The Shareholder Rights and Activism Review: South Africa
Historically, shareholder activism has not been prevalent in South Africa. More recently, however, shareholder activism has been on the rise, in line with global trends. This increase in shareholder activism, which has been gradual rather than a surge, can be attributed to a number of factors, including:
- the influence of shareholder activism in other jurisdictions, mainly the United States and Europe;
- a widely held market with an internationalised shareholder base: as at March 2019, 52 per cent of South African equities were held by international investors;2
- a greater tendency towards active engagement by institutional and other investors; and
- a regulatory and corporate governance framework that creates an enabling environment for shareholder activism or activist-like interventions.
Shareholder activism in South Africa manifests itself through campaigns or proposals by one or more shareholders seeking to effect some change or reform within a company, in relation to its business, governance, management or strategy, or in respect of a particular corporate action or fundamental transaction. Examples of activist proposals seen in South Africa include the following:
- reconstituting the board or replacing a CEO;
- changing executive remuneration;
- revising corporate strategies;
- addressing operational performance issues;
- pursuing environmental, social and governance (ESG) agendas;
- making balance sheet proposals, such as returns of capital to shareholders through buy-backs or distributions;
- changing the capital structure or capital allocation strategy;
- monetising assets (e.g., by forcing divestitures or spin-offs); and
facilitating or frustrating mergers and acquisitions (M&A).
Legal and regulatory framework
The primary sources of laws and regulations that are relevant to shareholder rights and activism are the Companies Act 71 of 2008 (the Companies Act), Chapter 5 of the Companies Regulations 2011 promulgated thereunder (the Takeover Regulations), the Financial Markets Act 19 of 2012 (the Financial Markets Act) and common law.
Takeovers and other 'affected transactions' (e.g., statutory mergers, schemes and disposals of all or a greater part of a company's assets or undertaking) are regulated under Chapter 5 of the Companies Act and the Takeover Regulations. In the context of such transactions, the Takeover Regulation Panel (TRP) is mandated to ensure the integrity of the marketplace and fairness to securities holders, and to prevent actions by offeree companies designed to impede, frustrate, or defeat an offer or the making of fair and informed decisions by securities holders. The TRP has the power to initiate or receive complaints, conduct investigations and issue compliance notices.
The Financial Markets Act provides for the regulation of financial markets and prohibits insider trading and market abuse. The Financial Sector Conduct Authority (FSCA) is responsible for enforcing the Financial Markets Act. In 2019, the FSCA reported that it and its predecessors had investigated 421 cases, taken enforcement action in 91 and imposed approximately 138 million rand in penalties since 1999.3
The Listings Requirements (the Listings Requirements) of the Johannesburg Stock Exchange (JSE), enforced by the JSE, apply to JSE-listed companies. The Listings Requirements regulate, among other things, the fair and equal treatment of shareholders, access to information, certain voting thresholds, and pre-emptive rights and related party transactions.
The King IV Report on Corporate Governance for South Africa 2016 (the King Code), issued by the Institute of Directors in Southern Africa, contains various principles and recommendations intended to promote good corporate governance, many of which are relevant to shareholder rights and engagement. Certain principles in the King Code are incorporated into the Listings Requirements, making it mandatory for JSE-listed companies to comply with them, with the balance of the King Code's principles and recommendations to be implemented on an 'apply and explain' basis.
Additionally, certain other regulatory avenues, although not intended as a means for shareholder activism, indirectly create opportunities for shareholder intervention and engagement. For example, shareholders, acting alone or with other stakeholders, may use the 'public interest' considerations assessed by the competition (antitrust) authorities as part of the merger approval or clearance process as a means to delay or thwart a transaction.
Some of the legal and regulatory avenues for shareholder activism are set out below.
i Ability to influence shareholders' meetings and approvals
Shareholders are entitled to attend, speak at and vote at a meeting, either themselves or via proxy. This allows shareholders to ask difficult questions of directors, express their views or lobby support from other shareholders for a particular agenda (e.g., a 'vote no' campaign).
Shareholders have the ability to requisition a shareholders' meeting by delivering signed demands to the company, specifying the purpose for which the meeting is proposed. If the company receives, in aggregate, demands from holders of at least 10 per cent of the voting rights entitled to be exercised in relation to the matter proposed, it must call a meeting unless the company or another shareholder successfully applies to court to set aside the demand on the grounds that it seeks only to reconsider a matter that has already been decided by shareholders, or is frivolous or vexatious.
Any two shareholders of a company may propose that a resolution concerning any matter in respect of which they are each entitled to exercise voting rights (e.g., the removal of a director) be submitted to shareholders for consideration at the next shareholders' meeting, at a meeting demanded by shareholders or by written vote.4
Corporate actions that require shareholder approval present opportunities for shareholder intervention. Generally, ordinary resolutions may be passed by a majority of 50 per cent plus one share, and special resolutions with a majority of at least 75 per cent, of the voting rights exercised on the resolution. Blocs of shareholders may therefore cooperate to block or pass resolutions. In particular, a minority shareholder holding 25 per cent of the voting rights may block special resolutions (e.g., to approve a buy-back, an issue of securities or a fundamental transaction).
