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[2020] ZAGPJHC 145
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De Bruyn v Steinhoff International Holdings N.V. and Others (29290/2018) [2020] ZAGPJHC 145; 2022 (1) SA 442 (GJ) (26 June 2020)
REPUBLIC OF SOUTH AFRICA
IN THE HIGH COURT OF
SOUTH AFRICA
GAUTENG
LOCAL DIVISION, JOHANNESBURG
CASE NUMBER:29290/2018
In
the matter between:
DORETHEA
DE
BRUYN APPLICANT
and
STEINHOFF
INTERNATIONAL HOLDINGS N.V. 1
st
RESPONDENT
(CCI
Registration number: 63570173)
(CIPC
Registration number: 2015/285685/10)
STEINHOFF
INTERNATIONAL 2
nd
RESPONDENT
HOLDINGS
(PROPRIETARY) LIMITED
(CIPC
Registration number: 1998/003951/07)
DELOITTE
&
TOUCHE 3
rd
RESPONDENT
(IRBA
practice number: 902276
MARTHINUS
THEUNIS
LATEGAN 4
th
RESPONDENT
HEATHER
JOAN
SONN 5
th
RESPONDENT
STEFANES
FRANCOIS
BOOYSEN 6
th
RESPONDENT
DEENADAYALEN
KONAR 7
th
RESPONDENT
DANIËL
MAREE VAN DER
MERWE 8
th
RESPONDENT
DAVID
CHARLES
BRINK 9
th
RESPONDENT
PAUL
DENIS JULIA VANDEN
BOSCH 10
th
RESPONDENT
CHRISTOFFEL
HENDRIK
WIESE 11
th
RESPONDENT
JOHANNES
FREDERICUS
MOUTON 12
th
RESPONDENT
ANDRIES
BENJAMIN LA
GRANGE 13
th
RESPONDENT
MARKUS
JOHANNES
JOOSTE 14
th
RESPONDENT
STEPHANUS
JOHANNES GROBLER 15
th
RESPONDENT
CLAAS
EDMUND
DAUN 16
th
RESPONDENT
BRUNO
EWALD
STEINHOFF 17
th
RESPONDENT
ANGELA
KRÜGER-STEINHOFF 18
th
RESPONDENT
THIERRY
LOUIS JOSEPH
GUIBERT 19
th
RESPONDENT
JOHAN
VAN
ZYL 20
th
RESPONDENT
JAYENDRA
NAIDOO 21
st
RESPONDENT
JACOB
DANIEL
WIESE 22
nd
RESPONDENT
ROBERT
HARMZEN 23
rd
RESPONDENT
MARIZA
NEL 24
th
RESPONDENT
FREDERIK
JOHANNES
NEL 25
th
RESPONDENT
DIRK
EMIL
ACKERMAN 26
th
RESPONDENT
FRANKLIN
ABRAHAM
SONN 27
th
RESPONDENT
JOHANNES
HENOCH NEETHLING VAN DER MERWE 28
th
RESPONDENT
JOHANNES
NICOLAAS STEPHANUS DU PLESSIS 29
th
RESPONDENT
YOLANDA
ZOLEKA
CUBA 30
th
RESPONDENT
KAREL
JOHAN
GROVE 31st
RESPONDENT
HENDRIK
JOHAN KAREL
FERREIRA 32
nd
RESPONDENT
NADINE
BIRD 33
rd
RESPONDENT
FRANS
JOHANNES
GELDENHUYS 34
th
RESPONDENT
RODNEY
HOWARD
WALKER 35
th
RESPONDENT
IAN
MICHAEL
TOPPING 36
th
RESPONDENT
STANDARD
CHARTERED BANK
LLC 37
th
RESPONDENT
(CIPC
Registration number: 2003/020177/10)
RÖDL
& PARTNER
GMBH 38
th
RESPONDENT
WIRTSCHAFTSPRÜFUNGSGESELLSCHAFT
STEUERBERATUNGSGESELLSCHAFT
(Registration
number: 201167i)
COMMERZBANK
AKTIENGESELLSCHAFT 39
th
RESPONDENT
(Registration
number: HRB 32000)
PSG
CAPITAL (PTY)
LTD 40
th
RESPONDENT
(CIPC
Registration number: 2006/015817/07)
ABSA
BANK
LIMITED 41
st
RESPONDENT
(CIPC
Registration number: 1986/004794/06)
STEINHOFF
SECRETARIAL SERVICES 42
nd
RESPONDENT
PROPRIETARY
LIMITED
(CIPC
Registration number: 1992/004646/07)
J
U D G M E N T
UNTERHALTER J
INTRODUCTION
1.
The Applicant, Ms De Bruyn, is a retired pensioner. In the period
2013 – 2016, Ms De Bruyn purchased shares in two companies:
Steinhoff International Holdings ( Pty) Ltd (“SIHL”), the
Second Respondent, and Steinhoff International Holdings NV
(
“Steinhoff NV” ), the First Respondent. The shares
purchased by Ms De Bruyn were listed on the Johannesburg Stock
Exchange. Her investment in these companies amounted to some R 80
000.
2.
On 5 December 2017, Steinhoff NV issued a press release. The company
disclosed that information had come to light concerning
accounting
irregularities. This required an independent investigation by
external auditors, and that Price Waterhouse Coopers (“PWC”)
had been approached by the company to undertake the investigation. It
was also announced that the CEO of the company, Markus Jooste,
was
resigning and that Steinhoff NV was postponing the publication of its
2017 results until the completion of the external audit.
A SENS
announcement, to like effect, was issued on 6 December 2017.
3.
On 5 December 2017, the share price of Steinhoff NV shares, listed on
the Johannesburg Stock Exchange (“JSE”) and
the Frankfurt
Stock Exchange (“FSE”) suffered a dramatic fall, from
which the shares have not recovered. The Financial
Times of 6
December 2017 reported a 62% fall in the price of Steinhoff NV
shares. Ms De Bruyn and many other shareholders lost
the greater part
of their investment in Steinhoff NV. The scale of these losses is
considerable.
4.
Criminal and regulatory investigations have commenced in South Africa
and elsewhere. Parliamentary scrutiny has followed. And
law suits
have been instituted, both in this jurisdiction and abroad.
5.
Ms De Bruyn seeks authorization in the notice of motion to represent
three classes of shareholders in a class action. This application
is
the first shareholder class action that is brought for certification
before the South African courts. That shareholders should
seek
redress, given the scale of their losses, is unsurprising. 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.
6.
The application was initially formulated on the basis of three
proposed classes described as follows. The first class (JSE 1
Class)
comprises persons who purchased or held shares in SIHL, registered on
the JSE, as at 26 June 2013 and exchanged those shares
on 7 December
2015 under the terms of a scheme of arrangement for shares that came
to be listed as Steinhoff NV shares, and continue
to hold these
shares or sold them on or after 5 December 2017. The second class
(JSE 2 Class) comprises persons who purchased shares
in Steinhoff NV,
registered on the JSE, between 7 December 2015 and 5 December 2017,
and continue to hold those shares or sold
them on or after 5 December
2017. The third class (the FSE class) comprises persons who purchased
shares in Steinhoff NV, registered
on the FSE, between 7 December
2015 and 5 December 2017, and continue to hold these shares or sold
them on or after 5 December
2017. As I shall explain, these classes
exclude certain persons.
7.
The class action is to be brought against three classes of
defendants: the Steinhoff holding companies ( SIHL and Steinhoff NV
)
and Steinhoff Secretarial Services ( Pty ) Ltd ( the 42nd Respondent
); the auditors of the Steinhoff companies, Deloitte and
Touche ( the
third Respondent ( “ Deloitte “) ) and various directors
of Steinhoff.
8.
Of the respondents cited in this application, the Applicant has
withdrawn against 21 respondents, principally respondents domiciled
or resident abroad. Ten respondents abide the decision of this court.
Those respondents who oppose the application are as follows:
the
Steinhoff companies ( 1st, 2nd and 42nd respondents “ the
company respondents” ), Deloitte ( the 3rd respondent
),
certain of the directors of the Steinhoff companies ( 8th, 11th ,15th
and 22nd respondents collectively “ the opposing
directors “)
. The 5th respondent opposed on a narrow basis that has been
resolved.
9.
The opposing respondents oppose certification on various grounds,
some common and others distinctive. I propose therefore to
consider
the case for and against certification under the organizing
considerations laid down in the leading cases that have recognized
class actions.
10.
I commence with a brief recitation of these now well-established
considerations and a somewhat more detailed treatment of the
standard
that is of application in considering whether the class action raises
a triable issue.
THE
CERTIFICATION OF A CLASS ACTION
11.
In
Children’s
Resources
[1]
,
the
Supreme Court of Appeal set out the factors that should be weighed in
deciding whether to certify a class action. These factors
are as
follows: the existence of a class identifiable by reference to
objective criteria; the proposed class representative is
suitable to
conduct the action and represent the class; a cause of action raising
a triable issue; the right to relief requires
the determination of
issues of fact or law, or both, common to all members of the class;
the relief sought or damages claimed flow
from the cause of action
and are ascertainable and capable of determination; where damages are
claimed, there is a procedure by
which to allocate the damages to
members of the class given the composition of the class and the
nature of the proposed action;
and that a class action is the most
appropriate means by which the claims of the class may be determined.
12.
Children’s
Resources
recognized
that these factors may not be exhaustive, but required that a court
should be satisfied that the factors are present
before granting
certification.
[2]
In
Mukaddam
[3]
,
the
Constitutional Court clarified the position. The factors referenced
by the Supreme Court of Appeal are not prerequisites for
the grant of
certification. Rather, they are considerations to be weighed under
the overarching principle of what is required by
the interests of
justice.
13.
The parties are not in agreement as to how the courts should consider
whether the proposed class action gives rise to triable
issues.
Counsel for Ms De Bruyn understand
Children’s Resources
to
propose a standard that the class action warrants certification if it
is not a hopeless case. The opposing respondents interpret
Children’s
Resources
to adhere to a more rigorous assessment. In essence, if
the cause of action upon which the class action relies cannot survive
an
exception, there is no triable issue. And if the evidence
available and potentially available will not make out a
prima
facie
case, then there are no triable issues of fact.
14.
The
treatment in
Children’s
Trust
[4]
as to
whether a cause of action raises a triable issue bears out the
interpretation of the opposing respondents. If a cause of action
is
not supportable as a matter of law, there is no case to try. If there
is no
prima
facie
case,
then there is insufficient evidence which, even if accepted, will
establish the cause of action.
15.
Two further
issues require clarification. First, if the cause of action raises a
novel question of law, is certification warranted
because the issue
is arguable? Counsel for Ms De Bruyn submit that this is the correct
approach, and sought support from the judgment
of Froneman J (
Skweyiya J concurring) in
Mukaddam
[5]
.
16.
A novel proposition of law may be arguable, but if a court is asked
to determine whether a cause of action is legally tenable,
this is
not a matter of degree. The cause of action is either good in law or
it is not. Questions of law may be hard to decide,
but they
ultimately admit of a binary determination: the law either recognizes
the cause of action or it does not.
17.
The issue is then whether a class action predicated upon a novel
question of law should be assessed under the standard of whether
the
cause of action is legally tenable or whether it is merely arguable.
The less rigorous standard would leave it to the trial
court to
determine the exception, the more rigorous standard requires the
certification court to decide the question of law as
it would on
exception.
18.
In my view, whether a class action raises a triable issue must be
considered by the certification court by asking whether the
cause of
action proposed is tenable in law. The trial court is in no better
position to decide this issue. If there is a question
of law to be
decided, the sooner it is decided the better. There is little to be
gained by triggering the procedural machinery
of a class action, only
to have a trial court pronounce on the matter and bring the process
to a halt, upon a successful exception
being taken.
19.
Nor do I
consider that this position is discordant with what was decided in
Mukaddam.
As the
court in
Children’s
Resources
[6]
emphasized,
there are certain questions of law that can be answered on the
pleadings as they stand. In certification proceedings
that may also
be so, assisted by the evidence that an applicant for certification
places before the court or indicates will become
available at trial.
Assuming then that on the case pleaded and, to the extent it is
helpful, on the evidence adduced or indicated,
there are questions of
law that can be decided by the certification court, there is no
reason why the certification court should
not do so. That in turn
will be important to decide whether there are triable issues that
warrant a class action going forward.
20.
But it may be that the issue of law is not so readily capable of
determination. That may be so because the issues of law and
fact are
not readily prised apart or because the question of law would benefit
from a more comprehensive exploration of evidence
that is best left
for the trial court.
21.
These matters are well understood in exception proceedings and they
are no less of application for the purpose of considering
whether
there are triable issues in an application for certification. When a
court is asked to consider whether there are triable
issues in a
certification application, and a novel question of law arises, the
court should decide the question of law, if it can
do so. A
determination by the certification court of the question of law will
then inform its consideration of whether there are
triable issues. If
the certification court cannot determine the question of law because
it is best left to the trial court to do
so, then that conclusion
will also inform the consideration as to whether there are triable
issues. It is in this situation that
it may be said that if the point
of law is arguable and is best determined at trial with the benefit
of evidence heard by the trial
court, then that will weigh in favour
of the conclusion that there are triable issues for the purposes of
assessing certification.
22.
So understood, the position is harmonious with the observations made
by Froneman J in
Mukaddam.
In that case, questions arose
concerning damages in an action arising from a proven infringement of
the Competition Act - novel
territory where difficult issues of fact
and law were considered best left to the trial. In such a case, it
may be concluded that
there are triable issues because there is an
arguable question of law that is best determined at trial. But that
is not always
the case. There may be a question of law that the
certification court is as well placed to decide as would be the trial
court.
In such a case, the certification court should decide the
question of law and its answer may be decisive in determining whether
there are triable issues.
23.
There remains a further point that warrants clarification.
Mukaddam
has made it plain, as indicated, that the factors relevant to the
consideration of a certification application are not requirements
that must all be satisfied before certification may be granted. Put
simply, the factors are considerations that must be weighed
together
so as to make a final judgment, against the overarching standard of
the interests of justice, as to whether certification
should be
granted, and if so, on what terms.
24.
If, then, a class action is predicated upon a cause of action that is
not tenable in law, and there is consequently not a triable
issue to
take forward to trial, is the class action nevertheless capable of
certification?
Mukaddam
allows that it could be. But that
would be so in unusual circumstances, not altogether easy to foresee.
If the certification court
can and has decided a question of law and
concluded that there is no cause of action that supports the class
action, then there
is no triable issue. If the point of law is novel
and has not been authoritatively determined by our highest courts;
that may warrant
the attention of these courts on appeal from the
certification court. But from the vantage point of the certification
court, if
the point of law is dispositive of the applicant’s
cause of action, then there is no triable issue to go forward. And
that
would bear much weight in determining the ultimate question,
because, if the certification court decides there is no cause of
action,
then there is nothing for the trial court to determine. In
such circumstances, whatever other virtues the certification
application
may have, it is difficult to see what would justify
certification.
25.
This analysis simply emphasizes that in a particular case certain
factors relevant to certification may weigh in different ways.
Certain factors may weigh with the certification court to incline the
decision one way or another. Other factors may be so weighty
that the
scales tip decisively. Every factor is to be weighed, and none
displaces the ultimate exercise of weighing all in the
balance to
determine where the interests of justice lie. But that does not mean
that a factor in a particular case may weigh so
heavily that it
points clearly to what the interests of justice require.
26.
With these observations as to the framework by reference to which a
certification application is to be considered, I turn to
the first
consideration: class definition.
CLASS
DEFINITION
27.
Class definition provides the foundation for a class action. As
Children’s Resources
makes plain, the class or classes
should be defined with sufficient precision to ensure that membership
of the class can be determined
by reference to objective criteria.
There are good reasons for this. The rights of members of the class
are affected by certification.
They are bound by the outcome of the
class action if they have not chosen to opt out or, in some species
of class action, they
have elected to opt in. The members of the
class must thus be determined or determinable. The membership of the
class should have
an identity of interest. Furthermore, the
definition of the class will be relevant to other considerations that
the certification
court is required to consider. Thus, by way of
example, the heterogeneity of a class may impact upon the common
issues capable
of determination in a class action, the suitability of
a class representative and the complexity of the proposed litigation.
So
too, a class that is under-inclusive may lack utility, because the
joinder of individual plaintiffs in a single action may be quite
as
effective as the certification of a class action. In other cases, a
class may over-extensive and lack coherence which gives
rise to other
infirmities.
28.
As originally conceived, the application proposed three classes,
referenced above, and styled JSE 1 class, JSE 2 Class and the
FSE
class. The definition of these classes excluded certain persons. The
excluded persons in each class are similarly specified.
They are the
past or present subsidiaries of Steinhoff NV, SIHL, and Steinhoff
Africa Retail Limited and their past or present
directors, officers,
affiliates, legal representatives, heirs, predecessors, assigns; and
all members of the families of individual
defendants; and any entity
in which any of the individual defendants has or had a controlling
interest. I shall refer to these
persons as “the excluded
persons”.
29.
Since launching the application, and responsive to criticisms
levelled by the opposing respondents, the class definitions proposed
by the applicant have undergone some change. The most recent
iteration, proposed by way of a draft order filed after the hearing,
reflects the following changes. First, classes JSE 1, JSE 2 and the
FSE Class are limited to persons ordinarily resident or domiciled
in
South Africa. Second, a fourth class is proposed and named “the
Foreign Shareholders Class “. This fourth class
comprises
persons who are not ordinarily resident or domiciled in South Africa,
but otherwise qualify for membership of JSE 1 Class,
JSE 2 Class, and
the FSE Class and expressly opt in to the class action. Third, the
definition of excluded persons is expanded
to include persons who
have commenced litigation against any of the respondents in South
Africa or any jurisdiction outside of
South Africa.
30.
Ms De Bruyn submits that these class definitions permit the
membership of the classes to be determined by recourse to objective
criteria. The shares in issue, when the shares were purchased, where
they were registered and when they were sold (if no longer
held) are
all matters of fact that define whether a person is a member of a
class. So too, the excluded persons can be identified
on an objective
basis. It is also said that the classes meet the consideration of
numerosity. There are a large number of shareholders
who would
constitute the members of the classes, as a large number of shares
form part of the public float of Steinhoff shares.
That is to say,
the shares were widely held and traded.
31.
The opposing respondents, and in particular the company respondents
and Deloitte, raise difficulties with the class definitions
as
originally proposed. These difficulties may be summarized as follows.
First, the classes are overbroad because they include
persons who are
foreigners. Foreigners who are members of the classes are not
subject, as plaintiffs, to the jurisdiction of this
court and would
be free to engage in multi-jurisdictional litigation, with the risk
of jurisdictional arbitrage. Second, the classes
do not exclude
shareholders who have already instituted proceedings, whether in
South Africa or abroad, to claim the very losses
that are the subject
of the proposed class action. Such shareholders should be excluded.
Third, the class definitions are said
to be imprecise and
tautologous. Finally, the definitions are under inclusive because
categories of “insiders” are
treated as excluded persons
when they should not be.
32.
The further draft orders proposed by Ms De Bruyn have sought to deal
with these difficulties.
33.
The complaint of overbreadth proceeds from the observation that class
members are bound by the outcome of the litigation. However,
while
certification binds
incolae
, it does not bind
peregrini
who
are not, absent submission, subject to the jurisdiction of this
court. This would permit
peregrini
who are members of the
classes in the South African litigation to pursue litigation in
multiple jurisdictions. An adverse outcome
before the courts in South
Africa would not be binding upon
peregrini
who would be at
liberty to seek a different outcome in other jurisdictions. This is
unfair, wasteful and potentially oppressive
of respondents who would
be required to defend the same action in multiple jurisdictions.
34.
Although these matters were much debated before me, the issue has
been simplified. Ms De Bruyn’s counsel have proposed
revised
class definitions. Membership of JSE 1 Class, JSE 2 Class and the FSE
Class requires that persons are ordinarily resident
or domiciled in
South Africa. The Foreign Shareholders’ Class requires persons
who are not domiciled or ordinarily domiciled
in South Africa to opt
in to be counted as members of this class. These revised definitions
are intended to cure the jurisdictional
difficulties raised by the
respondents.
35.
The
principle of our law is that a plaintiff always submits to the
jurisdiction in which she brings her action.
[7]
It follows that if
peregrini
opt in
to the Foreign Shareholders’ Class, they intend to bring the
class action, submit to the jurisdiction of this court
and will be
bound by the outcome before this court. This cures the jurisdictional
complaint in respect of the Foreign Shareholders’
class.
36.
Plainly, the same result was intended by the modifications of the
other three classes. The intention is to ensure that the members
of
these classes are
incolae
of the court and bound by the
outcome of the litigation before this court. In an action sounding in
money, a court has jurisdiction
over a defendant who is domiciled or
resident in the area over which the court exercises jurisdiction.
This gives expression to
the principle of effectiveness that lies at
the foundation of the law of jurisdiction.
37.
The
modification of the three classes as reflected in earlier iterations
of the draft order was both too narrow and too wide to
achieve its
purpose. Too wide because the prior modifications referred to South
African citizens. Nationality is not consistent
with the principle of
effectiveness. A person may be a citizen of South Africa but have no
connection to the country. Accordingly,
nationality, without more,
does not confer jurisdiction on this court.
