More twists than the Sani Pass

The saga at Sovereign Foods needs an elegant solution.

This article was originally published in the latest edition of the Moneyweb Investor digi-mag. To view the original, and the rest of the publication, please click here

I’m all for shareholder activism. Too often management whose interests are not aligned with shareholders’ ride roughshod over the rights of shareholders.

For this reason the efforts of shareholder activists like Theo Botha, Chris Logan and Albie Cilliers must be applauded. It is horrifically difficult to take a stand as a small shareholder and see it through to the end. It requires the tenacity of a Jack Russell, the thick skin of a rhino, the time of the elderly and when it gets legal, lots of cash.

Most institutional investors prefer to engage with management teams behind the scenes. But smaller investors do not always have that kind of access or clout.

Locally activists have been particularly vocal about issues such as executive remuneration and the inadequate disclosure of pay policies. Some companies have no problem hiking directors’ pay regardless of the company’s poor performance or the fact that they are involved in a round of retrenchments or cost cutting.

Last year Asief Mohamed, CEO of Aeon Investment Management, whose clients hold shares in Sovereign Foods, took issue with the company’s R24 million cash and share bonus to six members of the exco team which amounted to 18% of Sovereign’s 2015 profits before tax. Part of the bonus was enabled by a change in the company’s short-term incentive plan targets, which was made without informing shareholders.

Mohamed drafted a letter to the board of directors and institutional shareholders, which can be read here, taking issue with the bonus scheme, share options, and what seemed to be excessive fees paid to non-executive directors.

The board appears to have listened. (Their response can be read here.) While management will not pay back the bonuses (which the JSE investigated and found to be legitimate), they will commit and reinvest about R17 million back into the company as part of a black empowerment scheme which is central to a number of changes that the board believes will address shareholder concerns.

These include abandoning the long-term and short-term incentive schemes, aligning management and shareholder interests by ensuring management has skin in the game, reducing the fees of non-executive directors, returning capital to shareholders through a 10% share buy-back scheme and locking in management for a seven year period.

The changes are not perfect. For instance some investors have criticised the BEE deal for not being broad-based enough. The changes are also cumbersome in that each change is dependent on the one before it and as such have been packaged as one transaction, forcing shareholders to vote for an all or nothing package.

However for 85% of shareholders the changes were good enough and in January they voted in favour of the resolutions. These shareholders believe that management, which has been in place for five years, is doing a credible job of restoring a previously poorly-managed company for growth. And while the current share-price of R6.65 may be languishing between two previous rights offers (R8.50 and R4.75) the share has not performed badly when compared to its bigger competitor Astral over a five-year period (albeit off a low base). 

 

Total return 1 yr

Total return 3 yrs

Total return 5 yrs

Astral

-32%

+35%

+12%

Quantum Food

-27%

NA

NA

Sovereign

18%

+48%

+29%

Source: Aeon Investment Management

This is where I think there is a very fine line between positive shareholder activism and activism that is not constructive. A minority of shareholders continues to believe that management is simply ‘feathering its own nest’ and voted against the transaction. Effectively they are holding a company to ransom.

It is important at this juncture to spell out that 11.9% of shares in issue were voted against the transaction in January. Of these shares, Kevin James, CEO of unlisted competitor Country Bird, held 8.1%. (This stake has since increased to 10%.) Thus the shares held by arguably ‘legitimate’ dissenting shareholders equate to no more than 3.8% of Sovereign shares.

In terms of the Companies Act shareholders who object to a ‘fundamental transaction’ such as that proposed by Sovereign can exercise what are called appraisal rights. In other words the company is obliged to buy their shares from them at fair value. What that fair value is, is a matter of some disagreement.

However regardless of what the fair value price is, having to buy back 11.9% of its shares on top of the 10% share buy-back proposal was not expected, and is a bridge too far for a company whose market capitalisation is R506 million.

As a result Sovereign changed the terms of the proposal such that it would buy back just 5%, rather than the planned 10% of its shares.

