Phillips v Fieldstone Africa (Pty) Ltd and Another

• Jurisdiction: South Africa
• Judge: Mpati DP, Streicher JA, Farlam JA, Heher JA and Motata AJA
• Judgment Date: 28 November 2003
• Citation: 2004 (3) SA 465 (SCA)
• Docket Number: 516/02
• Hearing Date: 21 November 2003
• Counsel: N A Cassim SC (with him M A Chohan) for the appellant. T W Beckerling SC for the respondents.
• Court: Supreme Court of Appeal

Heher JA:

[1] This appeal concerns the liability of an employee to account to his employer for secret profits made by the employee out of an opportunity arising in the course of his employment. E

[2] The first respondent is a South African company which was set up by the second respondent to provide a corporate face for its activities in this country and to render services on its behalf.

[3] The second respondent, Fieldstone Private Capital Group, was, at the times with which the litigation was concerned, a F partnership operating from New York. Its business, which is international, consists in the main in raising investment capital and advising on activities in the infrastructure sector (that area which includes public utilities, port and road construction and telecommunications). It frequently works with small enterprises which have gained or hope to obtain large opportunities for which they have G neither expertise nor the financial clout to raise capital beyond the means of their individual members. In the South African context the redressing of historical imbalances in society by the promotion of black economic empowerment provides the typical field for the second respondent's endeavours. It charges fees for its services. Often, H however, its clients are unable to pay in cash or need to be carried financially. To cater for this difficulty, the second respondent frequently agrees to partial satisfaction of its fees in the form of an equity participation in the client or in the investment which is acquired by the client. The importance of this kind of opportunity (and its concomitant risk) was described in evidence by Mr Andrew Capitman, I the second respondent's managing director and chairman of the first respondent:

'The cream in our business is the equity participations because just as we make money for our clients out of their opportunities, the biggest gains sometimes come from the equity but it often takes years to collect, to harvest that investment.' J

Heher JA

[4] The appellant is a young black American recruited in the United States by Capitman especially for his expertise in the sphere of A telecommunications. He was employed by the second respondent in April 1997 at a salary of US$8 333,33 per month and an annual performance-based bonus guaranteed at a minimum of US$50 000.

[5] The dramatis personae are completed by Safika Investment Holdings (Pty) Ltd and Safika Wireless (Pty) Ltd. The latter B is a South African company established principally by black businessmen to pursue opportunities in telecommunications. It is a subsidiary of the first-mentioned company. The leading lights in both are Messrs Cuba and Ngoasheng. In this judgment, unless there is a reason to distinguish between their roles, I shall refer simply to 'Safika'. C

[6] In June 1997 a letter of agreement was signed between Safika Wireless, represented by Safika Investment Holdings, the second respondent, represented by the first respondent, and Citibank. It recorded that Safika Wireless sought to raise capital to finance the acquisition of all or part of the ordinary shares of MTN Holdings (Pty) D Ltd currently owned by SBC Communications Corporation. Safika Wireless employed the other two parties and their affiliates as its 'exclusive and joint Financial Advisors and Placement Agents'. (Since Citibank soon fell out of the agreement and the obligations then devolved solely on the respondents there is no need for further reference to the E role of Citibank beyond this point.)

[7] In summary, the respondents undertook to perform the following services to Safika Wireless:

(a)

to familiarise themselves, to the extent required to perform their duties under the agreement, with the F business, operations, properties, condition (financial and otherwise) and prospects of Safika Wireless and MTN;

(b)

to assist Safika Wireless in the valuation of MTN, the formulation of a negotiation strategy for the acquisition of the MTN shares and the actual negotiations with SBC; G

(c)

in co-ordination with Safika Wireless, to develop a computer-based financial model capable of incorporating alternative financial structures and operating and investment scenarios;

(d)

to assist Safika Wireless in developing an optimum financial structure and, 'in close co-ordination with the company', formulate a strategy for achieving the financing within the required H time;

(e)

to prepare, with the assistance of Safika Wireless, an appropriate financing information memorandum;

