In the years between 1998 and 2016, Steinhoff International Holdings Ltd became South Africa's corporate success story and entered into one major corporate takeover deal after another that comprised very large acquisitions in a relatively short period of time that Styan1 refers to as "the Golden Years". In 1998, Steinhoff's share price was R4 and by 2015 it was R60, with the Financial Mail referring to the Steinhoff Group as 'South Africa's investment darling'. However, in 2007, Sean Holmes (an analyst at JP Morgan) published a scathing report on Steinhoff. The crux of this report is that he advised investors to sell their shares. The report emphasised what he called "aggressive accounting practices" and the group's "worryingly poor disclosure", awkward takeovers with the intention to cover cracks, and an unusual focus on maximising taxation: "We believe it is difficult to put an attractive investment case forward for Steinhoff. We believe that the current share price of R23.20 a share is not a fair reflection of the risks associated with the company. We are concerned about the quality of Steinhoff's earnings, especially given its poor financial disclosure and lack of transparency. For example, when Steinhoff was asked about specific transactions, the financial director answered that only [Markus] Jooste had the details. That was unusual if you consider that the financial director should have knowledge of these details. We are surprised by Steinhoff management's refusal to disclose information about key issues". What was also concerning was the rising debt level in the numerous acquisitions. Steinhoff's own integrated report of 2013 indicated that the group held net-interest bearing debt of R24.2 billion (a net debt-to-equity ratio of 45%). In September 2017, one journalist in Business Day said that: "investors found Steinhoff impossible to analyse from one year to the next, given its frenzied deal-making". A number of clearly visible warning signs were overlooked, one of which was the intangible assets on the group's balance sheet. Simply put, intangible assets are those assets that one cannot physically touch. A major component of Steinhoff's intangible assets was goodwill. If you buy a business for R100 but its total assets are worth only R70, the remaining R30 is a goodwill, which is indicated as such on the balance sheet. In other words, it is that part of the purchase price by which the selling price exceeds the company's book value. By 2017, the group had non-current assets of approximately 23,9 billion against 15,8 billion in long-term debt (non-current assets are assets that cannot rapidly be converted into cash, and usually include property, vehicles and land). However, even although the accounting records reflected that the group was in a seemingly healthy position, most of its non-current assets were not tangible assets such as property or vehicles. They were actually intangible assets, mainly brand names and good will. At the financial year-end (30 September 2016) Steinhoff's total goodwill and other intangible assets amounted to 17,7 billion. This had been 9,5 billion the previous year, meaning that intangible assets had increased by about 86% within one financial year. On Monday 4th December 2017, the final annual financial statements of the Steinhoff Group were scheduled to be signed off by the auditors in order for the annual results to be announced two days later (Wednesday 6th December 2017). A listed company does not dare to miss this important date as it would have the effect of harming investor confidence. In the past, Deloitte had never taken so long to finalise the statement. However, when the auditors did not receive the information that they asked for, they refused to sign off Steinhoff's statements on Monday 4th December 2017. The result of this was that on Wednesday 6th December 2017, Steinhoff issued a statement on the JSE network staring that new information had come to light which relates to accounting irregularities that required further investigation. In the interim, Markus Jooste sent an email to Steinhoff's employees in which he resigned as CEO with immediate effect.

Q.2.1 Analyse the ways in which Steinhoff's directors failed to reflect in their fiduciary duties as set out by South African legislation and corporate governance principles. (30)

Reference 1 Styan, J Steinhoff: Inside SA's biggest corporate crash (2018) 17-27.