[8]
Domicile, however, within the area over which the court exercises
jurisdiction, is consistent with the principle of effectiveness.
But
so too is residence. These propositions, developed in oral argument,
have been cured in the final draft order proposed by Ms
De Bruyn.
38.
The Applicant seeks to ensure that the members of a class are bound
by the outcome of the litigation before this court. This
requires
either submission or some other basis upon which this court enjoys
jurisdiction under the principle of effectiveness.
The principle of
effectiveness is satisfied where class members are domiciled or
resident within the area over which this court
exercises
jurisdiction, but it is not satisfied on grounds of South African
nationality alone.
39.
Counsel for the Applicant indicated that further modifications would
be made to the definition of the classes to bring them
into
conformity with the principle of effectiveness and thereby ensure
that the members of the classes proposed by the Applicant
will be
bound by the outcome of the litigation. This has been done.
40.
I observe that this conformity with the principle of effectiveness
will give rise to choice of law questions should foreign
shareholders
who bought their shares on the FSE opt to litigate in this
jurisdiction. Their cause of action may be governed by
German law and
this complication may give rise to fragmentation of the class action.
I will revert to this aspect of the matter
when considering
commonality.
41.
As to the other difficulties raised by the Respondents, the company
respondents complain that the classes should exclude persons
already
litigating claims for their losses as shareholders. The Applicant has
now cured this complaint. The definition of excluded
persons has been
extended to include persons who have commenced litigation against any
of the respondents (presumably, in respect
of shareholder losses)
either in South Africa or elsewhere.
42.
Deloitte complains that the class definitions lack precision and
allow for tautology because persons who have bought shares
in
Steinhoff NV will not know if they form part of JSE 2 Class or the
FSE Class or both. This comes about because the shares are
dual
listed on the JSE and FSE. However, membership of the class is
determined by reference to where the shares are registered.
The same
share is not registered on both the JSE and the FSE. Registration
will determine membership and thus eliminate uncertainty.
43.
Deloitte also draws attention to what is said to be a problem of
under-inclusivity. Among the excluded persons are company “insiders”.
They are excluded, it is said, without adequate justification. This
difficulty is insufficiently specified. The definition of excluded
persons is intended to capture those who have held positions in the
Steinhoff group, members of their families and others with
a close
connection to the management of the Steinhoff companies. Deloitte
does not identify those excluded who should not be, why
this is so,
and where the exclusionary line should be drawn.
44.
It is possible to imagine that the exclusions may be too widely cast
in some particular cases. And certain of the exclusions
lack
precision. For example, who are the predecessors and assigns? But no
case has been made out that there is a sub-class of excluded
persons
who suffer prejudice from exclusion so as to warrant redefinition.
45.
In sum, the class definitions, as now proposed, adequately cure the
difficulties raised. The consequences of the classes so
defined for
the assessment of other considerations relevant to certification will
be treated by me in what is to follow.
SUITABILITY
46.
I turn to
the consideration of suitability. Our law recognizes, under the
guiding principle of s38(c) of the Constitution that a
person may act
as a member or in the interests of a class. This principle of
representation is not confined to cases in which the
Bill of Rights
provides the basis of a cause of action.
[9]
Three overarching issues require consideration.
47.
First, is the representative plaintiff in a position to represent the
proposed class either because she is so situated as to
typify the
class or is otherwise qualified to represent the class? Typicality
may permit of the conclusion that the representative
plaintiff has an
identity of interest with the members of the class and for this
reason may be suitable to represent the class.
But typicality does
not exhaust the reasons that may support the suitability of a class
representative. The representative plaintiff
may be in a position to
act in the interests of a class of which she is not a member.
48.
Second, as
Children’s Resources
makes plain, the
representative of the class must not have a conflict of interest with
those whom she wishes to represent.
49.
Third, the
class representative must also have the capacity to conduct the
litigation on behalf of the class. This has a number
of entailments,
also set out in
Children’s
Resources
[10]
.
Among
the relevant questions are these. Does the representative plaintiff
have the time, commitment and ability to conduct the litigation?
With
what financial means? Does the representative plaintiff have an
understanding of the case so as to instruct the lawyers who
will act
in the matter? Are there competent lawyers willing and able to
undertake the litigation? If so, what are the funding arrangements?
If by way of contingency, on what terms? What secures the
independence of the representative plaintiff and the lawyers
appointed
to the case to act in the interests of the class?
50.
Fourth, will the litigation be conducted not only in the interests of
the class, but in such a way as to avoid opportunistic
outcomes that
may work harshly upon the defendants?
51.
The opposing respondents have raised wide-ranging concerns as to the
suitability of Ms De Bruyn as a representative plaintiff,
her
attorneys of record and the funding arrangements in terms of which it
is proposed to conduct the litigation.
52.
I sound a note of caution in approaching these matters. Suitability
must be judged on the facts. Suitability matters. To bind
over a
large class of persons to the outcome of a class action pursued under
defective stewardship does not serve justice. However,
there are
aspects of suitability that necessarily require judgments of
comparison. We should all want a representative plaintiff
whose
interests chime clearly with those of the class. A representative who
has the desire, time and resources (of both insight
and finance) to
give to the litigation what is required; and a representative
plaintiff who acts independently in the best interests
of the class,
with access to lawyers of skill, dedication and repute. The real word
is however an imperfect place. Suitability
will often require a
weighing of what is possible to permit of access to the courts, as
against the hazards of what such access
may bring in its wake. The
pursuit of perfection is so often the enemy of the good.
53.
I consider
first the suitability of Ms De Bruyn as the class representative. The
class representative should have the capacity to
prosecute the class
action. This entails an ability to give instructions to the legal
representatives as to the conduct of the
litigation. This in turn
requires some knowledge of the facts. In addition, a representative
should be in a position to be able
to communicate with the members of
the classes that she represents.
[11]
54.
The company respondents submit that Ms De Bruyn does not satisfy
these criteria. She is a retired pensioner, without the knowledge
and
expertise of an investor who would be able to give instructions in
the proposed litigation. Nor is a case properly made out
as to the
composition of the classes Ms De Bruyn would seek to represent, the
numerosity of these classes, the necessity for a
class action in
respect of these classes and her suitability as their representative.
The company respondents draw attention to
the fact that Ms De Bruyn
is not a member of the FSE class. They have concerns as to whether
she would be able to act in the best
interests of the classes or
would simply be a nominal plaintiff, used by the funders to profit
from the class action.
55.
It would certainly be helpful if there were additional class
representatives who included investors of some experience and
expertise. However, the justification for the class action that is
proposed is that there are numerous retail investors who have
made
relatively modest investments in Steinhoff shares who would not be
able to litigate their claims, absent a class action. Retail
investors of this kind will often lack investment expertise. But I
should be reluctant to attribute much weight to this deficit.
The
detail of the transactions that are said to have laid the Steinhoff
companies low are clearly complex and will require expert
consideration. However, I do not see why Ms De Bruyn is not in a
position to appreciate the essential facts that make up the cause
of
action upon which she and other members of the classes will rely and
apply the common sense of an ordinary litigant. There are
cases in
which the cause of loss is outside the ordinary competence of a
litigant. The litigant will of course have to rely upon
the expertise
and independence of her legal representatives and qualified experts.
That does not mean that the position of Ms De
Bruyn, as a modest
retail investor who has suffered loss, will not allow her to identify
with investors who suffered a similar
fate. Nor is Ms De Bruyn’s
appreciation of the facts likely to be markedly different from other
retail investors. They bought
Steinhoff shares believing the
Steinhoff companies to have sound assets and earnings when, it
appears, they did not. I do not consider
Ms De Bruyn by reason of her
want of expertise and limited appreciation of the facts to be ill
suited as a class representative.
56.
Ms De Bruyn
is not a member of the FSE class. The company respondents have
referred me to the decision in
Falcon
[12]
,
a decision of the US Supreme Court, that requires a class
representative to be a member of the class. That is not our law. It
suffices, as
Children’s
Resources
has
explained, that the class representative can act in the interests of
the class.
57.
The company respondents doubt that Ms De Bruyn can do so because she
lacks knowledge of the members of the FSE class and their
interests,
not least because of the extra-territorial reach of this class.
Indeed, they say, this is simply an incident of a more
general
infirmity of the application – that the composition of the
classes, their numerosity and the need for bringing a
class action is
not established.
58.
It is important to know who is to be represented and with what
necessity before deciding whether Ms De Bruyn is a worthy
representative.
The application lacks details of these matters,
beyond the rather general reference to retail investors and the
thousands of enquiries
the attorneys of Ms De Bruyn have received.
More evidence should have been adduced.
59.
I am inclined to think however that these deficiencies are not fatal
to the application for certification. Some time has passed
since the
dramatic fall in the share price of Steinhoff shares. This has led to
extensive media coverage both in South Africa and
abroad. It is
probable that institutional investors and other significant
shareholders that suffered losses and wish to institute
proceedings
have done so. The papers indicate that there has been Steinhoff
litigation initiated in South Africa and abroad. Steinhoff
shares
were widely traded. In these circumstances, it is probable that those
shareholders who wished to litigate and had the means
to do so have
initiated proceedings. But there is little to contradict the claim
that there are indeed numerous retail investors
who invested in
Steinhoff shares and like Ms De Bruyn are not well placed to bring
individual suits for their losses. It is likely
therefore that there
is a need for a class action for retail investors in Steinhoff shares
and that the membership of the proposed
classes meets a plausible
threshold of numerosity.
60.
It would perhaps have been preferable to attempt a class
definition that more narrowly focuses upon retail investors. Quite
how
to do so is far from clear. That larger institutional investors
have in all likelihood already taken steps to institute proceedings
renders the need for a narrower class definition less acute. The
classes that are proposed are thus more likely to be populated
with
members less able to initiate proceedings for themselves.
61.
Once this is so, Ms De Bruyn does not appear to be an
unsuitable representative. She has suffered losses by reason of the
fall in
the price of Steinhoff shares in just the way that has
afflicted other retail investors. She has an identity of interest
with other
retail investors. And her account as to why she made the
investment in Steinhoff shares is likely to have resonance with other
retail investors. That Ms De Bruyn did not purchase Steinhoff shares
registered on the FSE does not oust her identity of interest
with
such shareholders. There is little reason to think that their reasons
for buying Steinhoff shares is any different, nor that
their losses
have a different significance. Since the members of the FSE class is
now made up of persons domiciled or ordinarily
resident in South
Africa, there are additional linkages to Ms De Bruyn. The Foreign
Shareholders’ class will be required
to opt in and can
therefore choose whether Ms De Bruyn is a suitable representative.
62.
Deloitte says that Ms De Bruyn has a conflict of interest that
disqualifies her from representing the classes, as they are now
defined.
Ms De Bruyn has retained her Steinhoff shares. But all four
classes comprise persons who sold their shares after 5 December 2017,
and others who retained their shares. Those shareholders, like Ms De
Bruyn, who have retained their shares have an interest that
Steinhoff
continues as a profitable enterprise. They want to have their claims
met and they want their shares to provide returns.
Those shareholders
who have sold their shares seek to maximize their claims, they have
no interest in the future returns Steinhoff
may afford its
shareholders. Deloitte submits these two classes of shareholders have
conflicting interests because shareholders
who have retained their
shares will be more willing to compromise their claims to secure the
viability of Steinhoff and hence secure
a return on their shares.
Those who have sold care not at all for future returns, they would
seek to maximize their claims. So,
the argument goes, Ms De Bruyn
cannot act as a class representative for those members of the classes
who have sold their shares.
63.
This
problem of intra-class conflict is less fundamental than Deloitte
asserts it to be. Both shareholders who have retained their
shares
and those who have sold them would look to the Steinhoff defendants
to satisfy their claims, in whole or in part. That would
require
viable companies. It is hard to imagine that remaining shareholders
would significantly compromise their proven damages
or the quantum of
any settlement against the speculative prospect of future dividends
or capital appreciation. If there are different
incentives, they are
likely to operate at the margin, and that margin is likely to be
modest. If the conflict should assume greater
significance than I
suppose, then the trial court can exercise a supervisory function to
differentiate classes into sub-classes
with separate representatives
for the purposes of any settlement. That is posited in
McKenna
[13]
,
and
appears to me to be a sufficient safeguard against the prospective
risk of intra-class conflict.
64.
In sum, it would have been better to have more representative
plaintiffs to share the burden and with more varied expertise, but
I
do not find that Ms De Bruyn is so unsuitable that she cannot act as
the representative plaintiff for the proposed classes.
65.
The opposing respondents do not confine their criticisms to
the suitability to Ms De Bruyn as a representative plaintiff. They
say
that the attorneys who will be the legal representatives in
bringing the class action are ill-suited to the task, and the funding
arrangements are problematic.
66.
The company respondents, in particular, say that LHL Attorneys
Inc (“LHL”) are neither competent, independent, nor
ethically
trustworthy, and as a result should not be permitted to act
as the legal representatives of the class.
67.
The
company respondents adopt this position on the following basis. The
certification court must be told how the class action is
to be funded
and what arrangements have been made.
[14]
The founding papers do not provide this information. The company
respondents, in their answering affidavits, accuse LHL of a lack
of
candour in failing to disclose the funding arrangements which, they
say, calls into question the firm’s suitability to
be appointed
the class lawyers. The replying affidavit discloses the following.
The funders are DRRT Limited and Therium. Both
companies are said to
be successful funders of large class actions. Therium is one of the
largest funders of cases in the world.
The funders have indemnified
the representative plaintiff against adverse costs orders. The
funders will earn a reasonable percentage
of the monetary damages
recovered on behalf of the class. LHL’s fees are paid by the
funders.
68.
The company respondents and other opposing respondents were
not satisfied with these disclosures, which they considered vague,
and
left many questions unanswered - not least, how LHL’s fees
were to be paid and whether LHL had complied with the provisions
of
the Contingency Fees Act 66 if 1997 (“CFA”) . These
matters were raised in the company respondents’ heads
of
argument.
69.
Certain of the opposing respondents brought proceedings to
secure the documents evidencing the funding arrangements. Ms De Bruyn
opposed this relief, initially on the basis of privilege,
confidentiality and prejudice. This stance was taken by reason of the
reticence of the funders. On advice, this opposition was withdrawn. I
gave an order requiring the disclosure of certain documents
relevant
to the funding arrangements.
70.
This gave rise to an application by Ms De Bruyn to file a
further supplementary affidavit to explain the documents disclosed
and
further elaborate upon the funding arrangements. Ms Hassan, an
attorney and director of LHL, offers an explanation as to why the
funding arrangements were not fully set out in the affidavits already
filed. Although aware of the need to satisfy the court that
the
action would be adequately funded, Ms Hassan fell into error because
she could not find authority as to how what she describes
as “
out-and
out funding
” was to be disclosed; she apprehended that
funders may resist disclosure; and that it would be extraordinary to
disclose
this aspect of the applicant’s litigation strategy.
She had thought disclosure could be resisted on grounds of
confidentiality
and privilege. But after taking advice from counsel,
Ms Hassan recognized the need fully to disclose the funding
arrangements and
bring them into compliance with “South
African
legal prescripts
”. She also sought to cure
misunderstandings by the respondents as to the funding arrangements.
Her failure to disclose the
funding arrangements in her founding and
replying affidavits was an error which she attributes to the novelty
of class action litigation
in South African practice.
71.
What follows in Ms Hassan’s supplementary affidavit is a
description of the funders DRRT and Therium, the funding agreements
and the extent of the funders’ commitments. These agreements
have given rise to sustained criticism on the part of the opposing
respondents. To this I will return. Ms Hassan also provides the
details of LHL’s fees. One important feature of these
agreements
is that LHL agreed to reduce their fees in consideration
of their participation in the proceeds accruing from the European and
South African class actions.
72.
Ms Hassan took advice on LHL’s fee agreements. Counsel
expressed concern that LHL’s participation in the proceeds of
the class actions may amount to a contingency fee arrangement and
could also impair LHL’s ability to advise the class in
an
independent manner. This, Ms Hassan says, was never the intention.
The intention of LHL was to comply with the law, and, if
errors were
made, they were made in good faith.
73.
Ms Hassan explains that she then set about remedying the
position. She wrote to the Legal Practice Council to explain that the
LHL’s
funding arrangements
, “may not be strictly
compliant with South African law
”. After discussions with
Ms De Bruyn and the funders, the agreements were amended. LHL waived
its participation in the proceeds
of the class action and agreed to
be paid their ordinary fees at the certification stage of the
proceedings and reduced fees thereafter.
74.
Counsel’s concern as to LHL’s funding arrangement
is well founded. S2(2) of the CFA stipulates that the success fee of
a legal practitioner may not exceed 100% of the practitioner’s
normal fee. The LHL funding arrangement, before the waiver,
was not
calculated on this basis. Rather, it allowed LHL 50% of the proceeds
of the South African class action (that is 50% of
25% recovered in
terms of the agreement with Ms De Bruyn) and 5% of the proceeds of
the European class action. That does not ensure
conformity with the
limit imposed by s2(2) of the CFA.
75.
The company respondents do not view the conduct of LHL to be
benign error. They say, rather, that the failure to make full
disclosure
of the funding arrangements in the founding affidavits and
replying affidavit was at best inept and at worst deliberate
concealment.
It was only the efforts of the opposing respondents to
procure documents under compulsion that finally required candour.
LHL’s
arrangements to participate in the proceeds of the class
actions, both in this country and in Europe, is unethical, quite
likely
unlawful, and comprises LHL’s independence. LHL’s
notification to the Legal Practice Council is formulaic and evasive.
LHL was all too quick to do the funders bidding in resisting
disclosure of the funding documents. LHL has demonstrated poor
judgment
on matters of importance. Its agreements to participate in
the proceeds of the South African and European litigation bound LHL
to a business arrangement that compromised its independence.
Understood in this way, the company respondents contend that LHL
cannot
act as the class attorneys.
76.
Counsel for Ms De Bruyn submits that this account is too
uncharitable. That mistakes were made is not to be doubted, but LHL
was
not dishonest. Errors were corrected when they were pointed out.
The funding agreements were always predicated upon the court
ultimately
agreeing to them. There was no effort to avoid scrutiny.
The initial refusal to provide the funding documents on the grounds
of
privilege, confidentiality and prejudice was driven by the
funders. Ms De Bruyn does not seek LHL’s replacement, and such
replacement would be prejudicial.
77.
The conduct of LHL does, in my estimation, give reason for
concern. The funding arrangements were of self-evident importance.
LHL,
together with the funders, had spent time fashioning them. It is
difficult to understand how LHL thought they deserved cursory
treatment. The most likely explanation is that the funders hoped to
avoid scrutiny of the arrangements in the course of the certification
proceedings. That LHL went along with this, even in the face of the
misgivings of the opposing respondents, does indicate that
the
funders have exercised unwarranted influence over the decision making
of LHL. This was made plain in the grounds of opposition
offered to
resist the production of the funding documents. It should not require
that the clarifying light of litigation be cast
before attorneys who
would act for a class make independent judgments. The agreement that
LHL shares in the rewards of any success
of the class actions also
shows a lack of judgment as to whether this might compromise LHL’s
independence. The need to consider
the legality of any such agreement
is obvious. But was not done.
78.
I recognize that this is complex litigation in which there are
many moving parts, and errors occur. The errors that were made,
regrettably,
implicate matters of great importance: independence,
legality, and disclosure. I weigh this against the considerable
efforts that
LHL has made to bring this matter to court, their
understanding of the matter, their acknowledgement of mistakes, and a
willingness
to correct them. I have also to consider the consequences
if LHL were to be removed from acting as class attorneys. To do so
would
not end the prospect of certification, if other considerations
favoured its grant, but without other attorneys to take their place,
the class action might flounder. There is no indication that other
attorneys are willing to replace of LHL as class attorneys.
79.
The answer it appears to me is for the court to appoint a
supervising attorney who will be required to ensure that LHL at all
times
acts independently, and in the best interests of the members of
the classes for whom the litigation is brought. If the supervising
attorney should have any concern that there is any want of
independence, candour or professional ethics on the part of LHL in
its conduct of the litigation, the supervising attorney will be
required to report the matter to the trial court. The trial court
would then take appropriate action. This acknowledges the warranted
concerns that the company respondents have raised, while permitting
LHL to continue to act, under a form of scrutiny that will ensure
that LHL’s past errors do not recur.
FUNDING
80.
A further aspect of judging suitability concerns the funding
arrangements. Of importance in this case are the arrangements that
have been secured to obtain third party funding. LHL, the prospective
class attorneys, were originally to participate in the proceeds
of
the class actions and compromise the fees they would charge to bring
the case. That arrangement has been abandoned by LHL, and
hence LHL
no longer offers their services for a stake in the successful outcome
of the proceedings. The funding of the class action
is to be provided
by third party funders. And it is to those arrangements that I now
turn.
81.
In
Children’s
Resources,
the
court drew attention to the question as to how the class action was
to be funded. The funding arrangements must not compromise
the
requirement that the litigation is conducted in the interests of
class members. The appeal court was exercised by the risk
that the
contingency arrangements of lawyers might compromise the interests of
the class members. Here the question is whether
third party funding
arrangements place at unwarranted risk the interests of the class
representative, the class members or the
interests of the defendants.
The Supreme Court of Appeal has warned that third party funders,
incentivized by profit, should not
be able to take over litigation
for their own benefit.