From here the story has more twists and turns in it than the Sani Pass, with the battle reaching the courts on two occasions. In the first case Sovereign turned to the Competiton Tribunal for support against what it claimed was hostile intentions on the part of Country Bird. They lost (ultimately because the competitor did not in fact acquire the shares necessary to achieve negative control). In the second case management found itself in court because Country Bird, later joined by activist Albie Cilliers, brought applications to stop shareholders from voting on the revised proposal.

The case is precedent setting because section 163 of the Companies Act (which refers to appraisal rights) has been invoked for the first time. The judge ruled that the shareholder meeting (planned for Tuesday March 29) could not go ahead. However she adjourned the rest of her judgement. Effectively this means that the proposed transaction is now in limbo.

With hindsight the Sovereign board may have acted differently. That said, while investors large and small have the right to take management on over the way they are running the company, so too has management a right to defend the company from what appears to be hostile shareholders whose long term intentions are not necessarily in the best interests of the company.

An elegant solution seems a little way off.

Get access to Moneyweb's financial intelligence and support quality journalism for only
R63/month or R630/year.
Sign up here, cancel at any time.

AUTHOR PROFILE

COMMENTS   0

You must be signed in to comment.

SIGN IN SIGN UP

LATEST CURRENCIES  

USD / ZAR
GBP / ZAR
EUR / ZAR

The Investor Issue 48
Separating out the noise from useful information in the markets is not easy. The trick to staying the course is to keep an eye on ...

The Investor Issue 47
Some people intuitively understand that investing for future gain is a long-term process that cannot be rushed. The management of ...

The Investor Issue 46
While US innovation soars and its tech listings continue at a ferocious pace, SA has no real plan for how to embrace the 4th Indus...

The Investor Issue 45
As the investment world falls more and more in love with the simplicity that ETF investing offers, index providers are realising t...

The Investor Issue 44
Company financial statements are the last line of defence for investors wanting to protect their investments. But these cannot alw...

The Investor Issue 43
What makes one CEO great and another mediocre? The Moneyweb Investor ponders this and other leadership questions in the latest iss...

The Investor Issue 42
Stagnant economic growth and questionable economic policy is hampering the development of mid-sized - and investible - businesses ...

The Investor Issue 41
If you are one of those people who invests more energy into your credit card or medical aid rewards programme than you do your ret...

The Investor Issue 40
Volatility in global markets is higher than it has been in years, giving investors the jitters. Some 'experts' are suggesting a re...

The Investor Issue 39
From lessons from Buffet to building your own crypto-portfolio (a risky endeavour by anyone's standards), this issue of The Moneyw...

The Investor Issue 38
They say the art of investing is to ignore the short-term noise and focus on attaining long-term goals. That's true, but that does...

The Investor Issue 37
Getting the economy on the correct footing requires that everyone pulls their weight. Our writers this month have gone above and b...

The Investor Issue 36
The past year is littered with train wrecks like Steinhoff, SAA and Eskom. But there is real sense of ‘back to business’ in So...

The Investor Issue 35
Stock markets are soaring, but productivity is not. Innovation continues, but leads to fewer new jobs. And the great and the good ...

The Investor Issue 34
South Africans are fed up with corruption, or anything that has even a whiff thereof, as JSE rockstar Naspers is currently experie...

The Investor Issue 33
As the year races towards its close, investors will be forgiven for feeling a little breathless. The British WWII propaganda phras...

The Investor Issue 32
Anyone would think that getting an economy moving is rocket science. It's actually not. It requires single-minded commitment. Whil...

The Investor Issue 31
We examine the opportunities of forex trading, the best unit trusts, e-commerce at Richemont and more. ...

The Investor Issue 30
Despite what the astrologers say, there are no shortcuts when it comes to successful stock picking. Fundamental analysis counts. T...

NEWSLETTERS WEB APP SHOP PORTFOLIO TOOL TRENDING CPD HUB

Follow us:

Search Articles:Advanced Search
Click a Company: