SHOWDOWN AT THE G5 CORRAL

Allan Gray’s intervention at Group Five is a watershed for shareholder activism — even if it faces a backlash at the July 24 meeting

It may look as if there was a bloodless coup at construction company Group Five last week, but don’t be fooled: the guerrilla war is just beginning. In an unprecedented step, Group Five’s entire board, led by Philisiwe Mthethwa, quit last Friday, having reached an impasse with its 25% shareholder, Allan Gray.

On the face of it, it seemed a colossal victory for shareholder activism. No institution has ever forced an entire board to walk the plank like this in SA.

But with a vote on a new board set for July 24, Mthethwa’s outgoing board has spoken to other shareholders — who’re not all buying Allan Gray’s argument.

“It’s not just the Public Investment Corp (PIC) and Mazi Capital who object to what Allan Gray did, there are a lot of other shareholders who do,” Mthethwa told the Financial Mail. “That vote will be groundbreaking; it will show major asset managers like Allan Gray they can’t just bulldoze decisions through.”

Or perhaps not. But the showdown will be epic. First, a brief recap on how it got to this: on May 11, Allan Gray demanded that Group Five convene an extraordinary shareholder meeting to elect a new board as it had “lost faith in the board”.

For Allan Gray’s Andrew Lapping, there were red flags aplenty: first, CEO Eric Vemer was forced out in February, followed by three other executives. (On his departure, Mthethwa points to Group Five’s R262m loss in its engineering and construction division, saying: “The CEO is the first to fall for poor performance”.)

But the real sticking point, say insiders, is that Group Five got an offer from a private equity firm and the board did not tell shareholders about this.

“Information was suppressed,” says one insider, partly because certain directors “had another agenda” — an agenda, supposedly, of preferring to shunt deals towards their business partners instead.

Mthethwa says this isn’t true. “We got an expression of interest to buy the two most profitable parts of Group Five. But we looked at it, and got legal advice that it wasn’t a binding offer. Until we see a formal offer, we have nothing to put to shareholders.”

But with trust at a low, and unable to reach a deal with Allan Gray, her board will now leave after the

July meeting. “We are gone. It’s final,” says Mthethwa.

Shareholders will get to vote on nine nominees — five proposed by Allan Gray, two by the PIC and two by Mazi Capital — to form the new board.

But Mthethwa expects an almighty scrap. “I think it will be 50/50 because I know some shareholders feel that Allan Gray must be told that what they’re doing is in violation of corporate governance rules,” she says.

In her view, these violations are that Allan Gray unilaterally demanded assets be sold to the private equity bidder and when it didn’t get its way, it got the board sacked. “A lot of shareholders aren’t happy with their modus operandi. Even some of our international investors are shocked. At the meeting, everyone will be in the same room, and they can tell Allan Gray to their face that they’re not happy,” she says.

Lapping says the motivation isn’t related to any asset sale. “We simply want a board that is independent, with the relevant skills that will protect and grow value,” he says.

But Allan Gray threw down the gauntlet by nominating Mike Upton, Group Five CEO between 2007 and 2014, as one of its new directors. Mthethwa says he is not an “appropriate” choice for many reasons.

The unprofitable contracts in the engineering and construction arm arose because of deals done under him.

More crucially, Upton was CEO during years of industry-wide collusion. “Even if he wasn’t directly involved in the collusion, he was the head of the organisation at the time, so people link him to the scandal,” she says. In a circular, the board says “other shareholders share [our] views” on Upton.

It’s a legitimate point — particularly as the industry appears to have dodged accountability for price-fixing involving the World Cup stadiums and other projects.

Allan Gray’s response is that Upton was “recognised for proactively initiating the investigation into industry collusion” and Group Five was given amnesty by the competition commission.

Still, Upton’s return is clearly a bridge too far for some investors — which implies a humdinger awaits at Group Five’s Midrand head office on July 24.

Whatever happens, it’s a watershed for activism — even if, in this case, Mthethwa feels hard done by. If more shareholders did their duty of axing boards they felt weren’t doing their job, we’d have fewer boards like SA Airways clogging the country’s arteries.

Allan Gray’s nomination of former CEO Mike Upton has raised hackles, as he led the firm during the collusion saga