[15]
Hence, as I have emphasized, the need for the class attorneys to be
independent of third party funders, and exercise that independence
in
the interests of the class.
82.
A
helpful account as how the courts should assess third party funding
arrangements is to be found in the Canadian case of
Houle
[16]
.
The
funding arrangements should be necessary to provide access to
justice; they should be fair and reasonable in doing so ( which
includes protecting the interests of the defendants) ; the access
provided must be meaningful; the arrangement must not over-compensate
the funders for assuming the risks of the litigation; the funding
arrangements must not interfere with the duty of the class lawyers
to
act in the best interests of their clients; and the class
representative must be able to give instructions and exercise control
over the litigation in the best interests of class members.
83.
Regrettably, the third party funding arrangements were not
disclosed in the founding affidavit. As I have explained, the
agreements
were disclosed under compulsion, and the detail of the
funding arrangements was then set out in a supplementary affidavit as
the
matter approached the hearing date. Even during the course of the
hearing, and responsive to criticisms offered by the respondents,
yet
further documents and explanations have been put up. This is
unsatisfactory. But I have afforded the respondents an opportunity
to
make further submissions. I consider it preferable to consider this
aspect of the matter on the basis of the documents and information
now made available.
84.
The essential features of the funding arrangements are as
follows. The class action is to be funded by the firm DRRT that has
had
considerable experience in funding significant litigation. DRRT
has undertaken to pay the expenses incurred in the litigation and
to
indemnify Ms De Bruyn from adverse costs orders. Under the terms of a
cooperation agreement, DRRT has assigned part of its funding
obligations to another firm, Therium. Therium commits to fund the
South African class action in an amount of EUR 700 000 and to
provide
for adverse costs insurance in an amount of EUR 1 000 000. In terms
of the addendum to the Litigation Funding and Indemnity
Agreement,
the funders will seek 25% of the class wide recovery, subject to the
court determining the acceptability of this funding
fee percentage.
DRRT will be liable for the fees of LHL, which fees are now agreed on
a revised basis that eliminates LHL’s
participation in any
damages award. DRRT may cease to fund the litigation if it believes
that there are not reasonable prospects
of success in the litigation.
However, DRRT will be required to pay the fees and costs of the
litigation up to the point of its
withdrawal. The addendum also
clarifies that DRRT’s assignment of funding obligations to
Therium does not relieve DRRT of
its primary obligation to fund the
litigation.
85.
It is plain that absent these funding arrangements there is no
basis to suppose that the proposed class action could go forward.
Ms
De Bruyn cannot fund the litigation and no alternative funders have
been found. There is no suggestion that the classes proposed
would be
able by other means to procure funding. LHL does not say that the
firm would undertake the litigation under the terms
of the CFA. The
funding arrangements are thus necessary to permit the class action to
proceed. The access that the funding provides
is meaningful. LHL and
counsel, already steeped in the matter, will be funded to take the
class action forward.
86.
There are three issues that require further analysis. First,
are the funding arrangements fair and reasonable, most especially, in
securing the interests of the class members and the defendants?
Second, are the funders compensated on a reasonable basis? Third,
do
the funding arrangements preserve the independence of the legal
representatives and the ability of the class representative
to carry
out her duties? The greater part of the respondents’ objections
fall under one or other of these issues. Where they
do not, I will
give them separate treatment.
87.
I commence with the proposed compensation of the funders from
any recovery that results from the class action. The draft order that
is sought reflects in prayer 6 that the litigation funders agree to
fund the running costs of the litigation and to indemnify the
class
members from adverse costs orders. In consideration of this
obligation, the funders will be entitled to 25% of the proceeds
of
any damages awarded or settlement reached, and the party and party
costs awarded to the representative plaintiff.
88.
A cap of 25% is consistent with the provisions of the CFA. It
was not suggested that it is not a figure that provides a reasonable
ceiling to the success fee that might become payable to the funders.
The proposed class action is complex and it is likely to be
costly
and endure for some time. However, neither the funding agreements,
nor prayer 6 of the draft order, seek 25% as a cap, but
rather as a
determined reward for success.
89.
This gives rise to some difficulty. The company respondents
point to the following conundrum. If 25% of the proceeds is required
as a condition of the funding, and its approval is sought from the
certification court, how is this to be squared with the requirement
that it is for the trial court to determine what is a justifiable
success fee, either in approving a settlement or at the conclusion
of
the trial, should the class action be successful. The success fee
that is justifiable will depend on many factors. But of course,
the
costs incurred by the funder, the risks assumed, and the outcome
achieved will be salient. These matters are not known at the
stage of
certification. The certification should not usurp the role of the
trial court, yet that is what is sought.
90.
This conundrum reflects a deeper difficulty. Third party
funding is a commercial proposition. Its virtue is that it commits
funding
to litigation that would not otherwise be brought. But as
with most commercial ventures, the possible reward is a function of
the
risk that is assumed at the outset. Profit is a function of ex
post determination, once the risk has been run and success results.
Yet the courts, by seeking to retain the power of the trial court to
determine the ultimate reward for the funder, undermine the
funding
model of risk taking by third party funders.
91.
This problem of risk and reward is compounded by the need to
consider the interests of class members and bind them to the outcome
of the litigation. The reward made to the funders diminishes the
compensation that is paid to class members, should the class action
be successful. This trade off may appear best made by the trial court
when the interests of the funders and class members can best
be
assessed. But to do so erodes the commercial basis of a funding model
that is predicated on prospective risk and reward.
92.
The difficulty is reflected in the draft order proposed. While
prayer 6 stipulates the reward that will be due to the funders,
prayer
8 recognizes that the funder’s entitlements whether
under a settlement or final award will be subject to the approval of
the trial court. Some recognition of this appears in the funding
agreement between DRRT and Ms De Bruyn: clause 6 states that a
settlement must be approved by the court, after it conducts a hearing
to determine whether the settlement is fair, reasonable and
adequate.
93.
Ultimately, there is a conflict of ends. The funder requires
certainty as to the reward for taking the risks of the litigation and
providing the funding. The interests of class members require that
the trial court should retain the competence to determine what
constitutes a fair and reasonable reward for the funding provided and
the risk assumed. The
ex ante
commitment and the
ex post
judgment cannot be reconciled.
94.
There is however a way of giving some recognition to both sets
of interests. The funders must recognize that the certification
cannot
stipulate for the reward that will be due, in the event of
success. That is for the trial court. However, the certification
court
can stipulate that a particular reward is,
ex ante,
a
reasonable return for the risk assumed by the funder in funding the
litigation. The downside risk assumed by the funders is the
cost of
funding the litigation in the event that the litigation fails or
yields a very modest award. Of course, there are other
possibilities:
a large settlement, for example, after incurring little cost. But
ultimately, the certification court can and should
indicate what the
reasonable
ex ante
reward for the funder should be. That
figure will be taken into account by the trial court in determining
the reward to paid to
the funder. It will assume no small measure of
importance because an essential metric of what the funder deserves is
what it was
willing to risk to fund litigation that would not
otherwise have materialized.
95.
This has entailments. First, there can be no certification on
the basis that the funders will be entitled to 25% of any settlement
or award of damages. Second, there will have to be an acknowledgement
by the funders that their funding commitments remain in place
notwithstanding this limitation. Third, should there be
certification, the order should reflect this. Fourth, to take account
of the interests of the funders, the certification court should
stipulate for an
ex ante
risk/return ratio that is warranted.
96.
Following this approach allows that third party funding can be
secured, with commercial viability, that permits the class action
to
proceed, while continuing to recognize the final decision-making
competence enjoyed by the trial court. I am aware that this
approach
to the matter was not known to the parties at the time the matter was
argued. Should the need arise, an opportunity will
be given to Ms De
Bruyn to meet its requirements, and provide reasons why 25% ( or some
revised figure) is a reasonable
ex ante
return for the risk
assumed. Opposing respondents will be permitted to make their own
submissions.
97.
The opposing respondents draw attention to a further feature
of the funding arrangements that they consider problematic. The
funding
must be secure to ensure that the litigation can proceed and
that meaningful access is provided to the courts. The opposing
respondents
have queried the “walk away” provisions in
the funding arrangements that would permit the funders to abandon
their
funding commitments. If the funders can walk away, then the
funding is insecure and meaningful access to the courts is not
secured.
98.
The most recent iteration of the draft order reads in relevant
part as follows:
“
subject to
consultation with the class members, the litigation funders reserve
the right to cancel the funding agreements where
they are of the view
that the matter lacks reasonable prospects of success. The litigation
funders will remain liable for expenses
and adverse costs orders
incurred until the date of cancellation “(prayer 6.3)
99.
The opposing respondents submit that this allows the funders
to cancel the funding agreements if the funders form the view that
the matter lacks reasonable prospects and this gives considerable
discretion to the funders to terminate the funding. Ms De Bruyn
submits that it would amount to an abuse for the funders to be
required to fund unmeritorious litigation.
100.
The funders cannot act without constraint in deciding to
terminate their funding of the class action. Class members must be
consulted.
There would also have to be a basis to believe that the
matter lacks reasonable prospects. It is the prospects of the
litigation
that signify, and not any overall assessment of risk and
reward. But there may be a basis that would permit of termination,
even
though it is a view that perhaps only a minority would share.
That does give the funders a margin of appreciation on the question
of prospects to permit of lawful termination. That margin of
appreciation may differ from the assessment made by a disinterested
but informed person.
101.
No one would reasonably resist the proposition that if
litigation reaches a point where it lacks reasonable prospects of
success,
the litigation should not be continued. A view as to
reasonable prospects is standardly required of counsel and attorneys,
and
that view must be objectively rendered in the best interests of
the client. The funders however may form their view with greater
latitude and in their own interests.
102.
One option is to permit the funders to terminate their funding
on an assessment by counsel and the attorneys of Ms De Bruyn that
the
class action lacks reasonable prospects. They have professional
duties to make the assessment on a disinterested and informed
basis.
The other option is to permit the funders to form the view, but put
in place protections. The funders would be required
to obtain the
opinion of the class attorneys and counsel as to the reasonable
prospects of the litigation. The funders would be
required to
consider that opinion. If the opinion thought there were reasonable
prospects, the funders would have to provide reasons
to the
supervising attorney as to why they took a different view. If the
supervising attorney considered the funders’ view
to lack a
proper foundation, then the funders would only be permitted to
withdraw funding if the trial court, upon consideration
of the
matter, decided that the position of the funders as to reasonable
prospects indeed had a proper foundation.
103.
The second option is more cumbersome but it allows the
funders, who undertake the funding obligation , to enjoy a margin of
discretion
to have a reasonable difference of opinion as to the
reasonable prospects. Either option would in my view create
sufficient safeguards
that the funding commitments cannot be
capriciously withdrawn and that funding will remain available to
maintain access to the
courts. One further consideration is this. As
the litigation proceeds, the funders will have invested ever more in
the litigation.
Their sunk costs will at a point exceed the marginal
incremental cost of seeing the litigation through to completion. The
further
the litigation proceeds, the smaller is the incremental cost
to secure a successful result. That too provides structural
incentives
that render the funding more secure.
104.
Whichever option is chosen, this will require some alteration
to the draft order and the funders’ commitments. But provided
they are agreed, this aspect of the funding arrangements can be
rendered sufficiently secure.
105.
I turn to consider a number of interrelated issues raised
principally by Deloitte. Deloitte is concerned that the funding
arrangements
do too little to protect the defendants in the event
that adverse costs orders are granted in their favour. The
unsatisfactory
manner in which the funding agreements were disclosed
left Deloitte, and other opposing respondents, with questions that Ms
De
Bruyn’s attorneys sought to answer during and indeed after
the hearing. I have permitted this in the interests of having a
complete picture and by allowing the opposing respondents to make
post hearing submissions.
106.
Certain matters have been clarified. First, Therium is not the
sole funder of the class action. DRRT has committed to fund the
litigation,
over and above the specific sum put up by Therium and its
undertaking to provide adverse costs insurance. DRRT has agreed to
pay
the fees of LHL and is liable for adverse costs orders. DRRT’s
liability stands unless the funding agreement comes to an end
or DRRT
lawfully withdraws. Although the financials of DRRT have not been
produced, the affidavits indicate that the firm is a
significant
funder of litigation in various parts of the world. The DRRT funding
commitments, taken together with those of Therium,
provide a
reasonable basis to suppose that the class action will be adequately
funded.
107.
Second, Deloitte raises the concern that the walk-away
provisions would allow DRRT to exit the litigation, avoiding
liability for
adverse costs orders made up to that point. This
concern has been met by an addendum to the funding arrangements and
the draft
order in terms of which DDRT will remain liable for the
expenses and adverse costs orders incurred up until the date of
cancellation
of the funding agreement or DDRT’s lawful
withdrawal of funding. This cures the concern.
108.
Third, Deloitte raises issues concerning the indemnity cover
that Therium has secured in respect of adverse costs orders. Therium
has undertaken to take out adverse cost insurance with cover of EUR
1000 000. The policy was however not provided, and Deloitte
questioned whether the cover was in place, whether DRRT was a
beneficiary of the policy, what exclusions were provided under the
policy, and whether the policy in fact applied to the proposed South
African litigation. These concerns have largely been dealt
with. The
policy (containing its exclusions) has been provided, as also the
endorsements to the policy. Correspondence from the
insurer confirms
coverage of the South African litigation and that Therium has secured
cover. It appears that Therium has honoured
its undertaking to take
out adverse cost insurance.
109.
Deloitte
placed some reliance upon the
Petersen
case,
decided in the Federal Court of Australia.
[17]
There the question was whether an insurance policy provided
sufficient security for the costs of litigation funded by a third
party funder. Although the case is of some interest in the scrutiny
it gave to the policy of insurance, class certification does
not
require that security for costs be provided by an applicant or those
who fund her. Rather, the interests of the defendants
figure as one
set of interests among others that warrant consideration when the
funding arrangements are scrutinized. To the extent
that adverse
costs orders made in favour of the defendants are likely to be
honoured, this counts in favour of certification. It
is, with much
else, a factor to be weighed. Given DRRT’s funding commitments,
taken together with the insurance cover secured
by Therium,
defendants are not placed at significant risk that adverse cost
orders will not be paid, for so long as the funders
continue to fund
the litigation.
110.
That gives rise to a further concern expressed by Deloitte. If
the funders depart the scene, is Ms De Bruyn not exposed to the
adverse
costs orders that might be made, and by extension, are the
defendants then not at risk? There can be little doubt that this is
so. But I do not consider that it is an eventuality that needs to be
considered at the stage of certification. The proposed class
action
is funded by third party funders. If that should change, Ms De Bruyn
, as class representative, would have to consider carefully
whether
the litigation should or could proceed. We cannot anticipate what she
would do because there are so many matters that are
unknown and would
have a bearing on her decision. In these changed circumstances,
should they ever come about, the defendants could
apply to the trial
court to revisit the regime under which the class action was being
litigated. There is no cause to anticipate
these matters for the
purposes of certification.
111.
These considerations permit me to return to the broad
criteria, referenced above, against which the funding arrangements
stand to
be judged. The funding is necessary to permit the litigation
to proceed. It funds legal representation that will allow for
meaningful
access to court. The funding, it appears to me, strikes a
fair balance between protecting the interests of defendants, the
funders
and the class members. There is funding and insurance cover
to secure the payment of adverse costs orders made in favour of the
defendants. The funders may withdraw, but under conditions that
permit of some scrutiny of their evaluation of the prospects of
success. As to the interests of class members, any payment to the
funders from an award or settlement will require the sanction
of the
trial court. The funders’ assumption of risk will be taken into
account, but so too will the interests of class members.
That class
members are bound by the terms of these funding arrangements is an
incident of certification. But there is a likelihood,
as I have
already observed, that the great majority of these class members are
retail investors who would otherwise be unlikely
to be able to
litigate their claims. This class action gives them an opportunity to
do so on terms that do not appear to me unfavourable
to them. Those
who think otherwise may opt out of the class. The funding agreements
should be made available to class members so
that they can make an
informed choice as to whether to opt out. The funding arrangement
thus appear to me fair and reasonable.
112.
That leaves over for consideration two further criteria of
importance. First, do the funding arrangements compromise the duty of
the class lawyers to act in the best interests of their clients?
Second, do the arrangements interfere with the ability of the
class
representative to exercise control over the litigation and give
instructions in the interests of the class she represents?
Formally,
the funding arrangements do not interfere with the duties of the
lawyers and the class representative. But it must be
recognized that
a formal separation of powers, does not mean that the funders may not
de facto
exercise unwarranted influence. Regrettably, the
funders have already shown a propensity to do so and the attorneys a
willingness
to yield to the wishes of the funders, contrary to the
requirements of the law as to disclosure and candour.
113.
It is unavoidable that third party funders, by reason of their
position, can seek to influence matters outside their remit. The
funders’ commercial stake in the outcome of the litigation can
make undue influence a singular temptation. That risk is not
best
dealt with by banishing third party funding. That would have the
perverse result of limiting access to the courts in cases
that might
be deserving. Rather, the risk is mitigated by requiring that class
lawyers do their duty to their clients, and that
the class
representative is reminded of the important duties she owes to the
members of the class to act in their interests. I
have already
indicated that a supervising attorney is to be appointed by the
court. Among the matters the attorney would be required
to supervise
is the sedulous adherence to duty by the class lawyers and the class
representative. The very presence of the supervising
attorney should
act to deter the funders from exercising undue influence. Under these
conditions, the funding arrangements adequately
meet the
consideration of suitability.
114.
The 15th Respondent initially opposed certification on the
narrow basis that the class definitions permitted of a duplication of
claims. That issue has since been resolved. However, the 15th
Respondent maintains that there remains a problem of duplication
because South African residents who have instituted claims are not
excluded persons. The most recent draft order includes in the
definition of excluded persons all persons who have instituted claims
against the respondents in South Africa and abroad. There
is no
duplication.
115.
The 15th Respondent then broadened its opposition on two
bases: that the funding arrangements are inadequate and the class
attorneys
are not suitable. These matters have been dealt with. The
15th Respondent makes a number of further submissions. He opposes the
introduction of the affidavit of Mr Reus, filed as an attachment to
the supplementary founding affidavit of Ms Hassan. The affidavit
was
sworn before a notary in the state of Florida who is not a
commissioner of oaths under South African law. That may be so. But
even if the evidence is hearsay, I allow its consideration because
under the stringent conditions of lock down that exist across
the
world, to insist upon compliance with formalities would deprive the
court of evidence that there is no reason to think does
not reflect
the testimony of Mr Reus.
116.
The 15th Respondent raises two other matters that are
distinctive. First, he says that the funding arrangements offend
against the
exchange control regulations in two respects. The funding
provided by the funders to conduct the litigation in South Africa
requires
the permission of Treasury or a person authorized by
Treasury. So too permission is required to pay to the funders the
percentage
of an award or settlement that is contemplated by the
funding arrangements. The relevant provisions of Regulation 3 of the
Exchange
Control Regulations preclude payment to the funders, should
that eventuate, without permission. The payments by the funders to
LHL and counsel are not so clearly impermissible under Regulation 3.
But I need not take a definitive position on this because nothing
about this court’s certification is a sanction for any
infringement of the Exchange Control Regulations. Should
certification
take place and permission is needed, it will be for the
parties concerned to obtain the required permission. Treasury will
decide.
Treasury permission is not a condition that must be in place
for the grant of certification. It may become necessary for the
implementation
of the class action, if it is certified. That
contingency does not render the funding arrangements incapable of
certification.
117.
Lastly, 15th Respondent contends that the agreement between Ms
De Bruyn and DRRT is a contract of insurance in terms of which DRRT
provides indemnity insurance to Ms De Bruyn in consideration of DRRT
being paid a premium, being a percentage of the ultimate award.
However, DRRT is not licensed to conduct insurance business in terms
of the Insurance Act 18 of 2017, and hence the funding arrangement
is
unlawful and cannot be sanctioned.
118.
In my view, the contention is incorrect. The agreement between
Ms De Bruyn and DRRT is not a contract of indemnity insurance. Any
payment to DRRT is an uncertain event. A contingent undertaking to
make a payment is not an obligation to pay a premium, as that
term is
defined in the Insurance Act. Nor, upon proper characterization, is
the agreement one of insurance. The central feature
of the agreement
is that DDRT, in consideration of its funding of the class action,
will be entitled to a percentage of any award
or settlement, as
sanctioned by the trial court. The indemnification of Ms De Bruyn is
an important but ancillary feature of an
agreement to fund litigation
on risk for a return. That is not a contract of insurance.
119.
By way of conclusion, I find that a case has been made that
the considerations relevant to suitability have been adequately
satisfied,
with some required modifications to the order under which
certification would take place. I have noted some significant
reservations.
But none that in my view should prevent certification
on this dimension of judgment.
A
TRIABLE ISSUE
120.
I turn to consider whether the proposed class action raises a
triable issue.
Children’s Resources
, to recall, sets the
standard as to what constitutes a triable issue. First, the cause
action must survive the test on exception,
that is to say, can the
opposing respondents satisfy the certification court that on every
interpretation that can be put on the
facts to be proven at trial,
the applicant has made out no cause of action. Second, has the
applicant shown that there is evidence
which, if accepted, will
establish the cause of action relied upon, that is to say, there is a
prima facie case?
