Depending on who you’re listening to, Steinhoff is offering the ordinary South African investors who collectively lost untold billions of rands in the value of their Steinhoff shares an “excellent deal” or a “starkly discriminatory” one.
Chances are, if you’re one of those ordinary South African investors, or what Steinhoff terms a ‘market purchase claimant’ (MPC) you’ll be feeling decidedly discriminated against.
If, on the other hand, you’re what Steinhoff has termed a ‘contractual claimant’ (CC) you’ll believe the ordinary investors are getting a lot more than they deserve.
The CCs are the investors who ended up with Steinhoff shares as a result of a contract with Steinhoff. They include the former owners of Tekkie Town, the Public Investment Corporation, Christo Wiese-related entities, GT Ferreira, the Du Toit Trust, Enrico Greyling, and current and former Pepkor executives.
The unprecedented decision to divide the shareholders into two categories of claimants will become increasingly significant in the weeks ahead as investors in the country’s largest ever corporate scandal edge closer to a decisive Section 155 scheme meeting.
That meeting, which has to be sanctioned by the court, will give shareholders the opportunity to vote on the €943 million settlement that has been proposed by Steinhoff.
Last week marked the latest milestone in the remarkably complex settlement process that has set all manner of new precedents. Shareholders wanting to participate in the scheme meeting had to register by Wednesday, May 5.
If all goes according to plan Steinhoff reckons getting the necessary support from claimants and the approval of Dutch and South African courts could take several months. To this end it has had to negotiate extensions to deadlines struck in the past three extremely tough years. Critically, the financial creditors have agreed to extend their deadline from December 2021 to December 2022, with a possible further extension to December 2023. This agreement was hardly surprising given the generous 10% interest they are earning.
More prosaically it is also likely that Steinhoff will have to secure an extension of the approval it has received from the South African Reserve Bank (Sarb) for cross-border payments that will need to be made; its current 12-month deadline expires in November.
Steinhoff sees success
Of course there is a chance things won’t go according to Steinhoff’s plan although, to be expected, Steinhoff does encourage expectations of success. As was noted in the 2020 annual report, the board has assumed “that it is more likely than not that the global litigation settlement proposal will be successful”.
At the end of March Steinhoff informed shareholders that “four large active claimant groups who represent MPCs based in South Africa and elsewhere have confirmed their support for, and will recommend that their respective constituents support, the Steinhoff Global Settlement”.
Crucially, however, although Steinhoff described them as ‘large’, it was at that stage unable to tell how many shareholders were represented by the four supporting claimant groups – out of six in total. That information, Steinhoff told Moneyweb, would only be known after the claimants registered on May 5, and after those claims were verified and valued by Computershare.
Last week Steinhoff did not respond to requests for details of the numbers of MPCs who had registered; also unknown is what percentage of shareholders are represented by the active claimant groups. A spokesman for the company referred to an earlier Sens announcement indicating that the next step would be the Section 155 meeting, the date of which would be announced “as soon as possible”.
However by now Steinhoff, which has had sight of the registered claims, must have a pretty good idea of the level of support it has for a Section 155 meeting.
That level of support will determine whether or not it has to strike some sort of deal with Hamilton, the largest of the claimant groups and the only one so far to express its opposition to the proposed settlement.
Hamilton emerges as the heavy hitter
Hamilton was established by Claims Funding Europe, which funds litigation on behalf of claimants across the globe, specifically to pursue shareholder claims against Steinhoff.
Ahead of formal figures being released by Steinhoff, it’s fair to assume Hamilton represents a substantial portion of the December 2017 Steinhoff shareholders.
The Dublin-based entity, which is offering its services free to claimants but gets 15% of any payout, has indicated that it represents at least 20% of the shareholders. This seems a reasonable figure given that its clients include the largest institutional shareholders in South Africa such as Allan Gray, Coronation, Investec Asset Management, Old Mutual, Momentum and Sanlam.
In addition Hamilton has secured the backing of many small shareholders.
Critically, all of the clients have assigned their voting rights to Hamilton and have undertaken not to engage in individual discussions with Steinhoff.
While many of Hamilton’s clients may feel so enraged by the Steinhoff fraud that they’re prepared to go to the brink, Hamilton’s negotiating strategy will presumably be influenced by the realisation that it will receive no fees if there is no payout.