In certain instances, the Companies Act and the Listings Requirements impose special approval requirements. For example, resolutions proposing fundamental transactions (statutory mergers, schemes, certain business or asset disposals) require approval at a quorate meeting of 75 per cent of disinterested shareholders present and voting (i.e., excluding voting rights of the acquirer and related or concert parties). Similarly, in respect of JSE-listed companies undertaking related party transactions, the votes of related parties and their associates will not be taken into account in the approval of any resolution in connection with the related party transaction.
ii Access to company records and information
A shareholder can access certain company records to assist with activist proposals and seek the cooperation of other shareholders. A holder of a beneficial interest in a company's securities has the right to inspect and copy the company's MOI,5 securities register, register of directors, reports and minutes of annual meetings, and annual financial statements. If additional information is required for the exercise or protection of a right, a shareholder may be able to rely on the Promotion of Access to Information Act 2 of 2000, enacted to give effect to the constitutional right of access to information.
iii Dissenting shareholders
Dissenting shareholders may frustrate or even prevent the implementation of a proposed scheme, merger or sale of all or a greater part of the assets or undertaking. Despite shareholders having approved a special resolution in respect of such a transaction, a company may not implement it without the approval of a court if (1) the resolution was opposed by at least 15 per cent of the voting rights exercised thereon, and any of the dissenting shareholders, within five business days of the vote, requires the company to obtain court approval; or (2) any dissenting shareholder who voted against the resolution, within 10 business days of the vote, successfully applies to a court for a review of the resolution. A court may set aside the resolution only if it is satisfied that the resolution is manifestly unfair to a class of shareholders or the vote was materially tainted by a conflict of interest, inadequate disclosure, a failure to comply with the Companies Act or the company's MOI, or some material procedural irregularity.
iv Appraisal rights
In certain prescribed circumstances – including schemes, mergers or sales of all or a greater part of a company's assets or undertaking – a dissenting shareholder may force the company to purchase its shares in cash at a price reflecting the fair value of the shares.6 This is a 'no fault' appraisal right that enables a shareholder to sell all of its shares and exit the company. It applies if (1) the shareholder notified the company of its objection to the resolution to approve the action or transaction; and (2) the shareholder voted against the resolution (which was nonetheless approved) and complied with procedural requirements to demand that the company buy its shares for fair value.
v Actions and remedies
In extreme cases, a holder of issued securities may apply to court for an order necessary to protect any right of the securities holder, or rectify any harm done to the securities holder by (1) the company due to an act or omission that contravened the Companies Act, the MOI or the securities holder's rights; or (2) any director of the company, to the extent that he or she is or may be liable for a breach of fiduciary duties.7
Similarly, a shareholder may apply to court for appropriate relief if any of the following is considered oppressive or unfairly prejudicial, or unfairly disregards the interests of that shareholder:
- the result of any act or omission of the company;
- the manner in which the business of the company is being carried on; or
- the manner in which the powers of a director, prescribed officer or related person are being exercised.8
Having considered the application, the court may make any interim or final order it considers fit, including an order restraining the conduct complained of, ordering a compensation payment, or varying or setting aside an agreement or transaction.
The Companies Act also introduced a statutory derivative action that enables a shareholder (among other stakeholders) to demand that the company bring or continue proceedings, or take related steps to protect the legal interests of the company.9 A company may apply to court to set aside the demand only on the grounds that it is frivolous, vexatious or without merit.
Activists should carefully structure any on-market or off-market stakebuilding, taking into account the legal and regulatory obligations applicable to their particular circumstances.
Disclosure obligations require persons who acquire or dispose of a beneficial interest in securities, such that they hold or no longer hold 5 per cent or any further multiple of 5 per cent of the voting rights attaching to a particular class of securities, to notify the issuer within three business days of the acquisition.10 This applies irrespective of whether the acquisition or disposal was made directly, indirectly, individually or in concert with any other person, and options and other interests in securities must be taken into account.
If an acquisition takes the acquirer's beneficial interest in voting rights to 35 per cent or more (whether acting alone or in concert), the acquisition will trigger a mandatory offer to the remaining shareholders, unless a whitewash resolution waiving the mandatory offer is approved by a majority of independent shareholders.
Where a stakebuilding involves two or more persons cooperating for the purposes of proposing an 'affected transaction' or offer, concert party rules in the Companies Act and the Takeover Regulations will apply. The latter also impose strict requirements in relation to dealings in securities before, during and after an offer period.
Activists should be mindful of the insider trading offences and the broader framework regulating market abuse under the Financial Markets Act.11
vii Defences available to companies and directors' duties
There are various defences available to boards and companies when faced with shareholder activism. Companies that have anticipated and prepared for activism, and carried out strategic stakeholder engagements, will be better placed to respond quickly, and to defend against activist campaigns that may not be in the best interests of the company. In assessing an appropriate response to shareholder activism, a board needs to have regard to the interests of the company and its stakeholders writ large. In doing so, it will have to consider the short-, medium- and long-term interests of the company.