121.
Ms De Bruyn has attached revised draft particulars of claim to
the replying affidavit. Although counsel for Ms De Bruyn made it
plain that this draft remained a work in progress, it is a voluminous
document from which the central features of the cause of action
may
be discerned.
122.
The case that is sought to be taken to trial, shorn of
elaboration, is this. The Steinhoff shareholders allege that SIHL,
Steinhoff
NV, the directors of these companies (collectively “the
Steinhoff directors “), and the auditors, Deloitte, failed to
carry out their duties. These duties are both statutory and common
law duties of care.
123.
In essence, SIHL and Steinhoff NV, through the actions of the
Steinhoff directors, engaged in unlawful transaction, styled the
“impugned
transactions”. The effect of the impugned
transactions was to overstate the assets, income and profits of SIHL
and Steinhoff
NV in the financial statements of these companies and
to understate their liabilities and expenses. SIHL, Steinhoff NV and
the
Steinhoff directors were required to disclose the true nature of
the impugned transactions and reflect the true position in the
financial statements of the companies for the benefit of existing and
potential shareholders. SIHL and Steinhoff NV, acting through
the
Steinhoff directors, failed to do so. As a result, the financial
statements of the companies did not comply with prescribed
financial
reporting standards and failed fairly to present the state of affairs
and business of SIHL and Steinhoff NV. The financial
statements were
false, falsified, misleading, and incomplete; they failed accurately
to show the assets, liabilities, equity, income
and expenses of the
companies; and failed to reference matters that would permit
shareholders to appreciate the companies’
financial state of
affairs and solvency.
124.
The auditors, Deloitte, conducted an audit of the financial
statements of SIHL in the period June 2013 to December 2015. Deloitte
is alleged to have either become aware of the impugned transactions
or should, by the exercise of reasonable care, have done so.
Deloitte
is then said to have made auditors’ reports, representing that
the financial statements of SIHL were reasonably
free of material
misstatement, when this was not the case.
125.
This conduct of the Steinhoff directors, SIHL and Steinhoff NV
is alleged to contravene the Companies Act 71 of 2008 (“the
Companies Act &lsquo
;) and give rise to liability in terms of
s
218(2)
or
s 20
(6) the
Companies Act for
the damages suffered by
shareholders who are members of the proposed classes. Alternatively,
the Steinhoff directors, SIHL and
Steinhoff NV, deliberately or
negligently breached their duties of care, and became liable to the
class members for damages suffered
by them.
126.
The conduct of Deloitte is alleged to contravene the
Companies
Act, the
Auditing Profession Act 26 of 2005 ( “ the APA “)
and the International Financial Reporting Standards (“IFRIS”)
which gives rise to Deloitte’s liability for damages suffered
by class members in terms of s 218(2) and
s 20(6)
of the
Companies
Act and
s 46(7)
of the APA. In the alternative, Deloitte was
negligent, breached its duty of care to shareholders and is liable to
class members
for the damages suffered by them.
127.
A claim is also made on the basis that an offer was made to
the public of securities in Steinhoff NV for subscription or sale,
pursuant
to a prospectus. (“the prospectus claim”). One
or more shareholders are alleged to have acquired securities on the
faith of the prospectus. The prospectus and its attachments contained
untrue statements as contemplated in
ss 104
and
105
of the
Companies
Act. The
directors (or certain of them) and the auditors in terms of
ss 104
and
105
are alleged to be jointly and severally liable to
class members for damages suffered as a result of the untrue
statements.
128.
The draft particulars of claim then deal with causation and
damages. It is alleged that at various stages the class members
acquired
securities in SIHL or Steinhoff NV. The securities were
traded on the JSE and the FSE. The price at which securities traded
was
based on the market’s perception of the underlying value of
SIHL and Steinhoff NV. This perception was causally connected
to the
unlawful conduct of the defendants, sketched above. Class members who
purchased shares suffered damages. This occurred in
the following
way. First, class members bought their shares at a price in excess of
the true value of the shares, the price having
been inflated as a
result of the unlawful conduct of the defendants. Second, class
members decided to hold their shares, the price
of those shares
having been inflated as a result of the unlawful conduct of the
defendants, whereas class members would have sold
their shares had
they known of the defendants’ unlawful conduct. The precise
quantification of the class members’ entitlement
to damages is
said to stand over for later determination.
129.
The director respondents and Deloitte submit that the revised
draft particulars of claim, taken together with what is said in the
affidavits filed on behalf of Ms De Bruyn, do not disclose a cause of
action. The class action should not be certified because
the test set
out in
Children’s Resources
as to whether there is a
triable issue is not met. The director respondents also contend that
a prima facie case has not been made
out, at the very least against
the directors opposing the application.
130.
The claims against the directors and Deloitte may be
categorized in the following way. First, SIHL and Steinhoff NV (“the
Steinhoff companies”), their directors and Deloitte owed
shareholders in these companies a duty of care at common law. These
prospective defendants made negligent (and in some instances grossly
negligent) misstatements concerning the Steinhoff companies.
These
misstatements caused the price of the shares in the Steinhoff
companies, traded on the JSE and FSE, to be bid up to inflated
levels. Shareholders bought the shares at these inflated price levels
and retained the shares because of the prices at which the
shares
continued to trade. When the falsity of the misstatements was made
public, the shares suffered a dramatic fall, occasioning
loss to the
Steinhoff shareholders. That loss is actionable as a common law
delict (“the common law claims”)
131.
Second, the Steinhoff companies, their directors and Deloitte
have breached their statutory duties and this gives rise to statutory
liability for the losses suffered by shareholders. I shall reference
these claims as the “statutory claims” which include
the
prospectus claim.
COMMON
LAW CLAIMS
132.
I commence with the common law claims. Do they give rise to a
triable cause of action? The logical starting point is to consider
whether the misstatements that are alleged to have issued from SIHL,
Steinhoff NV, the directors and Deloitte constitute wrongful
conduct
as against the shareholders. This requires some analysis. To whom
were the alleged misstatements made? The draft particulars
of claim
offer two answers. First it is said that the misstatements were made
so as to influence the price of the shares which
in turn influenced
persons who were prospective purchasers of Steinhoff shares to buy
the shares in the relevant periods. Second,
the misstatements
influenced the price of the shares which in turn influenced
shareholders who had purchased the shares to retain.
133.
The issue that then arises is whether SIHL, Steinhoff NV,
their directors or Deloitte owe any duty of care to prospective
purchasers
of Steinhoff shares who go on to buy the shares or to
shareholders who decide to hold their shares, rather than to sell
them over
the relevant period?
134.
The
Constitutional Court in
Country
Cloud
has
explained the general principle of the law of delict: conduct causing
pure economic loss is not prima facie wrongful, wrongfulness
must be
positively established. Negligent misstatements causing pure economic
loss is a category of case where wrongfulness is
recognized where the
plaintiff can show a right or legally recognized interest that the
defendant has infringed. The enquiry into
the question of
wrongfulness is one of policy and the legal convictions of the
community.
[18]
Loureico
[19]
,
framed the matter as one of the duty not to cause harm, to respect
rights and the reasonableness of imposing liability. These
are
principles stated at the highest level of generality.
135.
The issue may be framed, following
Country Cloud, as
follows:
what right or legally recognized interest do the
shareholders enjoy that has been infringed by the Steinhoff
companies, the directors
and Deloitte? This warrants a consideration
of certain fundamental principles of company law.
136.
In
general, directors of a company owe fiduciary duties to the company
and not to its members. This is an incident of the
Salomon
principle
that a company is distinct from its members. Directors control and
manage the affairs and assets of the company. They
do not control or
manage the affairs or assets of the members. It is this legal
relationship between the directors and the company
that requires that
the fiduciary duties of directors are owed to the company. That this
is so is a matter of high and durable authority.
A director is a
trustee for the company and is required as a result to show the
utmost good faith towards the company
[20]
.
137.
That
the fiduciary duties of directors are owed to the company is also an
entailment of the rule in
Foss
v Harbottle
[1843] EngR 478
;
(1843) 2 Hare 461.
The
rule requires that the company and not its shareholders have an
action for wrongs done to the company and losses suffered by
the
company. It is the company that may seek redress for breach by the
directors of their duties because these duties are owed
to the
company.
[21]
138.
These
propositions are well established. The question that has occasioned
more debate is whether the fiduciary duties of directors
may also be
owed to shareholders, and perhaps to other persons, such as
creditors. The holding in
Percival
v Wright
[22]
that
the directors of a company are not trustees for individual
shareholders was sometimes understood to mean that a director could
not owe fiduciary duties to shareholders, whether collectively or
individually. Such an absolutist position was questioned in our
law
in
Sage
[23]
,
and has
not been followed in English law
[24]
.
The
position that has developed since
Percival
v Wright
is
this. The legal relationship between the directors and the company
gives rise to fiduciary duties owed by the directors to the
company.
That relationship does not give rise to fiduciary duties owed by the
directors to the shareholders of the company. However,
the directors
may owe fiduciary duties to shareholders in special circumstances, in
addition to their fiduciary duties owing to
the company. The duties
owed by directors to the company does not preclude duties that may
also be owed to shareholders. However,
the duty that a director may
owe to a shareholder is not based upon the relationship between a
director and the company, nor is
there any general duty that is owed
by directors to shareholders.
139.
What
is required for directors to owe duties to shareholders has been
described as a special factual relationship subsisting between
the
directors and the shareholders.
[25]
There is no closed list of these special factual relationships. A
fiduciary duty owed by directors to shareholders has been recognized
in certain cases where directors have persuaded outside shareholders
to sell their shares in the company to the directors. In family
companies where shareholders reposed trust and confidence in a family
member and sought advice and information, a fiduciary duty
was
recognized.
[26]
So too, in
circumstances where directors had made representations to
shareholders to secure options, undertaking to sell the shares
of
shareholders, the directors assumed a position of agency and were
accountable to the shareholders.
[27]
140.
In
Sharp
[28]
,
the 5800 claimants were shareholders of Lloyds Bank. They pleaded
fiduciary and tortious duties owed by directors of Lloyds Bank
to the
bank’s shareholders. The directors had recommended to the
shareholders the takeover by Lloyds of HBOS (“the
acquisition”). The acquisition was approved by the shareholders
at an extraordinary general meeting. The acquisition did
not turn out
well, and the claimants sought damages from the directors. The
defendants conceded that the directors were under a
duty to take
reasonable care that the statements made in the circular to
shareholders were true and that there were reasonable
grounds for the
opinions expressed. The issue that arose was this. Beyond the duty of
the directors to provide sufficient information
to the shareholders
to enable them to make an informed decision as to how to vote on the
acquisition (“the sufficient information
duty”), was
there a more general fiduciary duty owing by the directors to the
shareholders? The court held that there was
no such duty. There was
no special relationship between the directors and shareholders. The
directors certainly knew more than
the shareholders, but that gave
rise to no fiduciary duty to act on behalf of the shareholders or to
put the interests of shareholders
first.
[29]
141.
The following propositions may be derived from these cases.
First, appointment to the office of director gives rise to fiduciary
duties owed by a director to the company. It is the company that
enforces these duties and seeks to remedy their breach. Second,
there
is no general fiduciary duty owed by directors to shareholders of the
company. The assumption of office and the relationship
between the
directors and the company entails no such duty. A fiduciary duty is
predicated upon a duty of loyalty. The director
owes that duty to the
company. And that requires the director to act in the interests of
the company. Third, the fiduciary duties
of directors to the company
may cohabit with a fiduciary duty owed by directors to the
shareholders. Fourth, the recognition of
a fiduciary duty owed by a
director to the shareholders (whether individually or collectively)
requires the showing of a special
factual relationship between the
directors and the shareholders. This will usually require a personal
relationship with the shareholders
or some specific dealing between
the directors and the shareholders. That may come about because the
directors have purchased shares
from the shareholders or acted as the
agent of the shareholders to sell their shares or sought the approval
of the shareholders
for a transaction giving rise to a duty to
provide sufficient information to the shareholders.
142.
It is also important to recognize the attributes of directors
that do not give rise to a duty by the directors to the shareholders.
That directors will generally have more information, and of better
quality, concerning the company provides no basis for imputing
a
fiduciary duty to shareholders. This asymmetry of information is a
structural outcome as to how the directors are positioned
in the
company. But their advantageous position requires directors to use
the information for the benefit of the company. It does
entail a
general fiduciary duty to shareholders to bring about symmetry of
information. There are particular circumstances in which
the
directors may be required to provide information to shareholders. One
such circumstance is where the directors provide advice
to
shareholders as to how they should vote on a proposed transaction, as
occurred in
Sharp.
That does not entail a general duty to
shareholders to bring about symmetry of information. It goes no
further, as was conceded
in
Sharp,
than this: if there is a
duty to provide information, reasonable care should be taken to
ensure that the information is correct
and there are reasonable
grounds for the opinions expressed.
143.
The issue that then arises is whether the proposed cause of
action, as set out in the draft particulars and the affidavits,
provides
a basis to support a fiduciary duty owing by the Steinhoff
directors to the shareholders of Steinhoff. The draft particulars
make
the following allegations. The Steinhoff directors, and through
them, SIHL and Steinhoff NV, engaged in the impugned transactions.
The transactions were unlawful and gave rise to a duty to disclose to
existing and potential shareholders the true nature of these
transactions and reflect them in the companies’ financial
statements. This the Steinhoff directors, and hence SIHL and
Steinhoff
NV, failed to do. They were negligent in not doing so.
144.
The proposed cause of action pleads no special factual
relationship between the Steinhoff directors and the shareholders or
prospective
shareholders of Steinhoff. SIHL and Steinhoff NV are not
small companies, akin to a family business, with closely held shares.
Nor have the Steinhoff directors sought to acquire shares from
Steinhoff shareholders or held themselves to be agents of the
shareholders.
The only transaction that was proposed by the Steinhoff
directors was the scheme of arrangement proposed to SIHL
shareholders.
That transaction is the subject of the prospectus
claim; it is not the basis upon which the claim in delict is brought.
145.
The draft particulars and affidavits do not set out facts
that, if proven at trial, would give rise to a special factual
relationship
between the Steinhoff directors and the Steinhoff
shareholders, much less, prospective Steinhoff shareholders. The
Steinhoff directors’
relationship was with the companies to
which they were appointed, and hence, their fiduciary duties were
owed to SIHL and Steinhoff
NV. The draft particulars do not state
that the directors had undertaken to act for the shareholders or had
forged a particular
relationship with shareholders by reason of some
special dealing with the shareholders or proposal made to the
shareholders.
146.
The consequence, on the authorities that I have cited, is that
no foundation has been laid for the proposition that the Steinhoff
directors owed fiduciary duties to the shareholders. If that is so,
then the shareholders and prospective shareholders have no
right or
legal interest to assert against the Steinhoff directors Nor, on this
analysis, is any duty owed by SIHL or Steinhoff
NV to the
shareholders. As I have explained, the fiduciary duties of the
directors are owed to the companies. The companies enjoy
the right to
enforce these duties, seek redress and claim damages against the
directors, in the event of breach. The companies
are the
beneficiaries of the fiduciary duties owed to them. No benefit
accruing to the companies, nor right vesting in them requires
or
entails any duty owed to the shareholders. Absent a duty owed to the
shareholders or prospective shareholders, the cause of
action against
the Steinhoff directors, SIHL and Steinhoff NV fails to establish
wrongfulness.
147.
What the draft pleadings rely upon is this. The Steinhoff
directors, SIHL and Steinhoff NV “engaged
in
” the
impugned transactions. These transactions were unlawful. The impugned
transactions were reflected in the financial statements
of SIHL and
Steinhoff NV. As a result, the assets, income and profits of SIHL and
Steinhoff NV were overstated and their liabilities
and expenses were
understated. This it is alleged gave rise to a duty on the part of
SIHL, Steinhoff NV and the Steinhoff directors
to disclose to
existing and potential shareholders of these companies the “t
rue
nature
” of the impugned transactions and reflect this in
the financial statements of the companies. I shall refer to this as
“the
disclosure duty”.
148.
This case rests upon the proposition that the complicity of
the Steinhoff directors in orchestrating the impugned transactions
required
these directors to disclose the true facts concerning the
impugned transactions in the companies’ financial statements
for
the benefit of the shareholders and prospective shareholders.
149.
The alleged complicity of the Steinhoff directors in
concluding or permitting unlawful transactions is a breach of their
fiduciary
duties. If then the Steinhoff directors failed to cure this
breach by making sure that the transactions were properly disclosed
in the financial statements; that would be a compounding breach. The
difficulty however is not the identification of the duties
breached,
but to whom the duties are owed. The draft pleading assumes that the
duty is owed to the shareholders, and even to prospective
shareholders. But the basis of the disclosure duty is not explained,
other than to state that the price of the shares was based
on the
perception of the market as to the underlying value of the shares.
That perception was impacted by the failure of the directors
to
disclose accurate information in the financial statements of the
companies concerning the impugned transactions. This led shareholders
and prospective shareholders to be misled by the pricing of the
shares in the market at inflated levels, which in turn led these
investors to buy shares at prices in excess of their true value or to
hold the shares when they would have sold them.
150.
The difficulty with this chain of reasoning is not that it is
implausible to posit that the mispricing of shares as a result of
non-disclosure could give rise to loss, but rather that the cause of
loss is not a sufficient basis to decide wrongfulness; and
more
particularly, to whom the duty of disclosure is owed. The heart of
the enquiry as to wrongfulness in cases of pure economic
loss is to
determine whether the loss should lie where it falls, and it is for
the plaintiff to persuade the court that this presumptive
allocative
principle should not prevail. That is not done, in cases such as
this, by pleading that the conduct of the directors
caused the shares
to be mispriced, which in turn, caused purchasers of the shares to
suffer loss.
151.
In my view, the case advanced has this difficulty. A case can
be pleaded that the conduct of the Steinhoff directors is in breach
of the directors’ fiduciary duties. But In accordance with the
standard account of directors’ fiduciary duties, those
duties
are owed to the company. Any harm suffered as a result of the breach
is actionable by the company to whom the duties are
owed. The breach
may also cause harm to shareholders, and indeed potentially to other
classes of persons: creditors, employees,
suppliers and customers.
The harm does not establish that the duty is owed to all persons who
suffer harm. On the contrary, and
as the cases show, there must be a
special relationship that subsists between the directors and the
plaintiffs so as to require
that the fiduciary duties owing to the
company are also due to other persons. The prospective action fails
to make that case. And
compounds the problem by alleging that the
Steinhoff companies to whom fiduciary duties are owed also owes those
duties to the
shareholders. I find no basis on the pleaded case, read
with the affidavits, that permit me to find that the Steinhoff
directors,
SIHL or Steinhoff NV owe fiduciary duties to the
shareholders. Without such a case, I cannot find that there is a
cause of action
because, absent wrongfulness, there is no delict.
152.
Wrongfulness,
as our courts have emphasized, is of course a wide-ranging enquiry.
It may be argued that the consideration of fiduciary
duty is to focus
too narrowly. Wrongfulness is determined by a reasoned judgment as to
what policy and the legal convictions of
the community require. Our
courts have emphasized a number of considerations that inform this
enquiry
[30]
. They may be
summarized as follows. First, cases of this kind give rise to the
twin dangers of numerous plaintiffs and indeterminate
liability. What
is the regulating principle that differentiates deserving plaintiffs
from the plurality of persons who may have
suffered foreseeable loss?
Second, what kind of losses are suffered by different classes of
persons? Where should the risk of that
loss lie, and what are the
costs and benefits to society of imposing liability or declining to
do so? Third, does the conduct infringe
important rights that we
value? Fourth, was the representation made in a commercial setting in
response to a request, in circumstances
where the plaintiff was
dependent upon the defendant for the information provided? Fifth,
could the plaintiff reasonably have taken
steps to avoid the risk of
harm: often styled the vulnerability to risk principle? These
considerations are by no means exhaustive,
nor of application in
every case.
153.
The claims of shareholders for the loss of value of their
shares certainly gives rise to the problem of numerous plaintiffs and
indeterminate liability. Steinhoff shares were widely traded on the
JSE and FSE. The variety of types of trading that takes place
on
financial markets by means of different financial instruments is
legion. These trades take place in response to price signals
in the
market. Those price signals, as the particulars of claim allege, are
responsive to what is said in the company’s financial
statements. It is difficult to imagine that directors should
potentially be liable to every person who trades in a share or a
derivative financial instrument because the quoted price is in some
measure reflective of financial information concerning the company
that has been made public by the directors. Nor is it clear how to
differentiate the claims of those who have traded the share.
The
natural sympathy that might be extended to small retail investors is
not a principled basis of differentiation because it is
not the size
or skill of the person who makes the trade, but the fact that the
price is distorted by misinformation that affects
all who buy and
sell shares and other instruments in the market.
154.
This difficulty is compounded by the problem of consistent
extension. If there is liability to shareholders, the particulars of
claim already contend for a duty owed to persons who were considering
the purchase of Steinhoff shares, and then did so. The novelty
of
this claim is that it is the price of the share that influences the
decision to purchase, even before the person has bought
the share and
become a shareholder. But if there is liability to prospective
purchasers who buy the share is there liability for
prospective
purchasers who decide not to do so because of distorted price
signals? And what of other classes of person who rely
upon the share
price of a company or even more directly upon the company’s
published financial statements? Are directors
also to be held liable
for the losses incurred by creditors, suppliers, customers? It is
hard to imagine that liability on this
scale could be justified.
