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

Financial Mail - Investors Monthly - - Contents -

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.

Pic­ture: iSTOCK

Peck­ing or­der: big­ger share­hold­ers can af­ford le­gal ac­tion

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