In a transactional context, the Companies Act contains a 'no frustrating action' rule that requires the board to refrain from taking any action vis-à-vis the company that is directed at frustrating an offer, or which could effectively result in a bona fide offer being frustrated, or shareholders being denied an opportunity to decide on its merits.12
As a general principle, it is the board that has primary legal responsibility for managing the business and affairs of the company. In doing so, the directors are subject to various fiduciary duties, all of which flow from the overarching duty to act in the best interests of the company at all times. There is no list of factors that a director must consider when assessing what is in the best interests of the company. The Companies Act includes a statutory business judgement rule, which affords directors some latitude and a degree of protection in responding to shareholder activism.
Key trends in shareholder activism
i Profile of activist investors
In broad terms, it is possible to distinguish between economic activists and governance activists. Economic activists in South Africa primarily comprise institutional investors (such as asset managers, collective investment schemes, hedge funds, insurers, retirement and pension funds) whose activism is often event-driven and is generally directed at extracting greater shareholder value. Governance activists typically seek to influence board composition and company policy, and to improve corporate governance.
Recently, non-profits and NGOs, such as Just Share, the Raith Foundation and the Centre for Environmental Rights, have actively pursued ESG agendas. A number of prominent individual activists also regularly challenge companies on corporate governance, ESG and related issues.
Of course, many investors regard shareholder activism as integral to their investment strategies and will pursue both economic and governance activism. Examples of investors who have pursued both economic and governance activism include Allan Gray, Sygnia Asset Management, Value Capital Partners and Foord Asset Management. The Public Investment Corporation (PIC) – an investment management company owned by the South African government, which manages the assets of the Government Employees Pension Fund and other social security funds – holds significant stakes in a number of JSE-listed companies and exercises considerable influence as a shareholder, particularly in M&A contexts. As at 31 March 2019, the PIC reported having assets under management worth 2.131 trillion rand.13
ii Companies targeted by activist investors
Activism in South Africa has not been restricted to any particular sectors, or by company size or performance. These factors are only a few among many, endogenous and exogenous, that might render a company a more vulnerable target of an activist campaign.
iii Activist campaigns
The objectives of activists vary, and activists will use different tactics and strategies in pursuit of their objectives. Shareholder engagement is more often than not private, 'behind closed doors', but may play out in public. Institutional investors are very influential, particularly when acting collaboratively.
Historically, most campaigns in South Africa have focused on executive compensation and board composition.
On remuneration, following the introduction of 'say-on-pay' rules, certain JSE-listed companies have had to reconsider their remuneration policies following significant shareholder opposition to such policies or implementation reports.14
On board composition, campaigns have forced companies to take steps to change the make-up of their boards or pushed for the resignation of the CEO. A noteworthy example of this was in 2014, involving PPC, a cement manufacturer, where activists sought to remove the entire board.15 Additionally, JSE-listed engineering firm PSV Holdings experienced a dramatic turn of events at its November 2019 AGM, when the recently ousted CEO managed to secure enough shareholder support to regain control and vote down resolutions for the election of four directors to the board.16
In the M&A context, the influence of shareholder activism is gradually increasing. Shareholders have intervened to block or force certain M&A activity. Recent examples of the former include shareholder opposition to a proposed takeover of PPC,17 and Prudential's opposition to an attempted takeover of poultry producer Sovereign Foods by Country Bird Holdings.18 An example of the latter is Grand Parade Investment's (GPI) disposal of its interests in certain franchises (described in Section IV).
Recent campaigns, for example that against La Concorde (described in Section IV), also demonstrate the potential for shareholders, in certain statutorily prescribed circumstances, to delay potential M&A transactions by requiring a company to obtain court approval before implementation or to exit their investments for fair value by exercising their appraisal rights.
iv Outcomes and the path to resolution
Recent campaigns relating to climate-related matters, particularly in the banking sector, demonstrate that activists can use a variety of different approaches to pursue the same ends, with varying degrees of success and a range of possible outcomes. Outcomes also depend to a large extent on the approach adopted by the target company in responding to an activist campaign: responses vary from summary dismissal, to collaborative engagement, to active opposition.
As noted above, shareholder activists who hold even nominal stakes in companies are afforded relatively strong rights and protections. Companies should focus on good corporate governance and proactively participate in appropriate levels of shareholder engagement, with particular focus on unlocking shareholder value. This includes abiding by the disclosure and engagement recommendations of the King Code, particularly in the context of listed companies.
In preparing for increased shareholder activism in South Africa, companies should continually and carefully monitor their shareholder portfolios for activists, assess potential vulnerabilities, and anticipate and prepare for campaigns on a case-by-case basis. Boards and companies that can demonstrate value creation over time, adherence to principles of good governance, including careful stakeholder engagement and responsible corporate citizenship, are less likely to find themselves vulnerable to activism. They are also more likely to have anticipated and planned for activism, and to be able to successfully communicate a well-articulated, carefully prepared and strategic response to particular instances of activism.