155.
There is little doubt that if directors were to be held liable
to shareholders and prospective shareholders, this would operate as
a
powerful deterrent against negligent misstatements made in the
financial statements of the company. It is certainly a public
good
that transactions in the market should be informed by information
that is accurate. But the risk thereby assumed by directors
of huge
liabilities to large numbers of investors is likely to be so great
that it would deter many from assuming office in listed
companies to
the detriment of these companies, capital markets, and the economy as
a whole. The balance of harm suggests that the
risk of loss should
remain with those who suffered it.
156.
There is a further matter of public policy that goes to the
conceptual foundations of the company and the compact upon which it
is based. The investment by a shareholder in a company is capital
placed at risk. The shareholder looks to the company to secure
a
return. The shareholder enjoys the great benefit that, save in
exceptional circumstances, no risk, beyond the equity stake, is
assumed for the liabilities of the company. If the directors breach
their duties and the company suffers loss, the company can
claim
damages from the directors. That permits of redress to make good the
loss, and the shareholders secure the benefit of this
through their
investment in the company. What the cause of action proposed by Ms De
Bruyn would do is to permit both the company
and the shareholders to
claim for the directors’ breach of duty. This would render the
directors liable not just for the
loss to the company but directly to
the shareholders for the loss of value of their shares. Quite apart
from the question as to
whether these losses are different and hence
whether the recognition of directors’ liability to shareholders
is double counting,
why should shareholders enjoy the risks and
rewards of the limited liability company, but in addition be entitled
to look to the
directors of the company to underpin the value of
their shares? The better view is that shareholders must rely on the
company to
claim for any loss caused to the company by the directors’
breach of duty and enjoy any benefit thereof through the company.
By
investing in the company, shareholders take the risk that the value
of their shares may be affected by misconduct on the part
of
directors. In order to mitigate this risk, shareholders must look to
the company to claim for any loss caused to the company.
Beyond this,
and save in special circumstances where directors have assumed
particular risks by reason of a special relationship
forged with
shareholders , the diminution in the value of shares caused by the
impact of the directors’ conduct upon the
pricing of shares is
simply one of many risks assumed by investors when they acquire risk
assets in a market.
157.
Adjusting the balance of risk to favour investors and burden
the directors of the company in which shareholders have chosen to
invest
is not self-evidently welfare enhancing. Nor it plain that
such risk adjustment is required as an incident of any fundamental
right
enjoyed by shareholders to invest in risk assets on a market.
158.
There are of course situations in which shareholders may have
sought specific information from the company and its directors or
where directors provide the information to permit the shareholders to
vote on a particular transaction. These situations may forge
a
special and particular relationship between the shareholders and the
company that gives rise to a dependency by the shareholders
on the
information given to them. And here the shareholders may be able to
show that they could not otherwise have protected their
position by
procuring accurate information.
159.
But that is not the proposed case before me. It is not said
that the Steinhoff shareholders forged any such relationship. Indeed,
they did not because their reliance was based on price signals in the
market. Those who buy and sell in markets do depend on the
prices
reflected in the market and there may be limited ways to identify and
verify information that influences market prices,
including what is
stated in published financial statements. That is why those who
invest in shares do so on risk as to the many
factors that influence
the quoted price of traded shares and the law of delict should not in
general be used to attenuate that
risk.
160.
For these reasons, I find that Ms De Bruyn has failed to plead
a case that makes out the requirement of wrongfulness. Absent such
a
case, there is no common law liability in delict against the
Steinhoff directors, SIHL and Steinhoff NV, and hence the reliance
on
this cause of action gives rise to no triable issue.
161.
The opposing Steinhoff directors raised other issues which
they submitted rendered the cause of action in delict excipiable.
Important
among them is the question whether the reliance by
shareholders and prospective shareholders on the price of quoted
shares, influenced
by the published financial statements of the
Steinhoff companies, provides a tenable basis upon which to establish
detrimental
reliance, and hence causation, in an action based upon
negligent misstatements. I find it unnecessary to express a view of
these
matters, given the conclusion I have reached on the question of
wrongfulness.
162.
For the same reason, it is also unnecessary for me to
determine whether there is a
prima facie
case in delict that
has been made against the opposing Steinhoff directors or indeed more
generally. There is simply no showing
on the draft particulars and
affidavits that members of the class have a cause of action that is
recognized as a matter of law.
THE
COMMON LAW CLAIM AGAINST DELOITTE
163.
Ms De Bruyn seeks to hold Deloitte liable for the damages
caused to shareholders and prospective shareholders as a result of
Deloitte’s
negligent performance of the audit of SIHL. The
auditors negligently represented that the financial statements were
reasonably
free of error when they were not; the quoted share price
of the shares was influenced by what was contained in the financial
statements;
and shareholders and prospective shareholders relied upon
the price to acquire shares or maintain their holding of Steinhoff
shares.
164.
As
with the claim against the Steinhoff directors, this cause of action
requires a showing of wrongfulness in respect of a claim
for
negligent misstatement causing pure economic loss. In a claim against
an auditor for pure economic loss wrongfulness is not
presumed.
[31]
More is required, and whether wrongfulness can be established is a
question of public and legal policy. Our courts have taken the
position that the mere fact that it was foreseeable that the
financial statements would be used in a commercial transaction
between
the company for whom the audit was performed and a third
party does not give rise to duty of care by the auditors to the third
party, with whom the auditors enjoyed no relationship.
[32]
165.
The
auditors are not the functionaries of the company. The auditors are
appointed to discharge an independent function to report
to the
shareholders as to whether the financial statements of the company
give a true and fair view of the company’s financial
position.
[33]
It might be
thought that this places the auditors in a proximate relationship to
the shareholders that could give rise to a duty
of care. This issue
was very fully explored in
Caparo
[34]
,
a
decision of the House of Lords. The appellants had audited the
accounts of a company, Fidelity Plc (“Fidelity”),
approved by the directors of Fidelity. The accounts were issued to
the shareholders. The accounts reported profits below predictions
and
the share price of Fidelity dropped. Caparo Industries Plc
(“Caparo”), already a shareholder when the accounts
were
issued, purchased additional shares in Fidelity and then made a
successful take-over bid. Caparo complained that its purchase
of
shares and bid were made in reliance on the accounts which were
misleading in overvaluing the stock and undervaluing the after-sales
credits. Caparo sued the auditors for negligently certifying that the
accounts showed a true and fair view of Fidelity’s
financial
position, when they did not.
166.
Lord Bridge examined the relationship between an auditor and
the shareholders of a company. The interest of the shareholders that
an auditor has a duty to protect is their collective interest in the
proper management of the company. If the negligent audit of
a company
were to deprive the shareholders of their powers in general meeting
to call the directors to account that might give
rise to a cause of
action. However, there was no basis to find that the scope of the
duty of an auditor to a shareholder extends
to a decision to purchase
additional shares. That decision is one taken by an existing
shareholder from a position no different
to any other member of the
investing public.
167.
There is much in
Caparo
that is of persuasive value.
First, there is no duty of care to the public that relies upon the
audited accounts of a company. Such
liability is far too diffuse and
indeterminate. Second, in order to find that the auditors owe a duty
of care to shareholders the
auditors must apprehend or reasonably
apprehend that their advice will be relied upon by a particular class
of shareholder for
a particular purpose or transaction. Whether
described as proximity or a special relationship, unless advice is
sought and given
to specific persons who depend upon it for a
particular purpose, it is hard to see how auditors may be held
responsible to all
shareholders for anything they may decide to do on
the strength of the company accounts. Third, in most circumstances,
the harm
done by the auditors’ negligence is done to the
company and any loss may be claimed by the company to the indirect
benefit
of shareholders through their shareholding. If the
shareholders have suffered a distinctive loss as a result of the
shares they
have bought in the company or shares they did not sell,
absent a special advisory relationship, shareholders are in no
different
position to other members of the investing public to whom
auditors of a company owe no duty of care.
168.
The
reasoning in
Caparo
and its
explication of the proximity test has been applied by the Appellate
Division in
Standard
Chartered Bank of Canada
[35]
,
a case
concerning a bank’s liability for negligent misstatement. There
is every reason to think that
Caparo
is just
as availing (if not more so) where, as here, we are concerned with
auditors’ liability for negligent misstatements.
169.
Counsel
for Ms De Bruyn sought to counter the persuasive reasoning in
Caparo,
referencing
the more recent decision of the Supreme Court of Canada in
Livent.
[36]
Livent
was a publicly listed company. It employed Deloitte as its auditors.
Deloitte identified irregularities in Livent’s
accounting of
profits. Instead of resigning and reporting the matter, Deloitte
helped to prepare a press release which misrepresented
the basis for
the reporting of profit and continued to support Livent, providing a
comfort letter for the underwriting of a sizeable
debenture. A new
management team discovered fraud and irregularities, giving rise to a
restatement of Livent’s financial
statements. This caused the
share price to fall and the company went into receivership.
170.
The issue for determination in
Livent
was whether
Deloitte owed a duty of care to Livent and the scope of that duty.
The majority of the court held that Deloitte owed
and breached its
duty of care to Livent in relation to the company’s statutory
audit. The purpose of the statutory audit
was to protect the company
from undetected error and wrongdoing and to give shareholders
reliable information to permit of their
oversight of the company. The
negligent audit by Deloitte exposed Livent to reasonably foreseeable
risk of financial loss that
could have been avoided had Deloitte
conducted a proper audit.
171.
Although
Livent
provides an account of the duty of care
of auditors that is broadly consonant with our law, it is of no
comfort to Ms De Bruyn’s
case. First, the claim was made by the
company against its erstwhile auditors for the losses caused to
Livent. The case has nothing
to say about a duty of care owed by
Deloitte to shareholders who invested in the company. Second, the
court found that there may
be a proximate relationship between an
auditor and its corporate client giving rise to a duty of care, but
the scope of that duty
is constrained by the purpose for which the
services of the auditor were rendered and the reliance that the
client places on the
advice or service rendered. Third, the court
drew a distinction between Deloitte’s participation in the
press release and
comfort letter which was undertaken for the purpose
of soliciting investment and Deloitte’s preparation of the
audit which
was prepared to assist shareholder oversight. The
inability of shareholders to engage in oversight gave rise to
reasonably foreseeable
injury, the solicitation of investment did
not.
172.
What
Livent
entails, of relevance to the case before
me, is the following. The duty of care of auditors in the preparation
of a company’s
statutory audit is owed to the company. The
purpose of the audit is to protect the company from error and
wrongdoing and to provide
reliable information to shareholders to
permit of their oversight. These purposes do not render te duty one
that is also owed by
the auditors to the shareholders. Rather, the
shareholders benefit from compliance with the duty so as to exercise
their rights
of oversight by way of the governance of the company.
The shareholders do not enjoy rights against the auditors for their
audit
of the company. And even where the auditors participated in
representations that sought to solicit investments for the company,
the issue of liability in
Levant
was not to recognize the
liability of auditors to investors but rather the extent of the
auditors’ duty to the company in
respect of the efforts to
solicit investment.
173.
Livent
offers no support for the claim against Deloitte
in the case before me.
174.
The revised draft pleadings, taken together with the
affidavits, in my view fail to disclose a cause of action against
Deloitte.
First, there is no case pleaded that Deloitte’s
opinion concerning the accounts of SIHL was sought by Steinhoff
shareholders,
nor that there was any special relationship that
subsisted between Deloitte and the Steinhoff shareholders; nor that
Deloitte had
any reason to apprehend that the Steinhoff shareholders
( or a subset of them ) would rely upon Deloitte’s opinion
concerning
the accounts when making investment decisions about the
acquisition or disposal of Steinhoff shares. This is so because the
proposed
class is made up of persons, as to one subset of the class,
who relied upon the quoted price of Steinhoff shares in deciding to
purchase share. These persons were either not shareholders when they
made the acquisition or, if they were, that was entirely incidental
to the acquisition. Thus, they were indistinguishable from members of
the investing public. As to the other subset of the class,
this is
made up of persons who were shareholders but did not sell their
shares in reliance on the elevated price of the shares.
Here too,
there is no proximate or special relationship that would extend to
these persons a duty of care owed by Deloitte when
these persons made
investment decisions.
175.
Second, while it is important to recognize that auditors,
appointed to report as to whether the company’s accounts give a
true and fair view of the company’s financial position, have a
duty to discharge that is independent of the company, the scope
of
that duty requires careful delineation. This duty is owed to permit
shareholders to exercise their rights as shareholders in
respect of
the governance of the company. It is not owed to permit shareholders
to make investment decisions as to whether or when
to buy or sell
shares in the company. Much less is it owed to persons deciding
whether to purchase shares in the company who then
decide to do so.
176.
Third, whatever the desirability of securing conditions that
foster making investment decisions by reference to undistorted price
signals, this does not rise to the level of a right, constitutional
or otherwise, that requires protection.
177.
Fourth, and for reasons already explained in respect of
directors, there is no compelling basis to suppose that the transfer
to
auditors of the risks associated with investment decisions made by
persons paying regard to distorted price signals would yield
some net
social benefit, even if the auditors’ incorrect opinion may
have contributed to that distortion. An investment in
shares is an
investment in a risk asset. Many factors may influence the price of a
share, including information that turns out
to be false. That is one
of the risks that inheres in this type of asset. Better in my
estimation, as a matter of policy, to let
the risk of faulty opinions
lie with those who invest in traded equities and enjoy the returns of
their risk-taking.
178.
I conclude on this aspect of the pleadings and affidavits that
rely upon a common law claim in delict by shareholders and
prospective
shareholders against Deloitte, based on the failure to
conduct a proper audit of SIHL and Deloitte’s publicly stated
opinions,
that cause of action along these lines is recognized in our
law.
179.
Deloitte submitted that a claim for negligent misstatement
that rests upon the effect of the misstatement upon the price of the
shares in the market and the decisions by investors to buy or sell
shares cannot meet the requirement of legal causation –
the
causal connection is too remote. Given the conclusion that I have
reached as to wrongfulness in respect of the auditors’
liability claim, there is no need to determine this criticism of the
proposed cause of action. For the same reason, I do not need
to
determine whether there is a
prima facie
case in delict made
against Deloitte.
THE
STATUTORY CLAIMS
180.
The essential features of the cause of action that is proposed
on behalf of class members has been summarized above. The statutory
claims against the Steinhoff directors, SIHL and Steinhoff NV rest
upon three claims: a claim in terms of
s218(2)
of the
Companies Act,
a
claim in terms of
s20(6)
of the
Companies Act, and
a prospectus
claim in terms of
ss 104
and
105
of the
Companies Act. I
turn to
consider these claims.
181.
The draft pleadings allege that the Steinhoff directors, and
through them, SIHL and Steinhoff NV, having engaged in the impugned
transactions, failed to state the true financial position of the
companies in their financial statements, and contravened the
following sections of the
Companies Act: ss
22, 28, 29, 30, 40 and
76. These contraventions give rise to liability to the class members,
jointly and severally, for any damages
suffered by them in terms of
s218(2)
and s
20
(6).
0cm
; line-height: 150%">
182.
Section 218(2)
reads as follows:
“
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.”
183.
Counsel for Ms De Bruyn submits that the language is clear.
While the provision establishes liability in the widest terms, if
that
is what the legislature decided, the Steinhoff shareholders have
a claim against SIHL, Steinhoff NV and the Steinhoff directors
for
their contraventions of the
Companies Act.
184.
Two
cases were cited in support of the proposition that
s218(2)
does
impose liability upon directors for contraventions of the
Companies
Act at
the instance of third parties. In
Rabinowitz
[37]
,
the
court, citing the interpretations of two commentaries on the
Companies Act, found
, on exception, that the directors can be held
personally liable in terms of
s218(2)
for acquiescing in or knowing
about conduct that falls within the ambit of
s22(1)
– the
prohibition against reckless trading. In
Sanlam
[38]
,
it was held that a person induced to enter a transaction could sue
for damages in terms of
s218(2)
as a result of the contraventions by
directors of
s 76(3).
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185.
A
different conclusion was reached,
obiter,
in
Hlumisa
[39]
.
Here
shareholders of African Bank Investment Limited (ABIL) sought to have
ABIL’s directors and auditors held liable on the
basis of the
devaluation of their shares. The shareholders’ claim relied
upon
s218(2)
and the conduct of the directors in contravening
s22(1)
and s
76
(3). The court did not accept that
s218(2)
could be
interpreted on the radical premise that the legislature intended to
dispense with the requirement of fault, to place no
limit on third
party claimants, nor restrict the provisions of the
Companies Act
that
could be relied upon to establish a contravention. Nor is there
is there reason to interpret
s218(2)
on the basis that it discards
the common law requirements of fault, foreseeability, causation and a
proper plaintiff. Indeed, the
court did not consider that
s218(2)
was
intended to change the common law.
186.
The
decision was ultimately decided on the basis that shareholders had no
claim for a loss that was suffered by the company. And
since it was
not the plaintiffs’ case that they suffered a loss separate and
distinct from the loss suffered by the company,
the plaintiffs had no
cause of action. This, it is submitted on behalf of Ms De Bruyn,
renders
Hlumisa
distinguishable
because the class members in the present case have suffered a loss
that is distinctive and it is questionable whether
SIHL and Steinhoff
NV have suffered any loss at all. That submission as to what loss is
alleged in the present case was much debated.
However, what is plain
is that
Hlumisa
provides
a strong endorsement of the need to interpret
s218(2)
so as to chime
with the common law and the limitations upon liability imposed by the
common law, including the
Prudential
[40]
principle
of reflective loss: a shareholder cannot sue for the diminution in
value of his or her shares where that loss is simply
a reflection of
the loss suffered by the company.
187.
The
interpretation of
s218(2)
must commence with the question of
interpretation posed in
Steenkamp
[41]
:
does the statute give rise to a claim for damages for breach of a
statutory duty? If so, that ordinarily excludes a common law
claim
for breach of statutory duty. If the statute indicates that there is
no liability for a breach of statutory duty, that would
ordinarily
support the conclusion that there is no common law claim for breach
of statutory duty. If the statute is neutral as
to the question of
liability for statutory breach that may indicate that no common law
claim can be made. The issue is ultimately
one of the interpretation
of the statute (text, context and purpose) so as to decide whether
the statute confers a right of action
or provides the basis for a
legal duty at common law.
[42]
188.
The plain language of
s218(2)
imposes liability for loss or
damage suffered as a result of a contravention of any provision of
the
Companies Act. This
has led certain courts to interpret the
provision literally and in the widest of terms. However, the very
generality of the language
does not answer two questions, without
irresoluble circularity. First, what obligation arises from the
contravention that gives
rise to liability? Second, to whom is the
obligation owed?
189.
The literalist interpretation may be tested in this way.
Section 77
(2) (a) holds directors liable for breach of fiduciary
duty, in accordance with the principles of the common law, for loss,
damages
or costs sustained by the company caused by any breach by a
director of a duty imposed upon directors in
ss 75
,
76
(2) or
76
(3)(a)
or (b). I have found that the common law does not hold directors
liable to shareholders who suffer the loss of value of their
shares,
even if, as alleged, that loss was sustained by reason of the
contraventions by the Steinhoff directors of the standards
required
of them as laid down in
s76(3).
Section 218(2)
cannot be read to
render directors liable to shareholders for breach of their duties
under
s 76(3)
, when the common law, incorporated by reference in
s 77
(2) (a), recognizes no such liability. To interpret
s218(2)
in a
literal way would give rise to incurable contradiction.
Section
218(2)
would be read to impose liability upon a director who
contravened the standards in
s76(3)
in favour of shareholders who
sustained loss, whereas,
s 77(2)(a)
imposes no such liability.
190.
This point of interpretation is further illustrated by
considering
s22.
Section 22
states that a company must not carry on
its business recklessly, with gross negligence, with intent to
defraud any person or for
any fraudulent purpose. A company
contravenes
s22
only if it carries on its business with one or other
of the specified species of fault. Any liability that arises under
s22
is determined under the disciplining concepts of fault to be
found in this provision. No coherent interpretation would suggest
that because
s218(2)
provides for liability without reference to
fault,
s22
can be read to impose strict liability. On the contrary,
fault is constitutive of the contravention.
191.
Section 218(2)
should not be interpreted in a literal way.
Rather, the provision recognizes that liability for loss or damage
may arise from contraventions
of the
Companies Act. And
so the
statute confers a right of action. But what that right consists of,
who enjoys the right, and against whom the right may
exercised are
all issues to be resolved by reference to the substantive provisions
of the
Companies Act.
192.
Such
an interpretation answers another difficulty that the
literal interpretation of
s218(2)
does not. As
Hlumisa
observed,
can
s218(2)
be understood to impose liability without the regulating
concepts of fault, foreseeability and remoteness; and an
undifferentiated
conception of permissible plaintiffs. Such an
understanding would require an interpretation of
s218(2)
that gives
rise to wholesale liability at the instance of all persons who
sustained loss or damage as a result of the contravention.
That is to
place a burden of liability and hence risk upon directors so great
that it is hard to imagine who would accept office
on these terms.
