Christo Wiese’s shares sale puts spotlight on corporate governance issues
Terms of the deferred shares structure means the shares are strictly nontransferable
On April 18 Shoprite announced a proposed transaction, the basic terms of which are that Shoprite chair Christo Wiese would dispose of his high voting deferred shares in Shoprite for R3.5bn.
He acquired these shares way back in 2000 for 1c. While there are undoubtably benefits to ordinary shareholders if this transaction proceeds, these benefits must be weighed up against a number of countervailing factors.
To Shoprite’s credit the transaction will be subject to shareholder approval and the lead independent director, Edward Kieswetter, who takes over as SA Revenue Service commissioner from May 1, has gone out of his way to engage with shareholders and ensure good corporate governance is applied.
That said, the fact remains that while good corporate governance is now being applied it was poor corporate governance that created this problem two decades ago.
In 2000, a complex pyramid structure was unbundled and Wiese was issued with high voting deferred shares. There appears to have been a loose undertaking by Wiese at the time that his control via the deferred shares would somehow reduce over time, as he was quoted as saying: “We have started a process which will see structures put in place aimed at diluting my control over of time”.
This promised dilution in control has not happened in the 18 years since the deferred shares were issued.
There is an increasing onus on fund managers to take environmental, social and governance factors into account when investing and voting on contentious corporate issues. Many recent SA corporate failures that have cost both pension funds and individual households dearly have been in large part due to environmental, social and governance failures at an individual company level.
So while an expedient solution to an awkward multidecade problem may seem attractive, it may well not be the right answer anymore. Fund managers now need to apply their minds and ensure any solution they vote to support meets the highest standards of corporate governance.
The first issue to evaluate is one of principle. The terms of the deferred shares structure is that the shares are strictly “nontransferable”. This means they cannot be sold to anyone, even to the company itself.
The fact that the deferred shares are held in a separate company makes the transfer technically possible but seems to contravene the spirit of their original issue (otherwise what was the purpose of the nontransferability restriction?) It also seems clear that the initial intent was that the deferred shares were never meant to be a vehicle to create wealth.
Shamil Ismail from Prima Research seems to have identified this issue when he wrote that “shareholders need to interrogate why what was initially presented to the market as noneconomic, nontransferable (ie no opportunity for capital gains), nominal value unlisted shares, can now be transformed to a strategic R3.5bn stake in Shoprite”.
The second issue is around the timing of the deal. While many SA households already know what the implosion of Steinhoff cost them, in this matter it is important to know what effect it has had on Wiese’s financial position. Why? Because if he is somehow compelled to dispose of his ordinary Shoprite shares to settle any debt before this structure is unwound, Shoprite can simply acquire the deferred shares for 1c.
Given that shareholders are being asked to stump up R3.5bn to unwind this structure it seems sensible to ensure that making this payment is actually necessary.
Perhaps shareholders should wait until it is clear that Wiese does not need to sell any more ordinary shares (remember, he was forced to sell 20-million Shoprite shares in December 2017 during the Steinhoff implosion), or alternatively there should be a clawback option if he does sell any ordinary shares in say the next two years. If Wiese is reluctant to provide a clawback undertaking this should be a warning sign that a future disposal of ordinary shares may be contemplated.
The third issue concerns value. Remember that despite these deferred shares conferring high voting rights, they do not have any economic rights (no dividends) and only count for 32.3% of the votes, so the best a holder of these shares can do is block special resolutions. Whoever holds these shares has negative control, but not control itself. A price of R3.5bn seems a lot of money if it only entitles you to vote against special resolutions.
We would welcome a more transparent valuation and bidding process for this stake, if there are in fact any other bidders. Otherwise, if Shoprite (that is, its shareholders) is the only willing buyer then it should be the one to dictate terms and a price that suits its shareholders.
In support of the transaction, Shoprite directors have argued that if some other party were to acquire the deferred shares from Wiese they could act contrary to the best interests of ordinary shareholders. But why would a new owner of these shares want to damage the interests of a company it has an economic interest in? The logic of the argument advanced in this regard is not compelling.
There is no doubt that for many decades the association with Wiese was positive for Shoprite. Post the collapse of Steinhoff this association is decidedly less helpful. That Wiese wants to sell the company his deferred shares but remain chair seems odd. There is a new team of executive management, perhaps changes at board level are equally desirable.
SA fund managers have historically either sided with company management or, more often, declined to get involved. Those days are over. The recent erosion in value that has resulted from a cavalier attitude to corporate governance is staggering, and amounts to R375bn in the case of Steinhoff alone. It seems obvious that any proposal must not just be legal but also pass the test of being fair and right.
Absent significant changes, All Weather Capital will vote against the current proposal.
• Watkins is chief investment officer at All Weather Capital, which owns Shoprite shares valued at about R500m.