Oppression of Acsa minority shareholders a red flag for foreign investors
The government’s attempt to renege on a settlement agreement with smaller shareholders represents bad faith that is not expected by investors under a ‘new dawn’
President Cyril Ramaphosa is leading an investment drive to raise $100bn over five years for the SA economy. How do prospective financiers perceive SA political risk?
There is increasing evidence of the damage done to SA during the nine disastrous years of the Jacob Zuma presidency. The heinously clever, systematic and resolute dismantling of state institutions that served the public interest, and the plunder of state-owned entities (SOEs), was carried out with three broad objectives: to facilitate deep-seated corruption at all levels of government and the private sector in order to enrich individuals, entrench political power, and prevent prosecution of the implementers and benefactors of state capture.
The full extent of the damage to the country has not yet been revealed. As Chris Bateman wrote in BizNews in March, “It’s far easier to estimate how much state capture cost SA in rands and cents (R1.5-trillion over the past four years) ... putting a price on destroyed trust, lost reputation and missed opportunities is inestimable.”
Global factors outside our control such as trade wars between major powers and conflict and negative sentiment around emerging markets, compound our problems. Nevertheless, our woes are mostly self-inflicted.
The ANC comfortably won the elections in May despite this enormous damage. The lack of competent, cohesive political opposition to the ANC has not helped. As the country emerges from the nightmare, South Africans face a bleak future: negative economic growth (GDP contracted by 3.2% quarter on quarter in the first three months of 2019 on a seasonally adjusted and annualised basis), risk of a credit ratings downgrade, unemployment, high levels of poverty, the poor state of public education, health care, and municipal service delivery, to name a few of the challenges.
Global factors outside our control such as trade wars between major powers and conflict and negative sentiment around emerging markets, compound our problems. Nevertheless, our woes are mostly self-inflicted. Ramaphosa has promised a “new dawn” that will clean up government, restore accountability, implement sound economic policies and put in place sound governance that serves the interests of the people. The president reiterated his plans for a capable, ethical and developmental state in his state of the nation address in June.
The problem is, there are clearly deep divisions in the governing party. While the president may be “in charge”, he is clearly not in control. One of his key objectives is to raise desperately needed capital, including foreign direct investment, and to recapitalise the state-owned institutions. He has been saying all the right things at places such as Davos and at investment conferences at home and abroad, but a key requirement for the success of the investment drive is for the government to demonstrate that it is trustworthy and committed to honour agreements it has entered into with the private sector.
The experience of minority shareholders in Airports Company SA (Acsa) is not encouraging in this regard. Acsa owns and manages nine SA airports and is the only SOE that has private sector shareholders. Acsa’s shareholders are the government, through the department of transport (74.6%), the Public Investment Corporation (20%), a staff share incentive scheme (1.2%), and five private sector shareholders in the form of pension funds and private investment holding companies that collectively hold 4.2%. Empowerment investors were originally offered shares in Acsa at the same price offered to Aeroporti di Roma (ADR) as Acsa’s strategic equity partner.
The share acquisitions took place after an undertaking by the government to complete the full privatisation of Acsa through an initial public offer. This implied that Acsa would be run commercially under an effective tariff regulatory regime. The minorities’ shares were acquired with funding from financial institutions (Futuregrowth, Old Mutual, Nedbank and Standard Bank), including retirement funds managed by these institutions.
The government did not honour its commitment to hold the IPO, but did facilitate an exit for ADR through the sale of its shares in Acsa to the PIC. The empowerment shareholders were not offered the opportunity to participate in this transaction, and no effort was made by the government to facilitate an exit for them. Consequently, the minorities have been shareholders in Acsa for more than 20 years.
After several years of fruitless attempts to engage with Acsa and the government to seek the sale of its shares at fair value, during which the minority shareholders were frustrated by Acsa, the government and the PIC, it became clear that there was no alternative other than to seek redress in the courts. In July 2015 two minority shareholders lodged a legal claim for relief against the oppression of minorities under section 163 of the Companies Act (unfair and prejudicial conduct). The applicants asked the court to order the purchase of their shares at fair value, which could include a share buyback.
A settlement agreement was reached between the parties on the “steps of the court”. This provided just redress to the minorities for the oppressive conduct and the agreement was made an order of the court on August 1 2017. Acsa was required to buy back the minorities’ shares at fair value, to be determined by an independent referee appointed with the consent of all parties.
The parties agreed on the appointment, and the valuation report was issued in February 2018. However, after the appointment of a new transport minister by Ramaphosa in February 2018, the government (represented by the transport minister) issued an application for leave to appeal against the court order on July 17 2018, followed by an application to rescind the agreement issued on July 25 2018. It would appear that the department and Acsa did not like the outcome of the independent valuation.
The government’s attempt to renege on the settlement agreement represents bad faith and a continuation of the oppression of minority shareholders. The government proceeded with these applications even though the parties had already substantially implemented the court order and the referee’s valuation report had already been issued.
In response, one of the minority shareholders, African Harvest Strategic Investments, changed its name to Oppressed Acsa Minority 1 in November 2018. Fikile Mbalula, appointed transport minister in Ramaphosa’s new cabinet announced in May 2019, has yet to show his colours in the matter. The history of interaction between the minorities, Acsa and its majority shareholder demonstrates a total disregard for the minorities’ interests, denying the minorities fair participation in the affairs of the company. It shows that Acsa is not run as a commercial enterprise, which is required under its memorandum of incorporation.
The treatment of minority shareholders presents useful lessons for investors contemplating funding of SOEs. Attempts to renege on the settlement agreement took place on Ramaphosa’s watch, about five months after his first inauguration in February 2018, and continues to this day. This is disturbing because it shows that, in spite of promises to do the right thing, much remains unchanged.
The success or failure of the “new dawn” hinges on the president and his executive, which are controlled by a deeply divided governing party. Trust is one of the most powerful economic forces, if not the most important. Is the government trustworthy? Can investors rely on the government to honour its obligations? That is where SA’s political risk lies.
• Barton-Bridges is principal and director of Griffin Advisors, a company that helps investors enter new markets in Africa. He acts as an adviser to Oppressed Acsa Minority 1.