Recent shareholder activism campaigns
In November 2018, GPI, a franchisee of Burger King, Dunkin' Donuts and Baskin-Robbins, was the subject of activism by a consortium of disgruntled minority shareholders.19 The consortium requisitioned an extraordinary general meeting (EGM) to overhaul the board and appoint four of its own non-executive directors. It sent a letter to GPI detailing its grievances: doubts about the competency, skills and independence of the board; large bonuses paid to executive directors despite a collapsing share price and dwindling dividend; poor capital allocation decisions; and an exodus of key executives. After GPI failed to abide by a JSE directive ordering it to notify investors of the letter, the JSE issued the letter to shareholders directly.
An investor presentation preceded the EGM, during which GPI's interim CEO threatened 'war' against the activists, branding them 'short-termists' and 'usurpers'. At the EGM, the consortium gained sufficient shareholder support to appoint two of its preferred nominees to the board as non-executive directors. Days later, the CEO resigned, shortly before a vote on her appointment at the company's AGM, and shortly after Value Capital Partners, a turnaround specialist, acquired an influential stake in GPI.
In February 2019, GPI announced that it was exiting its interests in the Dunkin' Donuts and Baskin-Robbins franchises. The consortium had long pushed for GPI to exit the chains, given their track record of underperformance – since their launch in 2016, the South African outlets struggled to gain traction, incurring cumulative losses of over 96 million rand.20
ii Standard Bank
This year, prior to Standard Bank's AGM, the Raith Foundation and Just Share sought to table a resolution to require the bank to adopt a policy on lending to carbon-intensive, fossil fuels activities, and to commit to a deadline for enhanced disclosures related to climate risk. The board of Standard Bank declined to table the resolution at its AGM, on the basis that the proposed resolution did not meet the statutory requirement of being a matter on which the proposing shareholders were entitled to vote. The resolution would, in effect, usurp the role of the board, which has primary responsibility for managing the business and affairs of Standard Bank, and ignored the significant work already being undertaken by the bank in these areas.
After the bank declined to table the resolutions, Just Share and other NGOs publicly called for shareholders not to elect or re-elect five of Standard Bank's board members on the basis that the directors are conflicted on climate-related matters due to their ties to the fossil fuels industry.21 Standard Bank recommended the re-election of the directors on the basis that the directors concerned are all nonexecutive directors who inevitably serve on different companies' boards and, in any event, the Companies Act has mechanisms in place to deal with conflict of interest issues.22 Shareholders overwhelmingly voted to approve the election and re-election of the directors concerned at Standard Bank's AGM on 26 June 2020.
In April 2018, Theo Botha and the Raith Foundation combined to propose a resolution at the AGM of Sasol, a JSE-listed energy and chemical company. The proposed resolution sought to have Sasol, currently one of the largest contributors to greenhouse gas emissions in South Africa, prepare an annual report detailing its plans for addressing climate-related 'transition risks'. Sasol declined to table the proposed resolution on the basis that it addressed matters falling solely within the purview of board and management, and therefore did not meet the statutory requirement of being a matter on which the proposing shareholders were entitled to vote.23
The following year, six major South African institutional investors – Old Mutual, Sanlam, Abax Investments, Coronation, AEON Investment Management and Mergence Investment Managers – tabled a shareholder resolution for the Sasol AGM in November 2019. The six had rejected Sasol's climate change plan on the grounds that the plan was not comprehensive enough and did not align with the Paris Climate Agreement. The resolution therefore sought 'greater transparency from the company on how its long-term greenhouse gas emission reduction strategy and executive rewards align with the Paris Climate Agreement'. It sought to require Sasol to publish its annual climate risk reports from 2020 onwards and its quantitative greenhouse gas targets aligned with the Paris Agreement. The board, however, declined to table the resolution on the basis that the matters raised by the shareholders 'have been addressed and there is no longer any necessity to consider the legality of those resolutions for the upcoming AGM'.24
iv La Concorde
In June 2018, the High Court considered the issue of whether a dissenting shareholder in a holding company is entitled to exercise appraisal rights (mentioned above) in respect of a subsidiary's disposal of all or the greater part of its assets or undertaking.25 Individual activist Albie Cilliers exercised his appraisal rights in respect of a sale of assets by a wholly owned subsidiary of La Concorde. After rejecting La Concorde's initial offer of 13.47 rand per share, Cilliers applied to court for a declaration that the valuation did not represent fair value. La Concorde countered by challenging Cillier's entitlement to appraisal rights at all, arguing that Section 164 of the Companies Act granted such rights to shareholders of the disposing company only (i.e., the subsidiary, not the holding company).26
Notwithstanding that Cilliers did not hold shares in the subsidiary that was disposing of the assets, the High Court found in his favour, adopting a purposive approach to the appraisal right. The Court held that the appraisal right was introduced to protect minority shareholders, particularly where they are unable to effectively influence company direction or pursue private actions. To treat dissenting shareholders in a holding company any differently from those in a subsidiary, the Court reasoned, would undermine the objective of protecting minority shareholders. Correctly interpreted, the relevant provisions of the Companies Act gave appraisal rights to both sets of shareholders. Therefore, Cilliers, as a minority shareholder in the La Concorde holding company, was capable of exercising a shareholder appraisal right in relation to the subsidiary's disposal of assets.
