolerant of fraudulent activity by anyone.

The judiciary has decided and ruled that crime pays.
And,legally, will always get away with it.

Greetings, I will like to appeal an editorial mismanagement off funds, via cross fire events, PS.

Quantitative easy ECB money distribution have rules like in movie John wick. It have to. This money rolling around uncontrolled brings old fashion disasters. Steinhoff did just that. The European central bank did excommunicate Jooste. On rules he have to follow the rest of his life. As a warning to others, do not even think about it.

End of comments.

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