And if that is what the legislature intended it would be expected to
have made the imposition of so great a burden
clear. The better
interpretation is that the legislature intended that the specific
requirements of any liability are to be found
in the substantive
provisions of the
Companies Act. Section
218(2) has a different
function. It determines the question posed in
Steenkamp:
contraventions do permit of a right of action. Whether there is a
right of action, who enjoys the right, and on what basis are all
matters regulated by the substantive provisions of the
Companies Act.
193.
I
am however in respectful disagreement with the central
holding in
Hlumisa
that
s218(2)
imports common law concepts of
liability. Although it is a durable and well established principle of
interpretation that legislation
must be interpreted in conformity
with the common law,
s218(2)
, read with the substantive provisions of
the
Companies Act, give
rise to a statutory scheme of liability. This
does not displace the common law, save in respect of the common law
claim for breach
of statutory duty. Rather the statutory scheme of
liability exists alongside liability recognized at common law, for
example in
delict for a director’s breach of a duty of care.
194.
This is so for the following reasons. First, as
Steenkamp
makes plain, once a statute provides for a claim for the
contravention of a statutory duty, that ordinarily excludes a common
law
claim for breach of statutory duty. Second, where the
Companies
Act intends
directly to import the principles of the common law for
the purposes of imposing liability for contraventions of the Act, it
states
this expressly. This appears plainly in s 77(2). Third, the
common law may still inform how the courts interpret the statutory
scheme of liability, but that is not the same as either equating the
statutory scheme to the common law or importing the common
law into
the statutory scheme, save where the statute so directs.
195.
This interpretation of s218(2) requires that the substantive
provisions of the
Companies Act must
be considered to determine
whether the statutory claims of the class members can be sustained.
196.
The amended draft particulars are pleaded in the following
way. The impugned transactions are alleged to be unlawful in various
ways. The impugned transactions caused the assets, income and profits
of SIHL and Steinhoff NV to be overstated in the financial
statements, and the liabilities of these companies to be understated.
The directors of SIHL and Steinhoff NV were under a duty
to disclose
to existing and potential shareholders the true nature of the
impugned transactions in the companies’ financial
statements.
The directors were negligent in failing to do so. Had they done so
the value of the shares in SIHL and Steinhoff NV
would have reflected
their true value.
197.
These allegations provide the foundation upon which specific
contraventions of the
Companies Act are
pleaded as follows. SIHL and
Steinhoff NV, acting through their directors:
(i) failed to keep
accurate or complete accounting records as required by
s28(1)
;
(ii) falsified or
permitted the falsification of the companies’ accounting
records in contravention of
s28(3)(b)
;
(iii) failed fairly to
present the state of affairs and business (including transactions) of
the companies as required by
s28(1)(b)
(iv) failed accurately to
show the assets, liabilities, equity, income and expenses of the
companies as required by
s29(1)(c)
and s
29
(6)(a);
(v) prepared
financial statements that were false, misleading and materially
incomplete in contravention of
s29(2)(a)
and (b);
(vi) prepared annual
financial statements that failed to include in the reports of the
directors matters material for the shareholders
to appreciate the
state of the companies’ financial affairs in contravention of
s30(3)(b)
;
(vii) carried on the
business of the companies recklessly, with gross negligence in breach
of
s22.
(I shall refer to the
contraventions listed in (i) – (vi) collectively as the
financial statement contraventions, and the
contravention in (vii) as
the reckless trading contravention)
198.
As against the SIHL directors and Steinhoff NV directors the
following contraventions of
s76(2)
and s
76(3
) are alleged:
(i) The directors failed
to communicate to the boards of SIHL and Steinhoff NV at the earliest
practicable opportunity, material
information that came to their
attention;
(ii) failed to exercise
the powers and perform the functions of directors in good faith and
for a proper purpose, in the best interests
of the companies, with
the degree of care, skill and diligence that may reasonably be
expected of a person carrying out the functions
of a director and
having the general knowledge, skill and experience of that director.
(I
refer to these contravention collectively as the
s76
contraventions )
199.
A special case is pleaded against Mr Jooste, the 14th
Respondent. He is alleged to have acted with intent to deceive or
mislead
shareholders in contravention of
s28(3)(a)(i)
and thus to
have committed an offence. Mr Jooste is also alleged to have carried
on the business of SIHL and Steinhoff NV with
intent to defraud any
person in contravention of
s22.
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200.
The case is then pleaded that this conduct of SIHL, Steinhoff
NV and their directors constitutes contraventions of
ss
22
,
28
,
29
,
30
,
40
, and
76
, and that in terms of
s218(2)
SIHL, Steinhoff
NV and their directors are jointly and severally liable to class
members for any damages suffered by them.
201.
I consider first the
s76
contraventions.
Section 76
sets the
standards of conduct required of directors. The liability of
directors for failing to meet these standards is set out
in
s77.
The
pleaded case relies upon contraventions of
s76(2)
and s
76
(3).
Section
77
treats of the liability for breach differently for different
categories of duty. A breach of the duties described in
s76(2)
or
76
(3)(a) or (b) allows that a director of a company may be held
liable , to use the statutory language, “
in accordance with
the principles of the common law relating to breach of a fiduciary
duty for any loss, damages or costs sustained
by the company as a
consequence of any breach by the director of a duty…”.
202.
The importation of the principles of the common law into this
species of statutory liability disciplines the ambit of liability
and, more especially, answers this central issue: to whom are these
duties owed so as to exact liability for breach? No liability
attaches that is not in accordance with the principles of the common
relating to breach of fiduciary duty.
203.
I have found that the principles of the common law do not,
save in special circumstances not pleaded or relied upon in this
case,
hold that the directors of a company owe fiduciary duties to
the shareholders. Once that is so, the case that is sought to be made
out in terms of
s76(2)
and s
76(3
) (a) and (b) has no basis in law
because these duties are in no way distinctive and are subject to the
principle of the common
law that the fiduciary duties of directors
are not owed to the shareholders.
204.
A breach of a duty specified in
s76(3)(c)
may render a
director liable in terms of
s77(2)(b)
“
in accordance with
the principles of the common law relating to delict for any loss
damage or costs sustained by the company as
a consequence of any
breach by the director …”.
Here too, common law
principles discipline liability, but in accordance with the law of
delict. I have found that the law of delict
does not recognize that a
duty of care is owed by the directors to the shareholders, save where
there is a special relationship
that is not here pleaded or relied
upon. It follows that the case sought to made out in terms of
s76(3)(c)
has no basis in law.
205.
I consider next the reckless trading contravention.
Section
22(1)
requires that a company must not carry on its business
recklessly, with gross negligence, with intent to defraud any person
or
for any fraudulent purpose.
Section 77(3)(b)
provides,
that a
director of a company is liable for any loss, damages or costs
sustained by the company as a direct or indirect consequence
of the
director having… acquiesced in the carrying on of the
company’s business despite knowing it was being conducted
in a
manner prohibited in a manner prohibited by
s22(1).
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206.
Section 22(1)
prohibits a company from carrying on business in
stated ways. Since the directors have the central responsibility to
manage a company
and how it carries on business,
s77(3)(b)
determines
the liability of a director when a company has infringed the
prohibition. For liability to arise, the director must
have known
that the business of the company was being conducted in this way, and
acquiesced.
207.
Two features of this scheme of liability are apparent. First,
the company must carry on its business with one or other attributable
type of fault. The fault must be attributable to the company by
reason of how those who act for the company have conducted its
business. It is however not assumed that every director is complicit.
That depends on a director satisfying the twin requirements
of
knowledge and acquiescence. Second, this is a nuanced regime which
limits liability by recourse to company fault and the failure
by a
director to act in virtue of their knowledge. Liability is individual
not collective. These provisions further reinforce the
observation,
referenced above, that
s218(2)
is not a self-contained provision that
determines liability for contraventions of the
Companies Act.
208.
Section
77(3) also answers this central question: to whom is a
director liable for knowing acquiescing in the company’s
reckless
trading? Put differently, who enjoys a right of action
against a director? The introductory language of
s77(3)
provides the
answer. A director of a company is liable for any loss, damages or
costs sustained by the company as a direct or indirect
consequence of
the director’s knowing acquiescence. It is the company’s
loss that is claimed and it is the company
that is the obvious person
upon whom the right is conferred to make good its loss. Such a
construction is also consistent with
the interpretative force of the
common law that directors owe their duties to the company, and if
they fail in those duties by
knowingly acquiescing in the company’s
reckless conduct, it is the company that exacts compensation for its
loss.
209.
It follows that the reckless trading contravention cannot be
made out, as a matter of law, because the shareholders have no right
of action.
210.
There is a further reason that leads to the same conclusion.
Section 77(3)
renders a director liable for the loss sustained by the
company. Counsel for Ms De Bruyn emphasized that class members do not
seek
to claim for the loss inflicted on the Steinhoff companies, but
for their own distinctive losses occasioned by the fall in the value
of their shares. This submission was necessitated by the acceptance
of the reflective loss principle that proved decisive in
Hlumisa.
But on the basis of the premise that class members wish to claim
for their own losses, they enjoy no right to do so in terms of
s77(3)(b)
, which confers a right of action confined to loss sustained
by the company.
211.
I turn to the financial statement contraventions. These
contraventions are an important part of the case the class members
wish
to make because it was the publication of false and misleading
financial statements that, it is alleged, informed the inflated
prices at which shares were acquired and decisions were taken by
shareholders to retain their Steinhoff shares.
212.
The financial statement contraventions fall into three
categories. The first concerns the failure by SIHL and Steinhoff NV
to keep
accurate and complete accounting records, as required by
s28.
The second concerns the duties resting upon a company to prepare and
provide financial statements that show the company’s
financial
position and that are neither false, misleading, nor incomplete in
any material respect. These duties are set out in
s29.
Third,
s30(3)(b)
requires that the annual financial statements of a company
must include a report by the directors with respect to the state of
affairs, the business, and profit or loss of the company and this was
not done.
213.
The statutory scheme of liability under the
Companies Act does
not attach a singular consequence for a contravention of the Act.
Rather, the
Companies Act attaches
a regime of liability for
particular contraventions. I have already observed that this is so in
respect of the contravention of
s76
and s
22
. This is a systemic
feature of the
Companies Act. A
breach of duty may exact compliance
by the Commission
(s22(3))
; a breach may be an offence
(s32(5))
; and
a breach may give rise to liability to make good a loss as a
consequence of the breach (
s77).
Certain breaches are visited with
more than one permissible consequence. Thus,
s22
permits the
Commission to issue a compliance notice. In addition, a director may
be held liable to the company for reckless trading
(
s 22(1)
read
with
s77(3)(b)
) .
214.
The more general point of interpretation is that the
legislature has been careful to stipulate what form of liability,
civil, criminal
or regulatory, may result from different
contraventions. There is no coherent reading of the
Companies Act
that
would subordinate this specification of differentiated liability
for the recognition under
s218(2)
of general liability of all persons
who contravene the
Companies Act in
favour of all who suffer loss as
a result thereof.
215.
Contraventions of
s28
and s
29
may give rise to criminal
liability (
s28(3)
and
29
(6)), In addition the Commission may issue a
compliance notice.
(s28(4)).
Significantly,
s77(3)(d)(i)
provides
that: “
a director of a company is liable for any loss,
damages or costs sustained by the company as a direct or indirect
consequence of
the director having ….signed, consented to, or
authorized the publication of any financial statements that were
false or
misleading in a material respect
”. This provision
imposes liability upon a director for loss or damages suffered by the
company as a result of a director’s
contravention of
s29(2)(a)
– the requirement that the financial statements prepared by the
company must not be false or misleading in any material respect.
216.
This is a clear indication that the legislature gave specific
consideration to the question of civil liability in respect of
financial
statements and decided to provide for a right of action as
it did in
s77(3)(d)(i).
There is no direct imposition of civil
liability for a contravention of
s28
, rather criminal liability may
result. That is a legislative choice that must be respected. But
civil liability may arise indirectly
from a contravention of
s28
because a failure to keep accurate and complete accounting records
may result in the preparation and publication of false or misleading
financial statements and the imposition of civil liability under
s29(2)(a)
read with
s77(3)(d)(i).
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217.
Section 30
does provide that a contravention may result in
civil liability. It does so in a particular form. The obligation
resting on a company
not to publish financial statements that are
false or misleading extends by direct reference to annual financial
statements contemplated
in
s30
( see the introductory language of
s29(2))
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218.
The financial statement contraventions that are to be relied
upon by class members to found statutory claims have no basis in the
Companies Act. The
civil liability that is recognized for such
contraventions is to be found in
s77(3)(d)(i).
As I have already
found, this species of liability is imposed upon directors at the
instance of the company that has suffered loss.
And further, it will
be recalled, that the class members seek compensation for the losses
they have suffered and not those of the
Steinhoff companies. That is
not the kind of loss that is contemplated by
s77(3)(d)(i).
No other
civil liability is recognized for the financial statement
contraventions. Consequently, the statutory claims based on
the
financial contraventions have no basis in law.
219.
I conclude also that the statutory claim predicated upon
s218(2)
cannot be sustained because the specific contraventions
relied upon do not accord shareholders a right of action against
SIHL,
Steinhoff NV or the Steinhoff directors.
SECTION
20
(6)
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220.
The second leg of the statutory claim is based upon
s20(6).
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221.
Section 20(6)
reads as follows:
“
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 –
(a)
this Act; or
(b)
a limitation, restriction or qualification contemplated in
this section, unless that action has been ratified by the
shareholders
in terms of subsection (2).”
222.
The draft particulars make a claim in terms of s20(6) in the
following way. The same specific contraventions are relied upon, as
is the case in respect of the claims under s218(2). In this claim, it
is alleged that the directors of SIHL, Steinhoff NV with
gross
negligence (and in the case of Mr Jooste intentionally, alternatively
fraudulently) caused SIHL and Steinhoff NV to conduct
themselves in a
manner inconsistent with the
Companies Act, alternatively
,
inconsistent with a limitation, restriction or qualification
contemplated in
s20.
The following sections of the
Companies Act are
then referenced as being the provisions, limitations, restrictions or
qualifications relied upon: 22,28,29,30,40 and 76. This,
it is
alleged, in terms of 20(6) renders SIHL, Steinhoff NV, and their
directors liable to class members, jointly and severally,
for any
damages suffered by class members.
223.
Section 20(6)
, unlike
s218(2)
, confers a right of action on
each shareholder of a company. The provision also specifies the
various species of fault that the
defendant must be shown to have had
for liability to accrue. This too distinguishes
s20(6)
from
s218(2).
The class of defendants upon whom liability is cast is not
indefinite. It is any person who, intentionally, fraudulently or due
to gross negligence, causes the company to do anything inconsistent
with the Act or
ultra vires
the powers of the company.
224.
Does s20(6) then confer a right of action upon Steinhoff
shareholders to claim from the directors of SIHL, Steinhoff NV and
the
Steinhoff for damages suffered by the shareholders for causing
SIHL and Steinhoff to act inconsistently with the
Companies Act or
ultra vires
the powers of the companies?
225.
One issue may be resolved with little difficulty.
Section
20(6)
cannot, logically, be of any application to confer a right of
action against SIHL or Steinhoff NV.
Section 20(6)
confers a claim
against any person who causes the company to do anything inconsistent
with the
Companies Act or
ultra vires
the powers of the
company. A company cannot cause itself to do something. As the
provision makes plain, it is persons who cause
the company to act. Of
course, there are circumstances in which the company may be liable
for what persons cause it to do. But
that is not what
s20(6)
provides, either expressly or by implication. Liability under
s20(6)
rests with the persons who cause the company to act, and not with the
company that acts as a result of what persons cause it to
do. This
interpretation is further borne out by the other remedial provisions
of
s20
that make it clear when the company may be made subject to an
order. It follows that no claim can be made by the Steinhoff
shareholders
against SIHL and Steinhoff NV in terms of
s20(6).
226.
One
ambiguity in the framing of
s20(6)
is the specification as to whose
damages the shareholders have a right to claim. On one reading, it is
the damages suffered by
the shareholder who enjoys the right to
claim. On another reading, it is the damages suffered by the company.
It is necessary to
interpret
s20(6)
by recourse to the oft- stated
principles of interpretation
[43]
to resolve this ambiguity.
227.
On one interpretation, the content of the right should be
understood on the premise that the right is conferred on shareholders
for their benefit. That benefit is to hold persons liable in damages
for causing the company to act so as to cause loss to the
shareholders. So interpreted, shareholders have the right to claim
damages for losses suffered by them.
228.
There is another way to interpret
s20(6).
Section 20(6)
does
not state what causal link must be established between what the
company is caused to do and the damages that are claimed.
This
omission stands in contrast to other provisions in the
Companies Act
that
impose statutory liability. For example, as I have observed, the
liability of directors imposed in terms of
s77
(2) and (3) refers to
loss, damages or costs sustained by the company.
Section 20(6)
is
also at odds with that most basic tenet of liability for civil
wrongs: determine who has suffered the loss caused by the wrong
to
decide who must be compensated.
229.
To the extent that
s20(6)
references causation, it does so by
marking out what a person causes the company to do. If, for example,
a director of a company,
with gross negligence, causes the company to
carry on business recklessly in contravention of, and thus
inconsistently with, the
Companies Act that
may do much harm to the
company. It may, in terms of
s22(3)
, lead the Commission to issue a
compliance notice, requiring the company to cease trading. That would
be likely also to cause the
price of the shares of a listed company
to fall, occasioning loss to shareholders. The point of significance
is that it is the
harm done to the company that gives rise to the
loss suffered by its shareholders. Does
s20(6)
render persons liable
to compensate the company at the instance of the shareholders or to
compensate the shareholders, or to compensate
both the company and
the shareholders?
230.
In the face of the omission from
s20(6)
as to whose loss is
compensable, it appears to me that the correct interpretation of
s20(6)
is that it imposes liability on persons who cause loss to the
company. This is so for the following reasons.
231.
First, it is important to situate
s20(6)
within the scheme of
s20
as a whole.
Section 20
is concerned with the consequences of
actions taken by the company outside the limits, restrictions or
qualifications of the purposes,
powers or activities of the company,
set out in the company’s Memorandum. I refer to such actions as
the
ultra vires
actions.
Section 20
gives treatment to the
consequences of
ultra vires
actions. This includes the
following: when an
ultra vires
action is void
(s20(1))
; the
ratification of an
ultra vires
action
(s20(20
and (3)) ; who
may restrain the company from doing anything inconsistent with the
limitations, restrictions and qualifications
of the company’s
Memorandum
(s20(5))
; and the position of persons dealing with the
company, other than directors, prescribed officers or shareholders
(s20(7)).
And
s20(4)
, in similar vein, allows that shareholders,
directors or prescribed officers of a company may restrain the
company from actions
inconsistent with the
Companies Act.
232.
Section
20 is thus concerned with two remedial functions: to
empower named classes of person to apply to court to restore the
company to
a state of affairs where it acts within its powers and
lawfully in terms of the
Companies Act; and
to secure the position of
third parties who deal with a company that is acting
ultra vires.
It would be discordant, in the light of these features of
s20
, if
s20(6)
were to be interpreted to provide the shareholders of a
company with a right of action to claim for damages suffered by them
as
a result of the
ultra vires
and unlawful actions of the
company. A reading of
s20(6)
that coheres rather better with
s20
is
this.
Section 20
recognizes that persons charged with managing the
business of the company, and most especially the directors, may cause
the company
to act
ultra vires
or unlawfully.
Sections 20(4)
and (5) provide a statutory remedy to restore the company to legality
because its deviance is prejudicial to the company.
Section 20(6)
is
simply a further statutory remedy, of a piece with the restorative
objects of
ss20(4)
and (5).
Section 20(6)
requires those who have
caused the company to act
ultra vires
or unlawfully to make
good to the company by way of damages the loss they have caused to
the company.
233.
This restorative claim for loss caused to the company is a
right of action given to the shareholders, and it might be considered
an oddity that the right of action was not also bestowed upon
directors and prescribed officers, as is the case in
ss20(4)
and (5).
The omission may be prudential.
Section 20(6)
is likely to focus
liability for the losses of a company upon directors, above others,
and this renders directors implausible plaintiffs
because to bring a
case to compensate the company may turn out to be an action of
self-harm. Shareholders, on the other hand, do
not manage or direct
the affairs of the company, and they have an interest in seeking
compensation for losses suffered by the company
because that will be
to the indirect benefit of the value of their shares.
234.
Second, the interpretation of
s20(6)
that I favour avoids
incongruity. There seems no reason why the legislature should wish to
compensate shareholders for what others
have caused the company to
do, whilst not compensating the company itself. So, for example, if
the company is held to a loss making
contract with a third party that
is
ultra vires
the company, it would be passing strange that
shareholders could claim for a loss that derives from the harm done
to the company,
but the company could not be compensated. No such
incongruity arises if the company is compensated for its loss at the
instance
of the shareholders because to do so will indirectly benefit
the shareholders.
235.
Third, there is no obvious rationale as to why the legislature
would decide to compensate shareholders, not only to the exclusion
of
the company, but indeed to the exclusion of other persons who might
suffer loss as a result of the company acting
ultra vires
or
unlawfully.
236.
Fourth, the common law provides helpful interpretative
guidance in deciding upon the meaning of
s20(6).