(f)

to advise and assist Safika Wireless in structuring and executing the financing, contacting potential investors or I underwriters and making appropriate presentations;

(g)

to make their best efforts to obtain commitments for the financing and to obtain the best terms and conditions on behalf of Safika Wireless. J

Heher JA

[8] The agreement further provided that if Safika Wireless were to acquire the MTN shares from SBC during the term of the engagement, A the respondents would be deemed to have completed their assignment successfully and to be entitled to full payment of the agreed compensation. If the financing was completed, the second respondent would be paid a structuring fee of 1,5% of the total nominal face value of the financing and a placement fee of the same percentage but not less than US$2 250 000. The agreement was to terminate at the B earlier of the closing of the financing or 12 calendar months from the date of the agreement but might be extended if agreed to in writing by the parties. Finally, the agreement recorded that the respondents' team on the MTN engagement would be led by the appellant and would include Mr Clive Ferreira of the Johannesburg office and Mr Capitman of C the New York office and such other middle and junior-level personnel as might be required.

[9] The second respondent duly seconded the appellant to South Africa for the purposes of carrying out the contract. He became the 'lead principal' in the undertaking, a role described in evidence D by Capitman in the following terms:

'(T)he Fieldstone person who will be responsible for communicating strategy to the client, be responsible for the ordering of resources within Fieldstone to get the work product in the client's hands, generally will lead all the client presentations and will get the lion's share of the revenue associated with a transaction.' E

Generally, he said, the MTN project would be referred to within the second respondent as 'Eric's deal' ('Eric' being the appellant). Although the appellant was employed on a fixed salary he would be entitled to additional reward if the project was successfully executed, the amount depending on the extent of the second F respondent's profit.

[10] Work on the contract commenced. On 16 September 1997 the appellant attended a meeting of management and employees of the second respondent, including its 'Africa team' at Skytop, a venue some 100 miles from New York. During the course of the return journey to that city, the appellant, who was travelling in a vehicle with G Capitman and others, announced that there might be an opportunity to acquire 10% of the shares in Safika (it is not clear that he had in mind a particular company). According to Capitman this provoked great excitement. He told the appellant to pursue the matter and let the second respondent know on what terms the shares were offered. H

[11] During November 1997 the appellant, during a visit to New York, was asked by Capitman what was happening about the Safika shares, a question which gave rise to an incident so described by Capitman:

'He [appellant] came into my office and said: ''They do not want to sell the shares to Fieldstone but they will sell them to I me''. I said ''Eric, if they want to sell them to you and you are simply holding them in trust for us, that is fine, but otherwise you cannot buy them, they are ours'', and he got very angry and said: ''What do you mean 'they are ours', I am being offered them because of the work I am doing''. I said: ''The work you are doing we are paying for, we are paying your salary, we are paying your expenses, you cannot take up those shares. J

Heher JA

Furthermore it is a huge conflict of interest'', and he said ''I don't see what the conflict is''. I A said: ''Say that there is some issue with the MTN deal about collecting our fee and you are a 10% holder of the company for your own account and the company is going to be a couple of million dollars poorer if it pays our fee, then you have a different interest about our getting paid our fee than we do. That is what the conflict of interest is. Furthermore, under our rules you cannot buy the shares, you are appropriating an opportunity.'' And this argument went on for B 15 or 20 minutes and finally it got too hot for me to, you know, I was just repeating myself. So I said: ''If you don't believe me, go and see Charlie Hill [second respondent's founder and managing partner]''.'

Capitman also testified that the appellant said on this occasion that Safika was a black empowerment company which only wanted black shareholders. C

[12] At about this time the appellant told Capitman that he had been asked by Safika to become a director. Capitman was prepared to agree provided that Safika furnished a letter informing the second respondent of the invitation. He stipulated that any remuneration so accruing had to be handed over to the second respondent although D it was the policy to refund fees so received to the payee on a dollar for dollar basis. On 1 December 1997 Cuba faxed a letter to Hill in the following terms:

'This is to inform you that the board of directors of Safika Investment Holdings (Safika) has requested Mr Eric Phillips to join the board as a non-executive director. E

...