v Steinhoff class action
The Steinhoff judgment dealt with the first shareholder class action brought for certification before the South African courts.27 Following the collapse of Steinhoff's share price in late December 2017, a retired pensioner sought authorisation to represent shareholders in a class action to hold, among others, certain Steinhoff companies and their directors liable for breaches of statutory and common law duties of care.
The shareholders alleged that the companies, through their directors, had engaged in unlawful transactions, the effect of which was to overstate their assets, income and profits, understate their liabilities, and render their financial statements non-compliant with prescribed reporting standards. They sought to hold the companies and directors liable: (1) at common law, in delict or tort, for losses caused to shareholders for negligent misstatements in the financial statements; and (2) under the Companies Act, on the basis that contraventions of statutory duty by the companies and their directors caused loss to shareholders, and gave rise to liability in terms of Section 218(2) or Section 20(6) of the Companies Act for the damage suffered by shareholders.28
Common law claim
For the shareholders to have a claim in delict wrongfulness had to be established. Negligent misstatements that cause pure economic loss are a category of case where wrongfulness is recognised if the plaintiff can demonstrate that a legally recognised right or interest has been infringed.29 In considering whether the shareholders have a legally recognised right or interest that had been infringed by the Steinhoff companies and its directors, the court looked to fundamental principles of company law.
It is a fundamental principle of South African company law that, in general, directors owe fiduciary duties to the company and not to its shareholders.30 While it is possible that directors may owe (additional) fiduciary duties to shareholders in special circumstances, namely where there is some special factual relationship subsisting between the directors and the shareholders,31 there is no general fiduciary duty owed by directors to shareholders of a company. The court found that there was no basis on the shareholders' case to find that the Steinhoff directors or the companies, by virtue of some special relationship, owed any fiduciary duties or duty of care to the shareholders. Therefore, the shareholders lacked a cause of action because, absent a finding of wrongfulness, there could be no delict.
Section 218(2) of the Companies Act provides that: 'Any person who contravenes any provision of th[e Companies] Act is liable to any other person for any loss or damage suffered by that person as a result of that contravention.' The court held that: (1) Section 218(2) should not be interpreted literally, as that would lead to incurable contradictions when considered in the light of the other provisions of the Companies Act;32 and (2) what Section 218(2) does is recognise that loss or damage may arise from contraventions of the Companies Act and confer a right of action. Questions concerning who enjoys the right of action, what the right consists of, and against whom the right may be exercised, must be resolved by reference to the substantive provisions of the Companies Act implicated by the particular contravention – bearing in mind that the Companies Act attaches different regimes of liability to different contraventions.33
Section 20(6) of the Companies Act provides that: '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) th[e Companies] 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).'
Section 20(6) does not specify whether a shareholder has a claim for damage suffered by the shareholders or the company. Having regard to Section 20 as a whole,34 the court held that Section 20(6) imposes liability on persons who cause loss to the company, and 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. It does not give rise to liability for the damage that shareholders may have suffered by reason of the unlawful or ultra vires actions of the Steinhoff companies. The company may be compensated for its loss at the instance of the shareholders, which would indirectly benefit the shareholders.
In weighing the various factors that are to be considered in an application for certification,35 Unterhalter J ultimately held that, as a matter of law, the class action failed to raise a triable issue: as pleaded it did not disclose a cause of action. Therefore, whatever the virtues of the class action, certification could not be granted: 'to trigger the machinery of a class action to determine something that does not exist in law . . . would be to place a ghost in the machinery of justice'.36
The fourth iteration of the King Code (effective from 1 April 2017) adopts a qualitative, outcomes-based 'apply and explain' application and disclosure regime, in contrast with earlier iterations that imposed an 'apply or explain' regime. The King Code promotes a stakeholder-inclusive approach to corporate governance (as opposed to a shareholder-centric approach), which regards shareholders as an important subset of stakeholders who, by virtue of their rights as shareholders, are able to hold companies and their boards to account. The King Code, therefore, encourages active shareholder engagement through a number of its recommendations.37 As such, it creates an opportunity for a framework for the responsibilities of shareholders, particularly institutional investors, to be incorporated in the corporate governance system of checks and balances.
In June 2019, the FSCA published Guidance Notice 1 of 2019 for pension funds on Regulation 28 of the Pension Funds Act 24 of 1956. The latter imposes a legal obligation on pension funds to, before making an investment in and while invested in an asset, consider any factor that may materially affect the sustainable long-term performance of the asset, including ESG factors. The Guidance Notice recommends 'active ownership' by pension funds, being the prudent fulfilment of responsibilities relating to the ownership of, or an interest in, an asset. These responsibilities include guidelines to be applied for the identification of sustainability concerns in that asset, and mechanisms of intervention and engagement with the responsible persons in respect of the asset when concerns have been identified.
