Edition: Sept - Nov 2013
Pandora’s box opens
When companies are fined, their shareholders pay. This is indefensible. Trustees of retirement funds, invested in these companies, must protect the interests of their members.
One isn’t supposed to speak ill of the dead, but sometimes it’s hard to avoid. Judging by the lack of outrage by trustees of retirement funds, at the fines imposed by the Competition Commission on construction companies for anti-competitive behaviour, they seem to be dead from the neck up.
For they should be screaming blue murder. It’s they, utterly innocent bystanders, who’re being penalised for the criminality of companies in which their funds are invested. Not to seek recourse is to neglect their funds’ best interests, a basic contravention of fiduciary duty, additionally allowing the numerous governance codes to be shown up as hollow if not hypocritical.
As with retirement funds, so too with collective investment schemes such as unit trusts. Institutions which manage them, on behalf of investors, cannot remain silent either. Stakeholder activism is put to the test.
But who’s responsible for the losses? Not us, say directors of the bid-riggers, as if the Companies Act were silent on personal liability; as if there weren’t directors who had to have known of price-fixing when it was being committed; as if due-diligence exercises into acquired companies detected no wrongdoing; as if there aren’t professional-indemnity insurance policies to cover and at least partially to compensate for the prejudice; as if it’s perfectly okay to blame lesser employees, let shareholders take the hit, and then return to boardrooms with halos untarnished.
This cannot be the end of the story, much as the firms’ disclosures of rigged projects allow immunity from prosecution. “The Competition Act makes provision for victims of anti-competitive conduct to lodge claims for damages suffered as a result of such conduct,” the commission specifically points out.
In other words, there might yet be a spate of civil actions by the dozens of public and private-sector organisations wanting recompense calculated on the lesser amount they’d have paid were the tenders not rigged. That the rigging has now been admitted gets the tender-awarders past first base in providing proof. Successful actions can only explode the amount in damages, measured by the fines, that shareholders have so far suffered.
Of the 15 construction firms collectively fined R1,46bn for collusive tendering, eight are listed on the JSE. Of these eight, three were each hit for over R300m. These three were Aveng, Murray & Roberts and Wilson Bayly Holmes-Ovcon. To put R300m into a context, the total 2012 dividend payouts to shareholders were R60m by Aveng, zero by M&R and R204m by WBHO.
So it means that each – and using these companies only for illustration – has R300m less to pay dividends, pursue acquisitions, reduce debt or do anything else that can enhance shareholder value. It’s a more useful yardstick than share-price movements for quantification of damages.
It’s because changes in share prices – looking at these three shares as well as the fines on Sasol, Tiger and Pioneer before them – cannot be isolated into the impact of the fines alone. Prices can be said to have discounted a fine in anticipation, for example, or to have moved over a period for market-sensitive reasons that have nothing to do with a fine.
Moreover, because of their high market capitalisations and liquidity, the shares of these three companies are knee-jerk inclusions for the investment portfolios of retirement funds and other collective investment schemes. Aveng is 31%-owned by retirement funds and 34% by unit trusts; M&R is 40%-owned by retirement funds and 30% by unit trusts; WBHO is 21%-owned by retirement funds and 14% by unit trusts.
The commission does a fine job (pun intended) in the exposure and punishment of corruption, right down to the methods by which the pecuniary penalties are computed. That said, however, the fast-track settlement process is not without flaws.
Primarily, it punishes the guiltless in the form of shareholders. Penalties accrue to the state. The parties which admit guilt are companies, not individuals. They are treated with lenience commensurate with their cooperation. It’s uncertain that their immunity from prosecution, thanks to their sacrifice of shareholders’ money, extends to individuals that the companies are now bound by their cooperation agreements to finger.
Even were the trustees of retirement funds to sue the pants off relevant directors, past directors and errant employees, it’s unlikely that their capacity to honour successful awards will match the sheer quantum of recompense required. Civil actions by the victims of rigged tenders will exacerbate these damages.
Generally, too, the fast-track settlement process might be said to compromise the rule of law. Administrative penalties avoid the court process of charging alleged wrongdoers, subjecting witnesses to cross-examination in an open trial, evaluating the defences of those accused, and considering jail time on conviction.
It’s a quasi-judicial procedure for addressing criminality. In essence the regulator, the investigator and the adjudicator are one and the same. This is similar to plea bargains, these days popularly used for white-collar offences that are difficult, expensive and time-consuming to prosecute.
Here the commission received applications from 21 construction firms covering 300 projects worth an estimated R47bn. How these could have been addressed by conventional means boggles the mind. Instead, practicalities are prioritised.
That wrongdoers are smacked by agreement is preferable to them not being smacked by ineffectual prosecutions. Like soldiers being killed by friendly fire, however, injustice arises when it isn’t the wrongdoers who pay the price.
This article, by TT editorial director Allan Greenblo, was first published in Business Report
It isn’t easy to offer a definitive view on whether Directors & Officers liability insurance (D&O) policies will kick in should there be successful litigation against any directors or officers of the companies that have paid fines, comments Marsh divisional executive Teri Solomon:
Unfortunately, we aren’t really able to express firm opinions on whether D&O policies will respond to the specific matters you’ve raised. Most of the affected companies are Marsh clients so we’d have to treat the matter as sub judice.
But as a general comment, the extent to which D&O could assist a director of any affected company, if sued civilly for damages by shareholders, will depend on a number of issues. They’d include the specific policy language, the timing of the claim and how the claim is formulated.
D&O will typically cover a director or officer for a loss he or she causes to a third party arising out of an actual or alleged ‘wrongful act’ committed by the director or officer. What constitutes a ‘wrongful act’ will again depend on the policy’s language but will include, amongst other things, breach of duty and breach of trust.
Shareholders would need to prove a direct link between a director’s breach of duty or negligence and the loss they have suffered. To do this might be extremely difficult.
Issues that will negate cover include known circumstances (whether the directors knew of the damages caused) and fines (which are uninsurable), as well as a director’s or officer’s own fraud.
In broad terms, the D&O may possibly provide for some legal costs to a director or officer defending an action for damages. But whether the cover will respond to the actual damages is too difficult to answer.
For sheer scale – that 15 companies agreed to penalties collectively totalling R1,46m – is itself unnerving. But the pervasiveness of law-breaking is worse. Another six haven’t settled. And, although over 300 projects of bid rigging were revealed, settlements were reached only in respect of the 140 projects concluded after September 2006.
As reward for “full and truthful disclosure”, the companies’ immunity extends no further than lesser penalties than the Competition Commission would have sought had these cases been prosecuted. They do not prevent civil litigation. Neither do they prevent criminal charges being pursued by the National Prosecuting Authority.
On the civil side, prescription only applies from the date on which a debt is discovered. So potential litigants needn’t be constrained by the September 2006 cut-off date if they only found out about a debt (the lesser amount payable had a contract not been rigged) when it was admitted to the commission in June.
On the criminal side, there’s no time limit. Companies can’t go to jail, but individuals can. In terms of the settlement conditionality for “full and proper disclosure”, the companies seem obliged to offer up individuals for prosecution on all 300 projects.
The settlements won’t necessarily bring closure. A series of unravelling could lie ahead. Possibilities to be argued include:
What beckons is a field day for lawyers.