Financial Mail - Investors Monthly
A court judgment has drawn new outlines for the fair treatment of minority shareholders
A court judgment has drawn new outlines for the fair treatment of minority shareholders, writes Ann Crotty
Arecent judgment in the Port Elizabeth high court is essential reading for minority shareholders.
The nub of the judgment was that circulars sent to shareholders in Uitenhage-based poultry group Sovereign Food Investments around the mechanisms of a proposed empowerment deal were “confusing and misleading” and the treatment of dissenting minority shareholders was not only “unjust, unfair and unreasonable” but “oppressive”.
Despite these damning comments by the court, the JSE says the circulars “were fully compliant with the provisions of the listings requirements”. Andre Visser, GM of issuer regulation, says: “The judgment made no adverse finding in respect of the listings requirements or the JSE’s approval thereof.”
Visser is correct in so far as the judge makes no specific mention of the JSE, but perhaps he is being a little disingenuous.
Indeed, his denial of responsibility looks rather cavalier against a judgment littered with disturbing comments on how the whole Sovereign transaction was packaged and presented to its shareholders. The judge has this to say about one of the JSE- approved circulars: “It certainly does not comply with the requisites of clarity, specificity, sufficient information or explanatory material. It explains nothing at all.” And, referring to resolutions (approved by the JSE) put to a shareholders’ vote, the judge says they were “contrived so as to deprive the intervening parties of their rights”.
Despite Visser’s efforts to put some distance between the JSE and the judgment, it does look set to play a significant role in JSE transactions from here on. Not only has Eastern Cape high court judge Igna Stretch set some markers on the clarity needed from circulars and put some flesh to the bones of appraisal rights, she has also enhanced the definition of oppression.
Remarkably, the Sovereign case is the first court judgment to address the issue of minority oppression as it relates to a listed company in terms of the Companies Act 2008. Judge Stretch extends the definition of oppression by including not just the violation of rights but the “unfair disregard” of the shareholders’ interests.
“Conduct may accordingly be oppressive or prejudicial within the meaning of the section (163 of the Companies Act), even where it does not violate any rights of the applicant,” she ruled. She referred to the legal opinion that section 163 has been drafted to include “interests” in order to underline or emphasise the principle that the oppression remedy is not limited to the strict infringement of legal rights but extends also to the protection of the interests of the shareholder.
Amazingly, when it comes to listed companies, battles between shareholders seldom make it to the inside of a court. This, according to a leading corporate lawyer, is not because there are no disputes but because the disputing parties tend to be powerful and well-resourced investors (usually institutional fund managers) who, when they feel their rights are being abused, make threats and phone calls.
It is, of course, an entirely different matter when it comes to small shareholders who feel their rights are abused. Their threats are ignored and their phone calls generally left unanswered. They can look to the regulators for help, which is rarely forthcoming, and then must decide whether to sell or take a stand. Either course of action involves a cost.
When it comes to investing on the JSE it is a case of “small shareholder you’re on your own”. This is why the next time Sovereign minority shareholder Albie Cilliers believes his rights and interests are being oppressed, he will suffer that oppression or
The Sovereign board is reviewing the judgment, which has put an end to a contrived plan to introduce a BEE shareholder
sell the shares.
A few months ago Cilliers was so incensed about the treatment being meted out to him by the board of Sovereign Foods (he was being prevented from voting his shares), that he decided to join the legal action that had been initiated by another group of minority shareholders. Doing so was not without risk.
Cilliers is a small shareholder and does not have the huge and seemingly unlimited financial resources other investors have at their disposal — and so getting involved in legal fees, which ratchet up by the second, is hugely risky. He was faced not only with the possibility of paying his own legal fees but, if he lost, at least part of Sovereign’s.
As it happens, though Judge Stretch found in his favour on the issue of his oppression, because she did not agree with the relief he sought (to be bought out) she awarded only 50% of his costs. Cilliers says he is delighted with the judgment and the fact it has clarified the law as it relates to the protection of minority rights. But he would not go through the process again. “It is extremely stressful and if you’re lucky the best you will do is come out square.” With even 50% of the costs Cilliers is looking at a hefty bill.
His attitude, while understandable, is regrettable and our company law, in need of moulding by precedent-setting cases, will be the poorer for it.
Before going the legal route Cilliers had sought help from the JSE, which claims as a general principle the “protection of investors”, and the Companies & Intellectual Property Commission, which is responsible for over- seeing implementation of the Companies Act. He also turned to the Takeover Regulation Panel for assistance.
None of these regulatory entities was interested in Cilliers’ story. Each disclaimed any authority to pass judgment on the matter, giving highly technical reasons why, and suggested he look elsewhere.
The JSE’s stance looks to be at odds with the fact it’s regularly ranked in the number one slot in the World Economic Forum’s competitiveness report. Cilliers’ experience suggests those rankings are determined by powerful shareholders who have the financial muscle to protect their own interests.
The Sovereign board is still reviewing the judgment, which has put an end to a contrived plan to introduce a black economic empowerment shareholder while simultaneously implementing a controversial executive remuneration plan that would create a negative control block of 28%. Its options are to appeal the judgment, abandon the BEE plan or try to implement another (third) version of the original BEE plan.
The major institutional shareholders, whose irrevocable undertakings to support the proposed deal enabled the Sovereign board to oppress the 11% minorities, appear ready to support another transaction. Prudential, the largest shareholder, says it remains supportive of a transaction that includes BEE, a better alignment of management and shareholder interests and a remuneration scheme less generous that the current one. A scheme with these principles “will ultimately unlock value for our clients”, says Lynn Bolin, head of communications and media at Prudential Investment Managers.
As for Cilliers, he’s hoping the current bottom-of-the-cycle slump in trading will entice a bid for the company. If not, and the current management remain in place, he’d prefer to exit.
Few shareholders are holding out much hope for a firm offer from Country Bird Holdings, which has built up a 10% stake in Sovereign and has made no secret of its desire to do a deal. The Sovereign board has so far dismissed Country Bird’s expressions of interest (this is its second play for Sovereign) and says Country Bird is merely intent on interfering with Sovereign’s business interests and undermining its shareholder value.
In a recent trading update Sovereign said it expected headline earnings for the year ended February 2016 to be between 15% lower and 10% higher than the previous year. The industry has been hit by increasing maize prices and the threat of imports from the US.