In November 2018, following campaigns and disruption in the market by certain short-sellers,38 the FSCA published a 'Discussion Paper on the Implementation of a Short Sale Reporting and Disclosure Framework'.39 These rules are still under discussion.40
While globally and locally there has been a dip in activist campaigns due to the impact of the covid-19 pandemic, activity is expected to pick up as the economy recovers.
Recent events, including some high-profile corporate scandals and governance failures, have resulted in (calls for) shareholder bases that are less apathetic in their approach to management accountability and the pursuit of shareholder value. Shareholder demands for greater levels of accountability, transparency and return on investment are on the rise. A failure to engage with sophisticated activist shareholders, or provide them with the levels of transparency demanded, may leave the board exposed to shareholder disapproval sparked by shareholder activists who are armed with an increased amount of information and a variety of regulatory rights and protections.
Shareholders are becoming increasingly active on such matters as diversity, board composition, performance and tenure, executive remuneration policies, transparency, ESG and sustainability. This is being driven in part by increasing civic action on high levels of inequality, climate and sustainability, ongoing debates about corporate purpose, enhanced reporting and disclosure requirements, and the recent changes introduced by the King Code.
Issues relating to ESG and sustainability are the focus of many recent campaigns and will remain high on the agenda. We expect local and international institutional investors, in particular pension funds, mutual funds, and insurers, to play an increasingly active and pivotal role in influencing corporate strategy and M&A with reference to sustainability and ESG factors. Careful consideration of these issues has become essential to corporate strategy and governance. Companies that pay inadequate attention to these issues are increasingly likely to become exposed to physical and transition risks (business, credit, market, reputational and legal), which could have a material adverse effect on their businesses over the medium- to long-term.
1 Ezra Davids is a partner and Ryan Kitcat is a senior associate at Bowmans. The authors would like to thank Lauren de Bruyn and Christopher White for their helpful research assistance.
2 Business Day, 16 May 2019, Lisa Steyn 'Foreigners take a shine to SA precious metals shares: Analysis shows foreign investors have increased their exposure to SA-listed gold and platinum producers', available at: www.businesslive.co.za/bd/companies/mining/2019-05-16-foreigners-take-a-shine-to-sa-precious-
3 See 'FSCA Press Release: Report by the FSCA on status of various investigations', dated 4 March 2019, available at: www.fsca.co.za/News%20Documents/FSCA%20Market%20Abuse%20Investigations%20Press%20Release%20-%2004%20March%202019.pdf.
4 Shareholders entitled to exercise at least 10 per cent of the voting rights may propose an amendment to a company's memorandum of incorporation (MOI).
5 This is the constitutional document of a company, which is binding among the company, its board and shareholders.
6 Section 164 of the Companies Act.
7 Section 161 of the Companies Act.
8 Section 163 of the Companies Act.
9 Section 164 of the Companies Act. Section 159 also provides whistle-blower protections for shareholders to make good faith disclosures of information to a relevant regulator where the shareholder reasonably believed at the time of disclosure that the company, director or prescribed officer had: (1) contravened the Companies Act; (2) failed to comply with a statutory obligation; (3) engaged in conduct that endangered or harmed an individual or the environment; (4) unfairly discriminated against a person; or (5) contravened other legislation that could place the company at risk. These shareholders are immune from any civil, criminal or administrative liability, and the relevant shareholder has qualified privilege in relation to the disclosure made, which would encourage shareholder activists seeking to hold the board accountable for its conduct.
10 The issuer then has 48 hours to disclose the acquisition to the market and shareholders.
11 See Chapter X of the Financial Markets Act.
12 Section 126 of the Companies Act.
13 See the PIC Integrated Annual Report for the year ended 31 March 2019, available at: https://www.pic.gov.za/DocAnnualReports1/PIC%20Integrated%20Annual%20Report%202019.pdf. Also see National Treasury, 'Ownership of JSE-listed companies: Research Report for National Treasury September 2017', which describes the Government Employees Pension Fund as the single largest major shareholder in JSE-listed companies, then accounting for around 11 per cent of the market value of the top 25 companies listed on the JSE, available at: http://www.treasury.gov.za/comm_media/press/2017/2017100301%20Ownership%20monitor%20-%20Sept%202017.pdf.
14 In particular, the King Code contains recommendations relating to executive remuneration, including a recommendation that companies should produce and disclose, in respect of a reporting period, a remuneration policy and a report on the implementation of that policy. This remuneration policy and implementation report must be tabled annually for a separate non-binding advisory vote by shareholders at the company's annual general meeting (AGM). If 25 per cent or more voting rights are exercised against any part of this remuneration policy, the board must engage with shareholders in good faith to understand shareholder dissatisfaction and the reasons for dissenting votes. The board is required to appropriately address reasonable and legitimate concerns raised in the evaluation of performance. Although the advisory vote given to shareholders is non-binding, this vote coupled with increased disclosure enables greater shareholder activism in that it encourages the board to engage with shareholders, promotes transparency and provides shareholders with a platform to express their dissatisfaction.
