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