Understaffed PIC not equipped for due diligence, says senior lawyer
Commercial decisions often taken without guidance, leaving it open to legal risks, commission told
The Public Investment Corporation is understaffed and sometimes fails to guard against legal risks when new investments are made, the asset manager’s acting head of legal counsel, governance and compliance said on Thursday.
The head of legal services Lindiwe Dlamini said there was a significant risk for the PIC as the legal team was inundated with not just transactions but also corporate legal matters such as compliance and labour matters. She said the institution often has to rely on external legal advisers.
“The PIC in the normal course of the business is generating transactions the size of other asset managers in this space. But unfortunately from a capacity point of view we are finding ourselves lagging seriously in that we are entrusting all these transactions to effectively two personnel,” she said.
The legal department helps the PIC investment team conduct legal due diligence, which includes identifying any legal risks of pending transactions. Dlamini helped the investment team conduct due diligence on the Steihoff BEE deal with the Lancaster Group. The PIC gave a loan of R9.35bn to help the company acquire a 2.75% stake in Steinhoff under an investment called Project Sierra in 2016.
As security for the loan, the PIC would take over the shares if Lancaster defaulted. When Lancaster later obtained another loan from Citibank to acquire an additional stake in separately listed Steinhoff Africa Retail (Star), the PIC agreed to subordinate 100% of the shares it held as security under Project Sierra. This meant that Citibank had the first claim to those shares should Lancaster default.
Dlamini said she advised the investment team that this revised agreement did not provide the necessary protection to the PIC and recommended changes be made before the listing of Star. But those changes were not implemented at the time of listing Star shares. Reports show that the PIC was forced to write off the value of its loan to Lancaster by R4.2bn when Steinhoff collapsed.
The commission said it was concerning how the PIC often found itself under pressure to work around listing timelines of companies such as Star and Ayo. It pointed out that the company approved deals that ended up compromising it. Dlamini said the legal department often got told that “commercial decisions needed to be made” and it should not stifle them.
“It’s a bit of a Catch-22 for us as legal because while we may not necessarily agree with the decisions that are being made, which I think has been adequately evidenced in the submission that I have made, at the end of the day commercial decisions were made. Whether taking into account legal advice or not, that remains to be seen.”