15 During 2014, a group of shareholders requisitioned a special shareholders' meeting to consider the removal of the entire board of PPC and to replace it with the nominees of the requisitioning shareholders. These measures successfully forced the board to engage with the requisitioning shareholders' concerns.
16 Financial Mail, 22 August 2019, Rob Rose, 'Boardroom coup: engineering chaos at PSV Holdings', available online at: https://www.businesslive.co.za/fm/fm-fox/2019-08-22-boardroom
17 In 2018, PPC was the subject of a merger attempt by a consortium comprising its smaller rival AfriSam and a Canadian investment house, Fairfax Financial Holdings. This failed as a result of shareholder resistance to a perceived undervaluation of PPC. Following failure of the proposed transaction, activist shareholders pressed for the removal of the chairperson and reconstitution of the PPC board.
18 Chris Wood 'Shareholder activism (2): Sovereign Foods: Defending against a hostile takeover', August 2018, available at: https://prudential.co.za/insights/articlesreleases/shareholder-activism-2-sovereign-foods-defending-against-a-hostile-takeover.
19 The consortium comprised Kagiso Asset Management, Denker Capital, Excelsia Capital, Westbrooke Alternative Asset Management and Rozendal Partners.
20 Business Insider, 29 November 2018, Helena Wasserman, 'Amid a war over Burger King's South African owner, this investor says Dunkin' Donuts and Baskin-Robbins should be shut down', available at: www.businessinsider.co.za/war-over-burger-king-may-claim-dunkin-donuts-2018-11; Business Day, 18 October 2018, Marc Hasenfuss, 'Hell hath no fury like Grand Parade's Hassen Adams', available at: www.businesslive.co.za/fm/money-and-investing/2018-10-18-hell-hath-no-fury-like-grand-parades-hassen-adams; Business Day, 13 December 2018, Marc Hasenfuss, 'A revolving door of CEOs at Grand Parade', available at: www.businesslive.co.za/fm/fm-fox/2018-12-13-a-grand-parade-;
of-revolving-ceos; Business Day, 18 February 2019, Larry Claasen, 'Activist investors win as GPI closes Dunkin' Donuts and Baskin-Robbins in SA', available at: www.businesslive.co.za/bd/companies/retail-and-consumer/2019-02-18-activist-investors-win-as-gpi-closes-dunkin-donuts-and-baskin-robbins-in-sa.
21 Moneyweb, 9 June 2020, Nompu Siziba, 'Standard Bank called to vote out climate-conflicted directors', available at: https://www.moneyweb.co.za/moneyweb-radio/standard-bank-called-to-vote-out-
22 Business Day, 22 June 2020, Wendy Dobson 'Standard Bank is helping Africa chart a green energy path:
The bank is committed to the shift to a low-carbon economy', available online at: https://www.businesslive.co.za/bd/opinion/2020-06-22-standard-bank-is-helping-africa-chart-a-green-energy-path/.
23 Weeks later, Trencor, a global leader in the container industry, used the same argument as Sasol to justify its refusal to table at its AGM a resolution proposed by a small group of shareholder activists. The proposed resolution sought to compel Trencor to use its position as a substantial shareholder of Textainer to, among other things, compel Textainer to remove its 'poison pill' by-laws and takeover defence provisions by making board consent a prerequisite to a third party's acquisition of control. See Business Day, 18 July 2018, Ann Crotty, 'Trencor rejects minorities' bid for resolutions on protection by-laws', available at: www.businesslive.co.za/bd/companies/2018-07-18-trencor-rejects-minorities-bid-for-
24 Mail & Guardian, 5 November 2019, Thando Maeko, 'Institutional investors reject Sasol's climate plan', available online at: https://mg.co.za/article/2019-11-05-institutional-investors-reject-sasols-climate-plan/.
25 See Cilliers v. La Concorde Holdings Ltd and Others 2018 (6) SA 97 (WCC).
26 Business Day, 19 June 2017, Ann Crotty, 'Albie Cilliers steps up battle over KWV shares amid Vasari sale', available at: www.businesslive.co.za/bd/companies/retail-and-consumer/2017-06-19-albie-cilliers-steps-up-battle-over-kwv-shares-amid-vasari-sale.
27 Dorothea De Bruyn v. Steinhoff International Holdings N.V. and 41 others (29290/2018)  ZAGPJHC 145 (26 June 2020) (not yet reported), available online at: http://www.saflii.org/za/cases/ZAGPJHC/2020/145.html.
28 The companies and directors were alleged to have breached Sections 22 (prohibition against reckless trading), 28 (accounting records), 29 (financial statements), 30 (annual financial statements), 40 (consideration for shares) and 76 (standards of directors' conduct) of the Companies Act.
