When you have been wronged, as shareholders were when the Steinhoff share price crashed, “we will sue” is easier said than done. The rash of adverts offering class action lawsuits that followed the crash may have offered a false promise.
The concept of a class action lawsuit – a relatively new type of litigation in SA law – is that it will enable the ordinary person who does not have the funds to mount a costly lawsuit to seek some form of compensation for their loss.
Class actions explained
Bowmans partner Adam Anderson explained that class action proceedings are governed by common law. These take place in a two-stage procedure: the certification application, in which the court must grant permission for the matter to proceed, and the trial itself.
Professor Theo Broodryk, associate professor and head of the Stellenbosch University Law Clinic, commented that in South African cases where certification was refused, the primary reason was that the applicants failed to satisfy the court that there were triable issues. “Nevertheless, just because a class action was found to be inappropriate in the circumstances, it does not mean that other civil procedural mechanisms cannot be used to recover the losses allegedly occasioned as a result of the unlawful conduct of the directors and the other class action respondents.”
The judgments in Children’s Resource Centre Trust v Pioneer Food (Children’s Resources) and Mukaddam versus Pioneer Foods (Mukaddam) set out factors to be considered – including that the damages claimed flow from the cause of action, and are ascertainable and determinable – as well as how to allocate the damages to the various classes.
Litigation for whose benefit?
In Children’s Resources the court noted that “litigation should be conducted in the interests of class members”, and that “contingency arrangements of lawyers might compromise the interests of the class members”.
The Supreme Court of Appeal, in Price Waterhouse Coopers Inc and others versus National Potato Co-operative Limited, warned “that third party funders, incentivised by profit, should not be able to take over litigation for their own benefit”.
Dorethea de Bruyn, who is a retired pensioner, represented three different classes of Steinhoff shareholders. Class members should have clearly defined objective criteria, and the initial criticisms of the class definitions by the respondents had to be resolved.
There were three different classes of respondents. These included the Steinhoff companies, the auditors (Deloitte & Touche) and various directors of Steinhoff (with some exclusions). A bit of a smorgasbord.
All in all, representing respondents were some 21 firms of attorneys and 17 advocates (including nine senior counsel).
This was going to be an extremely expensive matter.
The court had to rule on a number of issues. These included the adequacy of the class definitions, whether De Bruyn was a suitable representative of the class members, the funding of the litigation, and whether this is a triable matter.
The court found that this was not a triable matter.
Funding arrangements (be aware!)
The funders were DRRT Limited (an international law firm and litigation funder) and Therium (an international company that provides litigation funding).
Initially, the applicants’ attorneys, LHL Attorneys, were going to participate in the proceeds of the class action. This was in contravention of the Contingency Fees Act, which stipulates that the success fee of a legal practitioner may not exceed 100% of the practitioner’s normal fee. LHL had to waive their participation.
Details of the funding arrangements were only revealed when ordered by Judge David Unterhalter to do so.
LHL put down its failure to disclose the funding arrangements as an “error” attributable to the novelty of class action in South Africa.
The company respondents did not accept the conduct of LHL to be “benign error”, and said the failure to disclose the funding arrangements was “at best inept and at worst deliberate concealment”.
Judge Unterhalter noted that LHL’s conduct gave “reasons for concern”, and after considering the implications of a possible replacement, decided that the court would appoint a supervising attorney “who will be required to ensure that LHL at all times acts independently”.
The final features of the funding arrangement include:
- DRRT undertook to pay the litigation expenses and adverse cost orders;
- DRRT assigned part of its funding obligations to Therium;
- The funders would seek 25% of the class wide recovery, and would pay the fees of LHL; and
- DRRT may cease to fund the litigation if it believed there were no reasonable prospects of success, but would pay all fees up to its point of withdrawal.
The respondents also raised a number of concerns as to whether any adverse cost order would be adequately funded, but the court found the funding arrangements overall to be fair and reasonable.
The appropriateness of the class action procedure
Anderson remarked that in the De Bruyn matter, the court looked at the appropriateness of the class action procedure, and found that other remedies are available to shareholders who wish to hold directors liable for alleged breaches of their fiduciary duties.
Hence “the class action procedure was not the most appropriate means through which the class of persons in question could determine their claim”.
“The court therefore refused the claimants permission to institute class action proceedings against Steinhoff,” said Anderson.
Weighing up risk and reward with interests of class members
Without an adequate funding arrangement being in place, it is unlikely that such a class action can proceed. Third party funding is a commercial proposition, and carries risk. There is a trade-off between the interests of the funders and the class members. Class members can however opt out.
The court held that the compensation due to the funders should be fair and reasonable. However, the funding arrangements should not impact nor influence the independence of the legal representatives, who should act in the best interests of their clients at all times. Nor should the funding arrangements impact the ability of the class representative in carrying out her duties.
Before jumping into a class action lawsuit, the public should be cognisant of what is driving the class action, and whether the interests of the funders trump the interest of the class members. Most importantly, the person agreeing to join a class action should understand the fine details of the funding arrangements, and be certain that they will not incur exorbitant costs.