Good and bad in proposed JSE change
With just three little words, the JSE is proposing to extend significantly the definition of a related-party transaction to include lease agreements.
The proposed amendment to the listing requirements defines a related-party transaction as “a transaction ‘or other agreement’” between an issuer or any of its subsidiaries and a related party. The key new words are “or other agreement”.
Before the change only the acquisition and disposal of assets were treated as relatedparty transactions; agreements such as leasing agreements were not included.
The cut-off value to fall within the related-party definition remains an amount that is more than 0.25% of the company’s market capitalisation.
A listed company entering into a related-party transaction faces considerable disclosure and procedural obligations. It is required to disclose details of the transaction and the related party to the JSE and to shareholders. A simple majority of shareholders must approve the transaction, and the related parties are not allowed to vote. A fair and reasonable opinion has to be presented to shareholders.
Andre Visser, GM of issuer services at the JSE, said the amendment aimed to enhance safeguards “to prevent a related party from taking advantage of its position and to prevent any perception that it may have done so”.
The JSE is also proposing to add significantly to the list of transactions that will not be treated as related-party ones.
Most of the proposed additions relate to the granting of credit or a benefit to a director or other related party. In response to complaints that this could allow directors or key executives to benefit from unfettered generosity from their companies, the items to be specifically excluded were either covered by the Companies Act or by the of the King 4 recommendations, which are endorsed by the JSE in its listings requirements, Visser said. There were no approval requirements for these situations, he said.
Section 45 of the Companies Act regulates the granting of credit to a related party. In addition, any benefits arising from an employment agreement are covered by King 4 recommendations. “In terms of those recommendations shareholders will have an opportunity to vote on the company’s remuneration policy and on the implementation report,” Visser said.
One corporate governance analyst, who welcomed the proposed inclusion of lease agreements, said the new specific exclusions were worrisome as they left scope for executive enrichment at the expense of the company. The most significant concern was that the shareholder vote on remuneration was not binding.
In addition, the details of severance packages or golden handshakes were generally not included in resolutions that were put to a shareholder vote.
When Net1’s former CEO, Serge Belamant, was forced to resign in May, Allan Gray expressed outrage at the estimated $20m package he received. “We are very surprised that Mr Belamant was able to negotiate such an extravagant deal after such broad public censure and believe that it is unjustified,” Allan Gray’s chief investment officer, Andrew Lapping, said at the time.
Multimillion-rand ex-gratia severance payments, which could not be blocked by shareholders, had been a concern for a number of years, he said.
He called for such payments to be subject to a binding vote by shareholders.
Not only would Belamant’s payout escape scrutiny under the proposed amended requirements, but so too would the R1.8bn that Shoprite plans to pay former CEO Whitey Basson in exchange for his 8.7-million Shoprite shares. In May shareholders were told that in terms of an employment agreement, Shoprite had to repurchase the shares at what proved to be a 12-month high of R211.15 each.