If it does control at least 20%, then there’s a good chance Hamilton could block the Section 155 scheme, which needs the backing of at least 75% of the claims to succeed.
A matter of trust
Depending on your perspective, Hamilton has emerged as the biggest threat to Steinhoff’s proposed settlement or the best opportunity ordinary Steinhoff shareholders have of getting a ‘fair’ deal.
Hamilton appears to have no concerns about the size of the settlement pot but is extremely concerned about the “discriminatory” way it is being divided up between MPCs and CCs.
The former were originally due to get 6% payout on their claims but this was bumped up to 10% as a result of payments from Deloitte and insurance companies that had provided ‘directors and officers’ insurance to Steinhoff.
By contrast the CCs are getting payouts of between 18% and 29%.
Hamilton says the proposed payout to Wiese-related entities of R7.9 billion would be reduced to R1 billion if it was made at the same rate as its clients are getting. Similarly GT Ferreira’s proposed R421 million payout would be cut to just R29 million.
The proposed split between the two categories of shareholders has highlighted a key issue in the Steinhoff debacle – trust.
Ahead of the dramatic December 2017 announcement about “accounting irregularities” the Steinhoff problem was an excess of trust in former CEO Markus Jooste and in audited accounts signed off by Deloitte. That excess of trust led to what was subsequently realised to be a hugely inflated market capitalisation.
Having ‘over-trusted’ initially, many of the ordinary shareholders (the MPCs) are not inclined to be caught out a second time. Few of those prepared to talk express much trust in the recovery process being led by current CEO Louis du Preez.
Not only is it Byzantine in its complexity, but the seemingly favourable treatment given to Wiese has prompted suspicions that the current board is in cahoots with former decision-makers.
The payments from Deloitte and the insurers, described as “paltry”, are regarded as further evidence of close ties between the old guard and the new.
The MPCs contend that far from an underlying contractual relationship favouring the CCs it should prejudice their payout rate. As Hamilton notes, these claimants “had the opportunity to undertake their own due diligence before acquiring their shares – an opportunity that was not afforded to sharemarket purchasers”.
To be expected, given the stakes involved, not everyone shares these views.
Insiders report that the heated discussions between Steinhoff and every party it negotiates with is indication of even-handedness. In addition, they say, the mind-numbing complexity of the proposal is an inevitable consequence of the torturous dealing and side-dealing done by Jooste over several years and the fact that this was done across multiple jurisdictions. They contend the proposed settlement is the best that could be done in the circumstances and represents a remarkable effort by Du Preez’s team.
Furthermore, they say, the fact that shareholders are actually due to get some, albeit small, compensation for their losses is almost unique in South Africa and should be embraced, particularly by the MPCs.
Their prospects of success in a legal challenge are, according to Steinhoff, remote. During the recent AGM Du Preez took the opportunity to remind shareholders that the ruling in the (retired pensioner) Dorethea de Bruyn class action case “confirmed the legal position adopted by the company”, which is essentially that shareholders would not be able to sue successfully.
The CCs who have backed the proposal – the Wiese entities, Du Toit, GT Ferreira and Greyling – have made it clear that if the proposed agreement falls through they will resume their litigation based on contract law.
Hamilton, for one, isn’t buying the ‘be grateful’ line.
It dismisses the significance of the De Bruyn case: “This novel claim was run by a small personal injury law firm based in Johannesburg and it was based on a pleading of negligence.”
By contrast, says Hamilton, its claims have been brought on the same basis as a number of contractual claimants, namely they allege fraud on the part of Steinhoff, Jooste and other directors.
“There is no principle under South African law that the perpetrators of fraud are shielded from liability to shareholders,” says Hamilton.
Legal battles loom
One legal expert noted that the primary legal advantage enjoyed by the CCs is the ability to prove the extent of their loss – in each case it is based on the value of the assets they exchanged for the Steinhoff shares. For the MPCs proving the extent of their loss would be extremely cumbersome.
As evidence of its commitment to oppose the proposed settlement, Hamilton has already approached the Western Cape Division of the High Court challenging Steinhoff’s decision to divide the shareholders into MPCs and CCs for the purpose of the settlement and the Section 155 meeting.
Whether this is a negotiating tactic designed to increase the payout rate to its clients or a determined bid to kill a “discriminatory” settlement proposal will probably be known in the coming weeks when Steinhoff announces the date of the Section 155 meeting.