As I have explained,
the common law, save in special circumstances, has set its face
against a shareholders’ action for pure
economic loss caused to
shareholders by the actions of directors, and through them, by the
company. Yet that is precisely what
Ms De Bruyn contends that
s20(6)
recognizes. There is however an interpretation of
s20(6)
that is
consistent with the strictures of common law liability. And that,
other things equal, is the interpretation that should
prevail.
237.
Once, as I find, that
s20(6)
gives rise to no liability for
the damages that shareholders may have suffered by reason of the
ultra vires
or unlawful actions of SIHL or Steinhoff NV, the
cause of action that founds upon
s20(6)
is not , as a matter of law,
supportable. Recalling that ,as with the claim in terms of
s218(2)
,
the cause of action is based on the claim that the class members have
suffered a loss distinct from that of the company.
Section 20(6)
does
not afford shareholders a claim for losses of this kind.
THE
PROSPECTUS CLAIM
238.
The last of the statutory claims against SIHL, Steinhoff NV
and the Steinhoff directors is the prospectus claim.
239.
In the amended draft particulars it is alleged that on 7
August 2015 Steinhoff NV offered securities in Steinhoff NV to the
public
for subscription or sale pursuant to a prospectus as
contemplated in
ss104
and
105
of the
Companies Act. The
prospectus is
said to have contained untrue statements. During the period 7 August
2015 to 5 December 2017, one or more of the
shareholders acquired
shares in Steinhoff NV on the faith of the prospectus. The directors
who fall within the categories defined
in
s104
(1) are jointly and
severally liable for any damages suffered by the class members as a
result of the untrue statements.
240.
The predicate for liability in terms of
s104
is that
securities are offered to the public for subscription or sale
pursuant to a prospectus. An offer to the public is defined
in
s95.
Section 96(1)(c)
states that an offer is not an offer to the public
if it is a non- renounceable offer made only to existing holders of
the company’s
securities or persons related to existing holders
of the company’s securities.
Section 96(1)(c)
is a carve out
from the wide definition of an offer to the public in
s 95.
That is
made plain in the definition of an offer to the public which does not
include an offer made in any of the circumstances
contemplated in
s96.
Accordingly, an offer to the public includes an offer of
securities to be issued by a company to any section of the public,
whether
selected as holders of that companies securities or as
holders of any particular class of property, but does not include a
non-renounceable
offer made only to existing holders of the company’s
securities.
241.
Deloitte
and the Opposing Steinhoff directors contend, relying upon the
Goldfields
[44]
,
a decision pertaining to the position under the Companies Act 61 of
1973,that in terms of the Steinhoff prospectus and the Genesis
International prospectus there was not an offer made to the public
because the offer was a non- renounceable offer made to existing
holders of the company’s securities. It is common ground that
on 7 August 2015, SIHL received an offer from Steinhoff NV
to acquire
the entire issued share capital of SIHL by way of a scheme of
arrangement in terms of s110. The scheme consideration
was one
Steinhoff NV share for each SIHL share. The offer, it is submitted,
was made only to existing holders of the company’s
securities,
and is thus not an offer to the public.
242.
Counsel for Ms De Bruyn accepted that the prospectuses did not
make an offer to the public. The prospectus claim cannot be pursued.
No more needs be said about it.
THE
STATUTORY CLAIMS AGAINST DELOITTE
243.
The draft particulars plead statutory claims against Deloitte.
It is alleged that Deloitte has contravened s30 of the companies Act,
ss44(2) and (3), and 45 of the APA and IFRS. These contraventions are
said give rise to liability on the part of Deloitte to the
class
members for any damages they may have suffered. This liability rests
upon
s218(2)
and
20
(6) of the
Companies Act, and
s46(7)
of the APA.
The draft particulars also bring a prospectus claim against Deloitte
in terms of
ss 104
and
105
.
0cm
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244.
I have found that
s218(2)
requires that the substantive
provisions of the
Companies Act must
be considered to determine
whether the statutory claims of the class members can be sustained.
Section 30
requires that the annual financial statements of a public
company must be audited and must include an auditor’s report.
The
claim against Deloitte is that Deloitte failed to conduct a
proper audit.
Section 30
requires the company to prepare annual
financial statements. It is the company and not its auditors who must
satisfy the requirements
of
s30.
Section 30
does not impose any
statutory liability upon auditors, whether at the instance of
shareholders or otherwise, for a contravention
of
s30.
Accordingly,
s218(2)
provides no basis for a claim against Deloitte.
245.
The reliance placed upon contraventions of the APA and IFRS
cannot sustain a claim under
s218(2).
Section 218(2)
references, in
the clearest terms, a contravention of any provision of the
Companies
Act. Contraventions
of the APA and IFRS are not contraventions of the
Companies Act. Section
218(2) does not provide a remedy for such
contraventions.
246.
Nor is
s20(6)
of assistance to make a claim against Deloitte.
I have already found that
s20(6)
provides a remedy to make good a
loss suffered by the company and not by its shareholders.
247.
What then of the statutory claim founded upon the APA and
IFRS?
Section 46(2)
of the APA stipulates as follows :
“
In respect of
any opinion expressed or report or statement made by a registered
auditor in the ordinary course of duties the registered
auditor does
not incur liability to a client or any third party, unless it is
proved that the opinion was expressed or the report
or statement
made, maliciously, fraudulently or pursuant to the negligent
performance of the registered auditor’s duties.”
248.
The oddity of this stipulation is that it is framed on the
basis that without proof of certain matters there is no liability. It
does not provide, in plain terms, that proof of these matters
establishes liability, and hence an independent basis of liability.
249.
What signifies however is the limitation of liability
introduced by
s46(3).
The first limitation is that a registered
auditor incurs liability to third parties who have relied on an
opinion, report or statement
of that auditor and suffered financial
loss as a result of such reliance. I shall refer to this as the
detrimental reliance limitation.
The second limitation, in relevant
part, is that the auditor must know or could reasonably have been
expected to know at the relevant
time that the opinion, report or
statement would be used by the client to induce a third party to act
or refrain from acting or
to enter into a transaction, which the
third party has concluded with the client or any other person.
Alternatively, the auditor
knew or could reasonably have been
expected to know that the third party would rely upon the opinion,
report or statement to act
or refrain from acting or to enter a
transaction with the client or any other person. I shall refer to
this as the limitation as
to knowledge.
250.
The evident difficulty is that the cause of action against
Deloitte does not seek to make out a case predicated upon the
detrimental
reliance of the shareholders or prospective shareholders
upon the opinions of Deloitte expressed in the financial statements.
Rather,
the cause of action relies upon the allegation that class
members bought shares at inflated prices or held shares as a result
of
the inflated prices of the shares. Class members did not rely to
their detriment upon the opinions expressed by Deloitte in the
financial statements. That has never been the theory of liability
advanced. The cause of action seeks to rely upon an account of
causation that is indirect. The falsity of the opinions expressed in
the financial statements forms part of the information in
the public
domain that gave rise to the setting of prices in the market for
Steinhoff shares. It is the prices quoted on the exchanges
upon which
shareholders and prospective shareholders relied.
251.
Whatever the validity of this account of causation in order to
make out a case at common law based on negligent misstatements ( an
issue I have not found it necessary to determine ), it is not
causation in the form of detrimental reliance required in
s46(3).
Once that is so, there can be no statutory liability that Deloitte
incurs to class members by reason of any breach of duty in terms
of
s44
, even if,
arguendo,
s46(2)
establishes an independent
species of statutory liability.
252.
Nor does the cause of action against Deloitte satisfy the
limitation as to knowledge specified in
s46(3)(a).
The draft
particulars do not allege that Deloitte knew or could reasonably have
been expected to know that class members would
rely upon the opinions
expressed in the financial statements. That is simply not the case
that is sought to be advanced. Class
members did not rely on the
opinions expressed, and as a result it is unsurprising that it is not
pleaded that Deloitte knew or
could reasonably have known that class
members did so. Without such a case, there is no liability that can
be made out against
Deloitte in terms of
s46(3)(a).
0cm
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253.
The claim against Deloitte also relies upon a failure by
Deloitte of its duty to report irregularities in terms of
s45
of the
APA, and the contention that such failure results in liability to
class members in terms of
s46(7).
The draft particulars make no
allegations that the failure to report irregularities in the
Steinhoff companies was causally implicated
in the losses suffered by
class members. This much is clear from paragraph 178 of the draft
particulars that is referred to in
paragraph 185 of the draft. The
counterfactual as to what would have occurred had a report been made
and with what consequences
for the quoted price of the shares is left
unexplored.
254.
But in any event,
s46(7)
simply indicates that a registered
auditor may incur liability to a shareholder for failure to report.
Section 46(7)
does not say what requirements must be met for this to
take place, nor what liability may be incurred. This may be an
instance
where the legislature had it mind that a failure to report
may be wrongful for the purposes of common law liability. But
whatever
its meaning, it is not a self-standing basis for imposing
liability upon Deloitte.
255.
Finally, the contraventions of IFRS are advanced as part of
the claims made under
s218(2)
and s
20(6
) of the
Companies Act. These
claims, I have found, do not assist to make out a supportable cause
of action. The IFRS standards may inform the application of
the
criteria set out in
s44(3)
of the APA. No independent cause of action
is pleaded based upon the contraventions of IFRS. For this reason
also, the draft particulars
do not disclose a cause of action.
CONCLUSION:
TRIABLE ISSUES
256.
The draft particulars, taken together with the affidavits
filed on behalf of Ms De Bruyn, do not disclose a cause of action.
The
consequences of this finding is a matter I will consider in my
final consideration as to what the interests of justice require.
COMMONALITY
257.
I
turn to the issue of commonality. The utility of a class action
depends upon questions of law and fact that are common to members
of
the class and can be determined in one action.
[45]
Not every issue of law and fact that will determine a claim must be
common. Issues may be common to the class as a whole or to
subclasses.
Children’s
Trust
indicates
that there should be common issues that once determined would dispose
of all or a significant part of the claims of the
class or a
subclass.
Nkala
proposes
a more forgiving standard: does the determination of the common
issues move forward the case of the class?
258.
These cases may be reconciled in this way. In a simple case,
there is a claim and there are issues that require proof to establish
the claim. If there are central issues upon which the claim turns
that are common, then there is a strong showing of commonality
for
the purposes of certification. The fewer the issues of centrality
that are common the weaker is the case. Common issues that
are more
peripheral carry little weight.
259.
Where, as here, there are multiple claims brought against
different defendants, the assessment of commonality is made more
complex.
But the approach does not differ in principle. The judgment
of commonality is a question of degree. In a case of multiple claims,
there must be a coherent way of understanding the claims so as to
decide whether central features of the claims are common to members
of the class or subclasses. If this is shown, the more compelling is
the showing of commonality. It is possible that certain claims
exhibit strong features of commonality and others less so. It is then
a question of deciding whether there is nevertheless utility
in
certifying all the claims. In a complex case of multiple claims,
there is no requirement that the court must reach a binary
judgment
as to whether commonality is satisfied. Claims measure up to the
standard of commonality by degree. It is then a question
of deciding
in respect of the claims whether there are common issues of
sufficient centrality to warrant their determination in
a single
class action or whether certain claims would be better determined in
another way or whether the claims lack commonality
to a degree that
weighs against certification altogether.
260.
Attached to the founding affidavit is a schedule of common
issues. Ms De Bruyn relies upon the schedule in support of her
contention
that commonality is adequately satisfied. One feature of
the claims that is emphasized by counsel for Ms De Bruyn is this. The
class members are all shareholders. They are similarly situated as
shareholders in relation to the Steinhoff directors, SIHL, Steinhoff
NV and Deloitte. They make the same claims, raising in large measure
the same issues, against the proposed defendants.
261.
As I have explained at some length, the draft particulars set
out the claims that class members propose to make. The draft
particulars
can be analyzed in different ways. But in essence, the
shareholders seek to hold the Steinhoff companies, their directors
and Deloitte
liable by recourse to two types of claim. First, at
common law, for the losses caused to shareholders for the negligent
misstatements
contained in the financial statements. Second, by way
of statutory liability for contraventions of statutory duty that
caused loss
to the shareholders. For the purpose of my consideration
of commonality, I make the assumption that the claims set out in the
draft
particulars are valid in law, an assumption that in my view
does not hold when considering the question as to whether there are
triable issues.
262.
There are most certainly issues of law and fact that are
common to all class members. The factual foundations upon which all
the
claims are built are common. SIHL, Steinhoff NV and the Steinhoff
directors engaged in the unlawful impugned transactions. The impugned
transactions were not disclosed and this caused the assets, income
and profits of SIHL and Steinhoff NV to be overstated in the
financial statements and the liabilities and expenses to be
understated. The financial statements were, in a variety of ways,
misstated.
263.
So too the attributions of duty, both common law and
statutory, that arise from what the directors did and failed to do,
and hence
what is attributable to SIHL and Steinhoff NV also mark out
a significant set of issues that are common. The claims of
wrongfulness,
in delict or in terms of the
Companies Act, rest
upon
issues of fact and law that are common to the class members as
shareholders. That is true also of the varieties of fault that
are
relied upon. The claims of negligence, gross negligence, and
recklessness are common. The position of Mr Jooste, the 14th
Respondent, is distinctive in that he is alleged to have committed a
fraud. But what is said of Mr Jooste is a feature of the case
to be
made by all the members of the class.
264.
As against these common features of the case sought to be
brought, a number of issues are raised. Deloitte submits that the
liability
of the auditors concerns a very different enquiry from the
liability of the directors, even if the facts concerning the impugned
transactions are common. That is so. But it is not that different
claims are made against different prospective defendants that
counts
decisively against commonality, but rather whether the determination
of the claim resolves the issue across the class.
265.
Commonality is judged by asking whether the issue of law or
fact, once determined, resolves the issue for the class. If, by
contrast,
the determination of the issue requires multiple individual
determinations, then commonality is lacking. It is a different
question
as to whether two or more distinctive claims against
different prospective defendants warrant certification in a single
class action.
If the claims are very different, it may be that there
is commonality in that the determination of each claim (as to facts
and
law) resolves the claim for the class, but there is little
overlap as between claims. I will refer to this distinction as the
difference
between class commonality and claim commonality. Whether
Deloitte’s actions were wrongful and culpably so and whether it
contravened statutory duties are issues of class commonality. They
are issues resolved for or against the class as a whole. There
are
allegations of fact giving rise to claims against Deloitte and the
Steinhoff companies that are common. However, the claim
against the
auditors rests upon distinct duties and actions. There is thus some
want of claim commonality. Whether that warrants
two class actions is
a matter to which I will return.
266.
Both Deloitte and the opposing Steinhoff directors also raise
the question of causation, and in particular, that individual
shareholders
will each be required to prove their detrimental
reliance upon the misstatements that led them to buy or retain
Steinhoff shares.
That, they submit, is a necessary requirement of an
action for negligent misstatement causing pure economic loss. Such
proof would
require the trial court to make a multiplicity of
individual determinations on the question of causation – the
very antithesis
of class commonality. This they submit has led, in
other jurisdictions, to the dismissal of class certification in like
cases.
267.
These submissions led to an extensive exchange as to how the
courts in other jurisdictions deal with this question. I consider
that
this aspect of the case can be resolved on a different basis. I
have not found it necessary to decide whether the cause of action
advanced on behalf of the class members requires, in our law, a
showing of detrimental reliance by each shareholder or whether
imputed reliance suffices if shareholders relied upon the price at
which they bought or retained their shares. Counsel for Ms De
Bruyn
has made it plain that their case rests squarely on imputed reliance.
If such a case is cognizable in our law, then the want
of class
communality advanced by Deloitte and the opposing Steinhoff directors
is not present. Class members will not make a case
predicated upon
each member’s detrimental reliance upon the misstatements made
by the Steinhoff directors or the auditors.
Hence, any certification
that is ordered is postulated upon a case resting upon imputed
reliance. Such a case would not impede
class communality on the basis
of a need to determine each shareholder’s detrimental reliance
because members of the class
would all stand or fall on imputed
reliance based upon the pricing of the shares in the market.
268.
That raises a further issue as to how and when the
misstatements influenced the price. This issue may not yield a
singular conclusion,
and that, in turn, may have differential affects
upon members of the class, depending upon when they bought their
shares or over
what period they chose to retain them. This may have
some adverse impact upon class commonality. But there is a likelihood
that
this may well be less problematic for class commonality than the
spectre of having to prove each shareholder’s detrimental
reliance because imputed reliance is concerned with causation and not
loss. The price effects of the sustained failure to reflect
the
impugned transactions in the published financial statements may have
given rise to structural price expectations in the market
for
Steinhoff shares, resulting in predictable price effects upon which
class members may be taken to have relied. In any event,
the impact
of imputed reliance is likely to offer less of a problem to class
commonality than if each shareholder’s detrimental
reliance
must be proven because it seems improbable that the quoted price was
not material to the decisions of the shareholders
to buy and hold;
and improbable also that over time the price of the shares did not
reflect the market’s understanding of
the assets, liabilities
and earnings of SIHL and Steinhoff NV. These features are likely to
hold over the class as a whole.
269.
The opposing Steinhoff directors raise the following challenge
to commonality. The draft particulars distinguish the position of
Mr
Jooste from the other directors. However, the liability of directors,
other than Mr Jooste, cannot be treated
en bloc.
This is
illustrated by the position of the 22nd Respondent who was never a
director of SIHL and only became a director of Steinhoff
NV in
mid-2016, after the impugned transactions had taken place. The
position of other directors may well also evidence variability
as to
when they took office; what involvement, if any, they had in
approving the impugned transactions and the financial statements;
and
what information they were given and what reliance they placed on
internal advisors and the external auditors.
270.
There is some merit in this submission. The decision of each
prospective shareholder to buy shares and the decision of each
shareholder
to hold shares will be distinctive. Each shareholder
bought their shares at a particular time. Which directors were in
office at
relevant times and with what responsibility for the
misstatements of SIHL or Steinhoff NV so as to influence the share
price is
likely to be a matter of some variability. When individual
shareholders would have sold their shares, rather than hold them, as
against a counterfactual of proper disclosure, may exhibit the same
difficulty. This will impact on class commonality because the
variable circumstances of each shareholder will require
differentiated proof to establish liability against particular
directors.
The degree to which class commonality is likely to be
affected is not altogether easy to determine because it is not clear
whether
the position of the 22nd respondent is typical of high
variability or whether there was substantial continuity of directors
and
clear demarcations of responsibility, in which event class
commonality may be less affected.
271.
In my assessment, while this source of variability poses some
risk to class commonality on this aspect of the case, there remain
sufficient issues of commonality as to the liability of directors
such that central features of the case may be determined on a
class-wide basis. In particular, what duties were owed by the
directors is largely a question of law, common to members of the
class. The conclusion of the impugned transactions, how they came to
be approved, and who was responsible for their treatment in
the
financial statements is likely to fit a pattern of corporate
organization and responsibility, given that the impugned transactions
are alleged to be numerous, to have taken place over time and are
said to have led to a systemic failure to reflect the impugned
transactions fairly and correctly in the financial statements. These
issues are central to the question of the liability of the
Steinhoff
directors and the Steinhoff companies. They may be determined on a
class wide basis. This, in my view, permits of an
outcome where
commonality is sufficiently served.
272.
I have referenced the possibility that the claims of foreign
shareholders who hold shares on the FSE but elect to litigate in this
jurisdiction may be determined under choice of law rules that would
apply German law. This holds some risk of legal fragmentation
that is
inimical to commonality. But the risk is mitigated by two factors.
First, the fact pattern relevant to liability for local
and foreign
shareholders is likely to be very similar. Second, there is no
showing that the legal regimes of liability are so different
as to
pose a significant threat to class commonality. It may be that
foreign shareholders who purchased shares on the FSE may need
to be
treated as a sub- class. But the determination of their claims will
apply across this sub-class, with sufficient overlaps,
at least as to
common issues of fact, with the class as a whole.
273.
There is finally the issue of claim commonality in respect of
the claims against Deloitte, adverted to above. On balance, there
would be greater disutility in certifying two class actions by
uncoupling the claims against Deloitte from those against the
Steinhoff
directors and the Steinhoff companies. This is so because
the evidence as to what occurred, and who knew what and when, is
likely
to reflect an interconnected set of actions and actors that
should be recounted and tested in one proceeding.
274.
For these reasons, I conclude on this aspect of the matter
that there is sufficient to support class commonality, and not to
have
two class actions, or require that the claims of shareholders
should be pursued by each shareholder.
DAMAGES:
ASCERTAINABLE, DETERMINABLE AND CAPABLE OF ALLOCATION?
275.
I turn to the following issues: do the damages claimed flow
from the cause of action relied upon; are the damages ascertainable
and capable of determination; and is there an appropriate procedure
for allocating the damages to members of the class?
276.
It will be recalled that the cause of action relied upon rests
upon a theory of causation that it is the prices in the market that
caused the shareholders to buy or retain their shares, and it is
price formation in the market that is influenced by the
misstatements.