29 The Constitutional Court has explained the general principle of the law of delict/tort that conduct causing pure economic loss is not prima facie wrongful, and that wrongfulness must be positively established. Broadly speaking, the wrongfulness enquiry looks into whether it is reasonable to recognise conduct as wrongful and therefore attracting liability, based on policy and the legal convictions of the community.
30 This is entailed by: (1) the Salomon principle that a company is distinct from its members/shareholders; and (2) the rule in Foss v. Harbottle, which requires that the company and not its shareholders have an action for wrongs done to the company and losses suffered by the company. Both principles stem from the United Kingdom and are principles are reflected in South African common law and certain provisions of the Companies Act, in particular Sections 19 (legal status of companies), 76 (standards of directors' conduct) and 77 (liability of directors).
31 Peskin v. Anderson  1 BCLC 372 at  – .
32 For example, Section 77(2)(a) provides that a director may be held liable in accordance with the principles of common law for breaches of fiduciary duty for losses, damages or costs sustained by the company as a result of breaches of duties in Sections 75, 76(2) or 76(3)(a) or (b) of the Companies Act. Such duties are owed to the company and at common law, as noted above, directors may be liable to the company but not the shareholders for directors' breaches of those duties – even if the shareholders suffered a loss as a result of the breaches. Moreover, at common law the Prudential principle of 'reflective loss' provides that a shareholder cannot sue for the diminution in value of his or her shares where the loss is simply a reflection of the loss suffered by the company. (See Prudential Assurance Co Ltd v. Newman Industries Ltd (No. 2)  1 Ch 204 (CA), referred to at Para. 186 of the Steinhoff judgment.) If interpreted literally, Section 218(2) would be read to impose liability on a director who contravened a duty in Section 76(3) in favour of shareholders, whereas the liability regime established and regulated by Section 77(2) imposes no such liability. Additionally, the literal interpretation was problematic in that it would give rise to wholesale liability, and an undifferentiated conception of permissible plaintiffs, without the regulating concepts of fault, foreseeability and remoteness.
33 Steinhoff, at Paras. 187–193 and 213. See also Hlumisa Investment Holdings (RF) Ltd and Another v. Kirkinis and Others (Case No. 1423/2018)  ZASCA 83 (3 July 2020), in which the Supreme Court of Appeal considered whether Section 218(2) enabled a claim by a shareholder in relation to the diminution of value of shares in African Bank due to various alleged breaches of the Companies Act by the company's directors. The SCA held that the company was the proper plaintiff for breaches by directors of duties owed to the company, and that the rule precluding shareholders from claiming for reflective loss had not been abolished by Section 218(2) of the Companies Act.
34 Section 20 is broadly concerned with the validity of company actions. It recognises that persons may cause a company to act beyond its powers or some other limitation in its constitutional documents, and/or unlawfully in contravention of the Companies Act and sets out various remedial options available to shareholders and other constituencies (including directors and prescribed officers) in those circumstances. Section 20(6) confers a right of action for damages on each shareholder of a company against a person who, intentionally, fraudulently or through gross negligence, caused the company to do anything inconsistent with either the Companies Act or a limitation on the purposes, powers or activities of the company in its constitutional documents (the latter, ultra vires actions).
35 In Children's Resource Centre Trust v. Pioneer Food (Pty) Ltd 2013 (2) SA 213 ( SCA) at Para. 26, the Supreme Court of Appeal set out factors that should be weighed in deciding whether to certify a class action: 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. In Mukaddam v. Pioneer Foods (Pty) Ltd 2013 (5) SA 89 (CC) at Paras. 34–40, the Constitutional Court held that the above factors are not prerequisites for certification but are considerations to be weighed under the overarching principle of what is required by the interests of justice. And as Unterhalter J put it in Steinhoff, at Para. 25: '[F]actors 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.'
36 Steinhoff, at Paras. 299–300.
37 Among other things, the King Code recommends that the board encourage shareholders to attend general meetings and engage with shareholders through various means such as websites, advertising and press releases. Certain parts of the King Code have been incorporated into legislation by reference. The King Code has recently been updated to introduce greater disclosure recommendations, including in respect of board committees (e.g., remuneration committees) and CEOs (e.g., in respect of notice periods, contractual conditions relating to termination and succession planning).
38 See, in particular, the National Treasury's media statement, 'National Treasury's view on Viceroy's Capitec Report', dated 1 February 2019, available at: www.treasury.gov.za/comm_media/press/2018/2018020201%20Media%20statement%20Viceroys%20Capitec%20Report.pdf.
39 The discussion paper is available at: www.fsca.co.za/Regulatory%20Frameworks/Documents%20for%20Consultation/Discussion%20paper%20on%20the%20implementation%20of%20a%20Short%20Sale%20Reporting%20and%20Disclosure%20framework%20-%2019%20November%202018.pdf.
40 Daily Maverick, 16 August 2019, Ruan Jooste, 'Rules to manage short-selling still being 'discussed', available online at: https://www.dailymaverick.co.za/article/2019-08-16-rules-to-manage-short-selling-