The judgment handed down by Judge J Fisher on 25 November 2024 contains all of the drama associated with high stake commercial restructuring.  Dimension Data is a household name in South Africa and the case involves its six founders, led by Jeremy Ord (Ord).

In 2010, Dimension Data was acquired from the founders by Nippon Telegraph and Telephone (NTT), a Japanese company which has its headquarters in London.  By 2019, NTT had indicated to the founders that it wished to disinvest from South Africa and the founders were tasked with negotiating a transaction which would result in the disposal.

Ord, leading the founder group, which would be responsible for the buy-out, recommended that the BEE status of the group be first improved as it would benefit the ultimate disposal of NTT’s interest.  As part of this first leg to the management buy-out, it was proposed to NTT that Dimension Data sell its property holdings in Johannesburg, known as The Campus (The Campus).  This sale would be part of a broad-based black economic empowerment scheme which would improve the BEE Score of Dimension Data.  It was recommended that the sale of The Campus be to a private equity fund which qualified as a fund under Statement 100 of the BEE Codes.

The BEE Codes allow special rules to apply to a private equity fund.  These rules state that the general partner of the fund, or fund manager, must be structured on the basis that 51% of the voting rights, management and share of profits of the manager to the fund, accrue or be held by black people.  These structures allow the general partner, or fund manager, to be measured for BEE purposes, notwithstanding that the limited, or secret partners in the fund, who provide the bulk of the capital, do not have to be black investors.

The judgment refers to the general partner contributing between 1% to 3% of the fund’s capital to ensure that it has an interest in the fund. It also stated that the managing partner must receive a management fee which is usually 2% of the value of the fund.  These percentages, however, may vary, from case to case, but in almost all cases, the manager, or general partner, has a small equity stake in the fund with the majority of the capital and share of profit accruing to the secret or en commandite partners.

The structure which was put together was that The Campus be sold to a fund, the disclosed partner and manager of which was a majority black female owned investment company.  Ord and his co-founders were all limited, or secret partners in this fund, and provided the capital so as to enable the fund to purchase The Campus.

Ord, and his group of co-founders, contend that this structure was perfectly legal and in compliance with the BEE Codes.  They are quite correct.  It is a normal private equity fund structure, commonly used in these sorts of transactions in South Africa.

Ord and his co-founders have been criticised for using an en commandite limited partnership and private equity fund structure to circumvent the objects of empowerment.  That may well be so but the structure which was implemented appears to be perfectly legal and in compliance with the BEE Act and Codes.

Judge Fisher declared the sale of The Campus property void and ordered that the property be returned to Dimension Data.  The judgment did not set aside the transaction on the basis that it was non-compliant with the Codes.  Rather, it was held to be contrary to the Companies Act and our law on conflicts of interest.

Our company Law has followed English law, and it has long been a principle that directors owe fiduciary duties to the company of which they are a director and have to avoid conflicts of interest.  The court quoted an 1843 House of Lords judgment which is to the effect that a director may not have a personal interest in a matter affecting a company and it is irrelevant as to whether the contract or matter is fair or unfair.

At common law, where no disclosure was made of an interest in the matter in issue, the contract is voidable at the company’s instance.

Our new Companies Act codified the common law and extended the obligation further.  Section 75 states that if a director has a personal financial interest in a matter to be considered at a meeting of the board, then the director must disclose the interest and then not take part in the consideration of the matter.  If this is not followed, then the decision by the board is void unless subsequently ratified, following disclosure, by a simple majority of the shareholders.

The court held that Ord was a director of the seller and did not disclose his interest, as a secret or en commandite partner, in the buyer.  Following the principles of Section 75 of the Companies Act, the contract was therefore void.

Ord and his co-founders have indicated that they intend appealing the judgment.  We assume that they will be arguing that NTT was aware that this transaction was part of a management buy-out which, in any event would involve Ord and his co-founders.  They have stated, in a Press explanation, that the correspondence produced at court has been misinterpreted and the allegation that they were “six white males” seeking to arrest control of The Campus property to feather their own nest at the expense of empowerment is plainly wrong.

It will be interesting to follow the appeal process.

What the judgment however clearly shows is that the consequence of a failure to strictly comply with Section 75 of the Companies Act, is dire.  The entire transaction is void.

It is for this reason that we follow a practice of obtaining a shareholder resolution for each director resolution, so as to ensure that there is shareholder ratification in case there has not been a proper disclosure of the financial interest.