If this market based theory of causation is cognizable
in our law ( a matter I have found it unnecessary to decide ), then,
and
if such causation is proven, the damages do flow from the cause
of action because shareholders will have acquired shares at a price
above the price at which the shares would have been priced, but for
the misstatements. The loss caused by the retention of shares
is
rather more difficult to conceptualize. Under the counterfactual that
the shares were never mispriced, the shares would have
been acquired
at fair value and their retention would have been at the
shareholder’s own risk. If the shares were acquired
at an
inflated price, then the loss accrues at the time of purchase. The
failure to exit when the share price remained inflated
would not add
to the loss initially suffered, but would simply have caused the
shareholder to lose the opportunity to mitigate
the loss by selling
at an inflated price. There is a further category of shareholder who
buys at fair value and is then induced
to retain the shares by reason
of their inflated price, when she would otherwise have sold the
shares, and suffers loss as a result.
It is not clear that the draft
particulars seek to develop this species of liability. But is the
draft particulars do so, then
it remain difficult to see how the loss
arises because the opportunity to sell profitably appears to be
inextricably connected
to the inflated price of the Steinhoff shares
attributable to the misstatements.
277.
However, on the theory of causation proposed, I do find that
damages flow from the cause of action in respect of the acquisition
of the shares at inflated prices.
278.
On behalf of Ms De Bruyn, the expert report of Mr Pansari is
relied upon. Mr Pansari is offered as an expert to demonstrate that
there are methodologies available to determine aggregate damages on a
class-wide basis. Mr Pansari’s report rests on the
postulate
that the JSE is an efficient market. It seeks to show that the price
of Steinhoff shares was affected by the public disclosure
of
company-specific information and how methodologies may be used to
calculate the difference between the artificially inflated
price of
the shares caused by the misstatements and the true value of the
shares.
279.
The opposing Steinhoff directors and Deloitte have emphasized
that a cause of action based upon negligent misstatements causing
pure economic loss requires that class members must allege that each
shareholder who makes a claim was induced by the misstatements
to buy
or retain shares. As we have seen, that is not the case sought to be
made on behalf of class members. Their case rests upon
a market -
based theory of causation.
280.
The draft particulars state and certain submissions made on
behalf of Ms De Bruyn contend that damages may be determined on an
individual
basis or on an aggregate basis. Plainly, if class members
were each required to prove their detrimental reliance and individual
loss, that would be possible, but it would diminish some, but by no
means all, of the utility of a class action. However, as I
understand
the case that is sought to be made, it rests squarely upon the market
based theory of causation. On that premise, a
basis has been set out
as to how damages can be calculated on an aggregate basis. The
calculation is clearly complex and quite
likely contestable. But
complexity and contestability does not establish that an aggregative
approach to the calculation of damages
is not possible. Mr Pansari’s
report, despite its occasional forays into questions of law, shows
otherwise.
281.
Ultimately, Mr Pansari comes up with an estimate of aggregate
damages in an amount of R36.35 billion. I am not required to say
anything
as to whether that is a plausible estimate. It suffices to
show for the purposes of certification that aggregate damages are
capable
of calculation. There was nothing to show that what Mr
Pansari has offered is so methodologically flawed as to be entirely
speculative.
Rather, the opposition was directed to the theory of
causation. I find however that if the market- based theory of
causation is
legally supportable, there is a basis upon which damages
are susceptible of calculation on an aggregative basis.
282.
That then leaves the issue as to whether damages calculated on
an aggregative basis are then capable of being allocated to members
of the class. On behalf of Ms De Bruyn a methodology of allocation to
class members is set out in a litigation plan. The replying
affidavit
relies upon an allocation procedure based on a US securities case.
That procedure references a plan of allocation and
a formula to
calculate each individual claim.
283.
I make three observations concerning the plan and the
procedure referenced. First, outside the flexibilities which might be
permitted
under a settlement, allocation to class members will
ordinarily require proof that meets a threshold of adequacy that the
allocation
of damages approximates individual loss. Second, that, in
turn, requires some process of individual assessment. The loss that
accrues
to a class member will be variable depending, at the very
least, on when the shares were bought and the inflation of the share
price at different points in time. Third, it does appear, both from
the example of the allocation plan and what Mr Pansari has explained,
that it is possible to locate an individual’s purchase of
shares on a time series that will roughly reflect the difference
between the true value of the shares and the inflated purchase price.
Doubtless there is much complexity, and a need for individual
determinations, but it does appear that there is a methodology
available to put in place a rational scheme of allocation.
284.
Deloitte submits that the position of Ms De Bruyn is too
indeterminate on important issues concerning damages. In particular,
the
position allows for the aggregative or individual assessment of
damages; it is short on detail as to what would be entailed if
damages required individual assessment; and its procedural
suggestions as to the appointment of administrators or referees,
contained
in the litigation plan, specifies who might be used to
decide certain matters but not how they would do so.
285.
There is certainly some equivocation as to what is said on
this score on behalf of Ms De Bruyn. However, the role of the court
considering
certification is not to determine damages but to gauge
whether they are capable of determination and allocation. Once it is
clear
that the claim to be made on behalf of class members is
predicated upon market-based causation, then, as I have explained, it
is
the effects on the market that count. This permits of an
aggregative approach to the assessment of how far market prices
deviated
from a conception of true value. And once that is so, it is
a lesser task to locate the position of individual members in the
market
so as to permit of allocation. Once the aggregative
methodology generates a time series of inflated pricing, locating an
individual
on the time series would not appear to be an
insurmountable task.
THE
INTERESTS OF JUSTICE: IS CERTIFICATION APPROPRIATE
286.
I must decide, in the light of all that appears in the record
and the extensive submissions that have been made to me, whether
certification
should be ordered, and if so, on what terms. That is a
question of weighing all the issues and deciding, ultimately, what
the interests
of justice require. When doing so, it is necessary to
consider what access to justice class members would enjoy absent
certification,
and what would be gained and lost, and by whom, if
certification is ordered.
287.
Few will disagree that the precipitous fall of the Steinhoff
group of companies amounts to a corporate failure of significant
proportions.
There is quite understandable sympathy for investors who
have lost the greater part of their investment, most especially for
small
retail investors and the many individuals who may have placed
their savings and pension money with institutional investors who
bought Steinhoff shares. That they seek compensation for the losses
they have suffered is entirely understandable.
288.
Given the large the number of persons who bought Steinhoff
shares and suffered losses, there is every reason to consider that a
class action may be an appropriate means by which these persons may
gain access to the courts so as to litigate against those they
would
hold responsible. As I was often reminded by counsel for Ms De Bruyn,
absent a class action, many shareholders would go uncompensated
because the size of their claims would never permit them to institute
an action, given the complexities of such litigation. So
too, it is
said, if a class action is not certified in this case, given the
scale of the losses suffered by Steinhoff shareholders,
then the
shareholders’ class action is destined to extinction in this
jurisdiction.
289.
These are important considerations. It will be apparent from
my analysis that, in weighing the factors that bear upon
certification
in this case, there is much that favours certification.
290.
First, the identification of the classes has undergone
significant modification to avoid or mitigate many of the criticisms
levelled
against their original definition. The proposed classes are
identifiable by reference to objective criteria.
291.
Second, while Ms De Bruyn is not, in certain respects, an
optimal class representative (through no fault on her part), she is a
Steinhoff shareholder who has suffered a loss that doubtless permits
her to enjoy an identity of interest with the class she would
represent. Ms De Bruyn, though plainly willing to undertake the role
of class representative, is not possessed of some of the technical
expertise that would be advantageous to a representative who is
required to take important and often difficult decisions in complex
litigation. However, this deficiency should not be exaggerated.
Ordinary litigants in complex cases have ample common sense to
take
decisions in their own interests and those of the class, if they are
properly guided by their legal representatives.
292.
Third, there was a considerable case made to impugn the
suitability of LHL as the legal representatives of the class and the
funding
arrangements that have been secured. LHL has not always acted
as it should have. It has allowed the funders undue influence. But
the avowed recognition of error on the part of LHL, its exit from
participation in any award of damages, and the role to be played
by a
supervisory attorney do permit LHL to act without undue risk. There
was also much uncertainty as to the funding arrangements
which were,
regrettably, revealed in a piecemeal way, with a retentive
predilection that served neither the court, nor the litigants.
However, with the benefit of the information now available, there is
funding available that will permit the litigation to proceed,
on
tolerable terms, that offer a measure of protection to the
prospective defendants in respect of costs awarded in their favour.
No funding on better terms was said to be available. Here too, with
proper scrutiny by the trial court, and with the assistance
of the
supervising attorney, I do not find that the funding arrangements are
so inimical to the interests of justice that they
cannot be permitted
to support the proposed class action.
293.
Fourth, the extent to which the proposed action depends upon
the determination of issues of law or fact common to all members of
the class is not resolved with definitive singularity. There are
however significant factual foundations of the proposed case that
are
common to the claims against SIHL, Steinhoff NV, the Steinhoff
directors and Deloitte. This is so in virtue of the impugned
transactions and the alleged misstatements in the published financial
statements. The claims against SIHL, Steinhoff NV and the
Steinhoff
directors, on the one hand, and the claims against Deloitte, on the
other, rest upon distinct duties. Their resolution,
as a matter of
law, would certainly bind all class members. There are nevertheless
complexities that arise from the scope of the
cause of action
proposed. Claim commonality is compromised by the distinctive duties
that are said to be owed by Deloitte. There
is a risk that class
commonality will be fractured because of the distinctive
responsibilities discharged by individual directors
at different
times. And causation, even on market- based postulates, may
nevertheless require some proof that is to be provided
by individual
class members. On this aspect of the matter, a judgment is required
as to whether a class action remains the most
appropriate means of
determining the claims of class members. For the reasons given, on
balance, I consider that a class action
is appropriate. The
alternative, that many shareholders would not be able to bring claims
at all or if they could do so, would
institute multiple actions
involving considerable duplication of resources and decision-making,
appears to me a decidedly worse
outcome.
294.
Fifth, I have found that the damages sought in respect of the
acquisition of shares does flow from the cause of action relied upon.
And while an aggregative computation of damages is complex it is
capable of proof. So too, the procedure for allocating damages,
though not without difficulty, does not weigh decisively against
certification.
295.
There remains one consideration of very great salience to the
determination of this case – is there a cause of action raising
a triable issue? It will be recalled that counsel for Ms De Bruyn
sought to persuade me that this consideration should be assessed
on
the undemanding basis that the cause of action proposed is not
hopeless.
296.
I have rejected this standard. It is inconsistent with my
understanding of what binding precedent has determined. Even if this
were
not so, for the reasons I have given, the standard cannot be
accepted. It would allow a class action to go forward, with its
significant
entailments of cost to the parties and burdens upon the
court, in circumstances where the certification court considered the
cause
of action implausible but not unarguable.
297.
That is an unusual judgment to ask of a court on a question of
law. Questions of law ultimately have a right answer. That answer
may
not always be easy to give, but it is the function of courts to
decide questions of law in a binary way: a cause of action
is either
allowed by law or it is repugnant to the law. A cause of action is
not to some degree recognized by law. That being so,
there is no
reason to defer true questions of law to the trial court, and for two
principal reasons. First, the trial court is
in no better position to
determine a true question of law. Of course, as our courts have
observed, there may be circumstances in
which evidence may assist in
deciding a question of law. Then it may be prudent to leave the
decision to the trial. But where that
is not so, the certification
court should decide the question of law. Second, class actions, as in
this case, often involve complex
litigation, of importance to many,
with significant consequences of both expense and expectation. For
this reason also, the interests
of justice require that a
certification court should not permit a class action to proceed on
the minimal premise that the cause
of action is not hopeless. Too
many, risk too much to proceed on this basis.
298.
I have found that the each of the component parts of the cause
of action that is proposed against SIHL, Steinhoff NV, the Steinhoff
directors and Deloitte have no basis in law. As a result, I find that
the class action rests upon a cause of action that fails
to raise a
triable issue.
299.
I have already referenced the holding in
Makaddam
that
the factors relevant to the consideration of a certification
application are not requirements but matters to be weighed in
making
a final decision, judged against the overarching standard of the
interests of justice. I have also observed that different
weight may
attach to the factors that require consideration. How then should the
finding that there are no triable issues be weighed
in deciding
whether to certify the proposed class action? If, as I have found,
the law does not recognize the cause of action that
is the basis of
the class action, then there is nothing to take forward to trial.
300.
In these circumstances, whatever the other virtues of the
class action, without a cause of action, the application for
certification
must fail. The matter may be framed as one of weight:
the absence of a cause of action weighs too heavily to permit of
certification.
It is also a matter of logic. Why would a court
trigger the machinery of a class of action to determine something
that does not
exist in law. To do so would be to place a ghost in the
machinery of justice.
301.
I am aware that this conclusion will disappoint the
expectations of Steinhoff shareholders that the law must be able to
compensate
them for their losses. I have found that the law does not
do so by recourse to the cause of action relied upon in this
application.
This does not mean that 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
s165
for shareholders to
require the Steinhoff companies to commence legal proceedings. Any
compensation that is due to the Steinhoff
companies will redound to
the benefit of those shareholders who have retained their shares.
302.
I turn then finally to the question of costs. I have found
that certification cannot be granted. The application fails because
the
claims relied upon do not, in law, disclose a cause of action.
The class action does not raise triable issues. On other aspects
of
consideration, I consider a class action to be supportable. However,
as will be apparent, the questions of law concerning the
cause of
action have been a very significant part of the contestation in this
case. Their resolution has turned out to be decisive,
and has
determined the application. That outcome ordinarily determines the
question of costs. In some matters of public interest
that is not so.
But here, the litigation is funded on a commercial basis. In these
circumstances, I cannot find a basis to deviate
from the position
that the costs should follow the result. The matter is one of some
scope and complexity that has quite understandably
led to the
employment of more than two counsel. However, I am inclined to think
that given the employment of two counsel by Ms
De Bruyn, that is a
fair basis upon which to make a determination of costs.
In
the result:
(i) The application is
dismissed
(ii) The Applicant shall
pay the costs of the Respondents who have opposed the application,
including the costs of two counsel,
where two counsel were employed.
_____________________
Unterhalter J
Judge
of the High Court
Gauteng
Local Division: Johannesburg
Date
of Hearing: 20 - 24 APRIL 2020
Date
of Judgment: 26 JUNE 2020
APPEARANCES
APPLICANT:
Advocates Andy Bester SC and Mabasa Sibanda instructed by LHL
Attorneys Inc.
1
st
,
2
nd
& 42
nd
RESPONDENTS: Arnold Subel SC,
Andre Smalberger SC, Kate Hofmeyr and Musatondwa Musandiwa instructed
by Werksmans Attorneys.
3
rd
RESPONDENT: Wim Trengove SC, M Van der Nest SC,DJ Smit and T Scott
instructed by Webber Wentzel.
4
th
RESPONDENT:
Law
firm: Tugendhaft Wapnick Banchetti & Partners.
5
th
RESPONDENT:
Law
firm: Anneke Whelan Attorneys C/O Shepstone & Wylie.
6
th
RESPONDENT:
Law
firm: Tim Du Toit & Co Inc (Pretoria) C/O Tim Du Toit & Co
Inc. (Johannesburg).
8
th
RESPONDENT:
CM
Eloff SC and A Morrissey instructed by ER Swanepoel & Associates
C/O Hector North Inc.
9
th
RESPONDENT:
Law
firm: Michael Krawitz & Co.
11
th
& 22
nd
RESPONDENTS:
CM
Eloff SC and A Morrissey instructed by Tinus Slabber & Associates
Attorneys:
C/O
Oosthuizen & Co (Cape Town)
C/O
Pieter Moolman Attorneys (Johannesburg).
12
th
RESPONDENT:
Law
firm: Cliffe Dekker Hofmeyr Inc (Cape Town) C/O Cliffe Dekker Hofmeyr
Inc (Johannesburg).
13
th
RESPONDENT:
Law
firm: Bernadt Vukic Potash & Getz.
14
th
RESPONDENT:
Law
firm: De Klerk & Van Gend.
15
th
RESPONDENT:
PL
Uys instructed by Savage Jooste & Adams Inc. C/O SKV Attorneys.
24
th
RESPONDENT:
Law
firm: Ashersons Attorneys
C/O
Tugendhaft Wapnick Banchetti & Partners.
20
th
& 25
th
RESPONDENTS:
PA
Botha SC instructed by Cluver Markotter Inc C/O Swanepoel Attorneys.
32
nd
RESPONDENT:
Alfred
Cockrell SC and Isabella Kentridge instructed by Cliffe Dekker
Hofmeyr Inc.
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Children’s Resource Centre Trust v Pioneer Food (Pty) Ltd
2013
(2) SA 213
( SCA) at para 26
[2]
At para 28
[3]
Mukaddam v Pioneer Foods (Pty) Ltd
2013 (5) SA 89
(CC) at paras 34 -
40
[4]
At paras 35 - 42
[5]
Paras 71 – 77
[6]
At para 38
[7]
Mediterranean Shipping Co v Speedwell Shipping CO Ltd
1986 (4) SA
329
(D) at 333 H
[8]
Foord v Foord
1924 WLD 81
at 87-88
[9]
Children’s Resources para 46
[10]
Children’s Resources para 46
[11]
Mukaddam at para 18 and Nkala and Others v Harmony Gold Mining Co
Ltd and Others
2016 (5) SA 240
(GJ) para 130
[12]
General Telephone Co of the Southwest v Falcon457 US 147 at p156
[13]
Mckenna v Gammon Gold Inc
(2010) ONSC 1951
para 183
[14]
Children’s Resources para 48,
[15]
Price Waterhouse Coopers Inc and others v National Potato
Co-Operative Limited
[2004} 3 All SA 20
(SCA) at para 41
[16]
Houle v St Jude Medical Inc
2018 ONSC 6352
para 33
[17]
Petersen Superannuation Fund Pty Ltd v Bank of Queensland Limited
[2017] FCA 699.
[18]
Country Cloud Trading CC v MEC, Department of Infrastructure
2014
(12) BCLR 1397
(CC) at [22] –[25]
[19]
Loureico v Imvula Quality Protection (Pty) Ltd 2014(3) SA 394 (CC)
at para [53]
[20]
Robinson v Randfontein Estates Gold Mining Co Ltd
1921 AD 168
at
216; Howard v Herrigel
[1991] ZASCA 7
;
1991 (2) SA 660
(A) at 678; SIbex
Construction(SA) (Pty) Ltd v Injectaseal CC
1988 (2) SA 54
(T) at
65; Peskin v Anderson[2001]
1 BCLC 372
at para 33
[21]
Atlas Organic Fertilizers (Pty) Ltd v Pikkewyn Ghwano (Pty) Ltd
1981
2 SA 173
(T) at 200 - 201
[22]
Percival v Wright [1902] 2 Ch 421
[23]
Sage Holdings Ltd v The Unisec Group Ltd and Others
1982 (1) SA 337
(W) at 365
[24]
Peskin v Anderson
[2000] EWCA Civ 326
;
[2001] 1 BCLC 372
at
[30]
– [37]
[25]
Peskin at para [33]
[26]
Coleman v Myers
[1977] 2 NZLR 225
at 328 -330; Brunninghausen v
Glavanics
[1999] NSWCA 199
;
[1999] 46 NSWLR 538
at 547-560; Chez Nico (Restaurants)Ltd
[1992]BCLC 192
[27]
Allen v Hyatt 919140
30 TLR 444
, a decision of the Privy Council.
[28]
Sharp & Others v Blank [2015] EWHC 3220 (Ch)
[29]
At para [15]
[30]
Telematrix (Pty) Ltd v Advertising Standards Authority SA 2006 (1)
SA 461 (SCA)
s 13
and
14
; Cape Empowerment Trust Ltd v Fisher
Hoffman Sithole 2013(5) SA 183 (SCA) paras 21 and 25;Van der Byl v
Featherbrooke Estate
Home Owners’ Association
2019 (1) SA 642
(GJ) at paras 11 -20
[31]
Cape Empowerment Trust Ltd v Fisher Hoffman Sithole at para [21]
[32]
Axiam Holdings Ltd v Deloitte &Touche
2006 (1) SA 237
(SCA) para
18
[33]
Powertech Industries Ltd v Mayberry and another
1996 (2) SA 742
(W)
at 746
[34]
Caparo
Industries PLC v Dickman[1990] 2 AC 605
[35]
Standard Chartered Bank of Canada v NedPerm Bank Ltd 1994(4) SA 747
(A) at 772 -773
[36]
Deloitte & Touche v Livent Inc 2017 SCC 63
[37]
Rabinowitz v Van Graan & others 2013(3)SA 315 (GJ)
[38]
Sanlam Capital Markets (Pty) Ltd v Mettle Manco (Pty) Ltd &
Others [2014] 3 All SA 454 (GJ)
[39]
Hlumisa Investment Holdings(RF)Limited and Another v Kirkinis and
Others 2019 (4) SA 569 (GP)
[40]
Prudential Assurance Co Ltd v Newman Industries Ltd (No2) [1982] 1
Ch 204 (CA)
[41]
Steenkamp NO v The Provincial Tender Board of the Eastern Cape
[2006]1 All SA 478 (SCA) at paras [21] and [22]
[42]
Olitzki Property Holdings v State Tender Board and Another
2001 (3)
SA 1247
(SCA) at para [12]
[43]
Natal Joint Municipal Pension Fund v Endumeni Municipality 2012(4)
SA 593 (SCA)
[44]
Goldfields Ltd & Another v Harmony Gold Mining CO Ltd and Others
2005 (2) SA 506 (SCA)
[45]
Children’s Resources para 44