Netcare CEO Dr Richard Friedland has been forced to sell 10.4 million shares in the private hospital group – practically his entire holding – to cover “finance charges” as well as other costs relating to their acquisition “over several years”. The sale was forced due to a sudden slump in the group’s share price, meaning it is highly likely the position was leveraged. It is down 37% over the past year (from around the R30 level), with a sharp slide in the past week which took the price below R20. This triggered the sale in two tranches, the first at a low of R20 was valued at R27 million, the second at a low of R19 was valued at R173 million.
The group was compelled to make a highly unusual statement to the market alongside the notification of the share trades. It said on Wednesday afternoon that “The board wishes to confirm that Dr Friedland remains absolutely committed to Netcare. Dr Friedland has confirmed his intention to remain in office as CEO to oversee the implementation of the revised strategy, a key component of which is digitisation, until at least the end of 2022”.
The group’s 2018 annual report notes that Friedland had 10 387 444 shares at the end of September 2018. The total sold this week was 10 423 163. He would’ve likely been allocated additional shares during the 2019 financial year. At the end of September, Friedland had another 1.4 million forfeitable shares.
This is not the first instance of directors being forced to sell their shares on the JSE due to a drop in the share price. In December 2017, then EOH director Jehan Mackay was forced to sell R163 million worth of stock when the group’s share price plummeted from over R80 to under R30. John King, then also a director, was forced into sales totalling R16.3 million at the same time.
These transactions were described by the group as forced sales “of shares on [the] market actioned by a financial institution due to the shares being linked to an equity finance transaction resulting in a margin call”. In these kinds of situations, the forced selling triggers (abnormal) panic amongst market participants which perpetuates the slide, triggering yet more forced selling.
Similar situations have occurred in the past year at MTN Group and at Ascendis Health, with numerous instances of ‘forced’ sales at other companies over the last decade, including high profile cases involving Invicta and Vox Telecom.
These cases illustrate the risk of leveraged share purchases by directors. Last month, Shoprite CEO Pieter Engelbrecht took a leveraged bet on the group’s share price. He purchased R20 million of exchange-traded contracts for difference (eCFDs) in a long position with his own money in what seems to have been an effort to signal confidence.
The JSE has weighed in on the disclosure of these kinds of transactions. In a discussion document released in September last year, it said it had noted “recent transactions in securities relating to directors where (i) pressure was placed on the share price of the issuer’s securities and (ii) the market was unaware of the arrangements that resulted in the transactions”.
The document, titled “On possible regulatory responses to recent events surrounding listed issuers and trading in their shares”, highlighted that “Paragraph 3.63 and 3.64 of the listings requirements require an announcement of certain transactions in securities (including off-market transactions) relating to an issuer by or on behalf of (i) a director, (ii) the company secretary and (iii) any of their associates (an “affected party”).”
It said that submissions to the exchange had “asked for more transparency on transactions where shares held by directors have been used as collateral/guarantees as security for financial commitments. The JSE is aware that certain transactions in securities by an affected party involve using securities as collateral for a financial obligation or otherwise.”
It noted, however, that “currently, disclosure is only required at the time of perfection of the security/guarantee and not at the time that the arrangement is entered into.”
The JSE said it is considering two changes to the disclosure of these transactions.
Firstly, it “is considering enhancing disclosure of these arrangements as an announcement to be made pursuant to the provisions of paragraphs 3.64 of the listings requirements at the time that the arrangement is concluded, in addition to the disclosures currently required. Given that the above arrangement may impact a director’s interest (directly or indirectly) in an issuer, the JSE would also consider requiring the necessary disclosure to be carried across into the annual report of the issuer.”
Secondly, it “is further considering expanding the overall dealings in securities provisions to include senior management of the issuer.”
Last month, it proposed amendments to the listing requirements to “clarify” that the above types of transactions “in securities will be regarded by the JSE as a transaction in securities pursuant to paragraphs 3.63 and 3.64 of the requirements and will accordingly require an announcement pursuant to the new paragraph 3.64(h) of the requirements, in each of the following circumstances when –
(a) the arrangement is agreed;
(b) the right or discretion afforded to the lender is being
(c) an existing arrangement is amended or terminated.”
It said the (Sens) “announcement must disclose the nature, term and amount of the financial obligation as well the number of securities offered as security/guarantee”.
Comments on these proposed amendments can be submitted until tomorrow. It is expected these amendments will come into effect later this year.
Netcare reported interim results to end-March last week. It said normalised Ebitda (removing the former UK operation as well as other exceptional items from calculations) was up 1.3%, with adjusted headline earnings up 2.4%. It said, however, “the challenging healthcare landscape is expected to continue into the second half of FY 2019” and that it expected “full year growth … to be lower than H1”. It also said that Ebitda margins would be “under pressure in H2 2019”.
* Hilton Tarrant works at YFM. He can still be contacted at email@example.com.