In a judgment delivered on 25 November 2024, the High Court of South Africa, Gauteng Local Division, Johannesburg declared a series of transactions involving Dimension Data Facilities (Pty) Ltd (Dimension Data Facilities) and Identity Property Co (Pty) Ltd (Identity PropCo) void and invalid. This case is poised to become a significant reference point for corporate governance, particularly in relation to section 75 of the Companies Act, 2008 which deals with conflicts of interest.

The court’s findings are particularly relevant to those involved in banking and finance structures, addressing the use of en commandite and limited partnerships in the context of a Broad-based Black Economic Empowerment transaction.

Key Principles of Section 75

1. Personal Financial Interest: is defined broadly to include any direct material interest of a financial, monetary, or economic nature.

• Disclosure of Personal Financial Interest: Section 75(5) requires directors (including prescribed officers, alternate directors and members of board committees) to disclose any personal financial interest in matters to be considered at a board meeting.
  
• Recusal from Deliberation: Once a director discloses their interest, they must recuse themselves from the deliberation and decision-making process regarding that matter. This is intended to ensure that the board’s decision is made without undue influence from the conflicted director.

• Post-Approval Disclosure: Section 75(6) requires directors to promptly disclose the nature and extent of any personal financial interest acquired after the board has approved a matter (including the material circumstances of its acquisition).

• Validity of Decisions: According to Section 75(7), a board decision, transaction or agreement is valid despite a director’s personal financial interest only if: (a) it was approved following the required disclosure; or (b) despite having been approved without disclosure of that interest, it is subsequently ratified by an ordinary resolution of the shareholders or declared valid by a court.

• Consequences of Non-Disclosure: Failure to disclose a personal financial interest as mandated by Section 75 renders the transaction, agreement or board decision void unless ratified by the board or validated by a court.

The Dimension Data Facilities vs Identity Property Co Case

The case centres around the 2019 sale of the Dimension Data Campus in Bryanston, Johannesburg, along with other assets (the Campus), by Dimension Data Facilities to Identity PropCo. The sale was achieved through a complex scheme involving en commandite (silent or limited) partnerships and private equity fund management structures. The applicants, including Dimension Data Facilities and two other holding entities in the group, alleged that six erstwhile Dimension Data executives, all white males, conspired to gain surreptitious control over and beneficial ownership of the assets sold to Identity PropCo. The scheme was found to have been designed to conceal the true beneficiaries of what was intended (by Dimension Data) to be a BEE empowerment transaction to improve its BEE score, deliberately subverting the BEE Act.

 Key Allegations

• The Impugned Interest and Conflict: The applicants’ claimed that the executives were the beneficial owners of and held ultimate control of Identity PropCo, through personal funding (of the cash portion of the purchase price for the sale of the Campus) and using nominees and en commandite partnerships. The interest was present from the early stages of the transaction’s planning and structuring.

• The affected nominee arrangements and en commandite partnerships: The executives used an entity, controlled by one of the implicated executives, as a nominee to hold their interests in Areti, an en commandite partnership. Areti, in turn, was the limited partner in Identity Property Fund 1, also a limited partnership and the sole shareholder of Identity PropCo which acquired the Campus in the transaction.

• Non-Disclosure: The sale of the Campus was approved by the applicants’ boards without any disclosure of the executives’ interests, in contravention of section 75 of the Companies Act. The relevant applicant (and shareholder of Dimension Data Facilities) also did not subsequently ratify the transaction (or underlying agreements) once it became aware of the non-disclosure.

• Concealment: Despite the outward appearance of a BEE-compliant transaction involving independent black investors, the true investors were the implicated executives themselves. The transaction’s structure was deliberately complex, involving nominee agreements and en commandite partnerships, to conceal the executives’ interests.

• Executives Argument: The executives contended that they did not have a personal financial interest in the transaction at the time of the board approvals, or that they were in control of Identity Propco. They also contended that their interests (acquired after the conclusion of the transaction and relevant board approvals) were indirect due to the complex structuring of the transaction.

Court’s Findings

The court stated that the executives did not deny personally funding the investment in the transaction or that they had failed to disclose this to the applicants and their holding structures. These issues were common cause. The executives engaged legal and financial advisors to set up the nominee arrangements and en commandite partnerships, through which they would hold their interest in the transaction. This included instructing attorneys to draft the necessary agreements and structuring the financial transactions to ensure their interests were hidden.

The court stated that the executives’ control over Identity PropCo was evident from (amongst other things) their clandestine manoeuvres and their ability to replace the General Partner and manager of Identity Property Fund 1 without the consent of the buyer, indicating their ultimate authority over the transaction. The executives also subsequently indicated that they would step away from the transaction and allow it to be reversed, provided they were not implicated in any wrongdoing. The court held that the executives could not credibly claim not to be the controllers of the scheme, while at the same time offering to reverse it in exchange for their immunity.

The court emphasized that the executives’ interests were direct and material, despite the complex structures used to conceal them, and highlighted the following key legal principles, in relation to section 75 of the Companies Act:

• Section 75 codifies the common law principles of conflict of interest, requiring directors to disclose their interests and recuse themselves from deliberations on the matter. The court found that the executives failed to comply with these requirements.  

• The Legislature in enacting section 75 did not intend to limit the common law protections relating to conflict of interest but to codify and enhance them. Importantly, the court noted that the transaction would be voidable at common law due to the conflict of interest and the failure to disclose.

• The requirement of a “direct” personal financial interest under section 75, does not mean that the interest must be held in a personal capacity. The interest can be discernible (by reference to the matter or transaction) to benefit the director directly. The court stated, “section 75 cannot be evaded by clever structures which seek to conceal the interests of parties.”

• A court faced with a complaint of conflict of interest must have careful regard to the financial structures implicated “to determine where the beneficial interest actually resides.” In this case, and despite the layered ownership in Identity PropCo, the nominee agreements (through which the executives held their interests) were clear and stated that the executives were the ultimate interest holders in and to the rights under the transaction.

• The nature and extent of the interest should be determined on the facts of each transaction. A compelling factor, the court said, is evidence which is not explicable on any basis other than that it is a device to conceal the interest in issue (as its primary purpose) i.e. evidence that clearly shows an attempt to hide the interest. Aside from the nominee arrangements and en commandite partnerships which concealed the executives investment in the transaction, the court flagged the email exchanges between the executives and their legal advisors (and others) which indicated deliberate efforts to keep the identity of the true investors secret.

Conclusion

The court declared the transaction (and underlying agreements) void and ordered the restitution of the Campus property to Dimension Data Facilities. The judgment underscores the stringent requirements of Section 75 and the consequences of non-compliance, serving as a stern warning against corporate malfeasance and emphasising the importance of transparency and integrity in corporate governance. The court noted that whilst nominee arrangements and en commandite partnerships have their place in corporate structures, they should entail the implementation of checks and balances which serve to prevent them from being used to make corrupt relationships possible and in fraudem legis (directly translated: in fraud of law).

According to media reports, the executives have sought to appeal judgment.

The facts underlying the judgment (and the transaction) are complex. The role players and issues considered are also numerous. Here is the full judgment.