It seems a pig, albeit one with a lot of lipstick, may have dealt a fatal blow to Steinhoff’s €900 million (R15.2 billion) plan to settle the roughly €10 billion (R169 billion) of claims it is facing in various jurisdictions across the globe.
Just hours after the Western Cape High Court declared on Friday that a key aspect of the settlement plan was legally void, Steinhoff issued a Sens statement saying it was considering the implications for its proposal.
One legal expert told Moneyweb that it was difficult to see how the settlement proposal – the Contingent Payment Undertaking (CPU) – could be rescued given the clear statement from the court.
The court action was launched by Trevo, which in 2015 had entered into a forward contract to purchase Steinhoff shares, and was joined by Hamilton, which is acting on behalf of many of South Africa’s largest institutional shareholders.
By contrast, contractual claimants such as former Steinhoff chair Christo Wiese and former banker GT Ferreira were due to receive around 30c in the euro.
And the financial creditors, whose extremely complicated arrangement with Steinhoff was at the heart of the legal battle, stood to receive more than 100c in the euro.
The high payout to the financial creditors was particularly galling for the ordinary shareholders as most of the financial creditors had purchased the bonds after the December 2017 news of the accounting irregularities – and had paid cents in the euro for them.
Any changes to the proposed CPU could see the market purchase claimants and the contractual claimants receive more generous payments.
The issue at the heart of the legal battle is the financial assistance that was provided by Steinhoff, in the form of a guarantee, to an associate in 2019 to ensure the €465 million of bonds held by the financial creditors would be rolled over. The events of December 2017 gave the bondholders the right to call up payment, which would have forced Steinhoff into default.
Throughout the court proceedings Steinhoff argued that the guarantee was not new financial assistance but the mere reorganisation of existing financial assistance. It therefore did not require adherence to Section 45 of the Companies Act, which obliges boards to adhere to a strict process designed to protect the interests of shareholders.
Included in the process is a solvency and liquidity test as well as the need for sanction by shareholders.
As that process was not followed and because Judge Lee Bozalek deemed the new arrangement to be the provision of new financial assistance to a related entity, he declared the CPU to be void.
On the way to making that ruling the court had to endure several days of mind-numbingly tedious descriptions from Steinhoff’s team explaining why the new arrangement wasn’t actually new at all but just a continuation of the financial assistance agreed to back in January 2014.
The 2018 financial arrangement, according to Steinhoff, involved:
- The bondholders issuing a cashless loan to Steinhoff associate Lux Finco 1;
- Lux Finco 1 then on-lent the cashless proceeds of this new loan to Steinhoff Finance Holding GmbH (SFHG) pursuant to an inter-company loan; and
- SFHG used the deemed proceeds of this inter-company cashless loan to discharge its obligations to the bondholders under the existing debt and received extended terms.
‘Straw man’ transaction
Bozalek seemed unconvinced that this new arrangement was better for Steinhoff International Holdings Proprietary Limited (SIHPL), pointing out the many new restrictions the CPU placed on SIHPL
“Most importantly, in terms of the CPU, SIHPL is now guarantor to a different entity, Lux Finco 1, which appears to be no more than a shelf company without any assets or financial backing other than that provided by SIHPL,” according to Bozalek.
“Clearly, a capping of liability does not address the prejudice which may be suffered by a guarantor or co-debtor where the original issuer of the Convertible Bond is replaced by a man of straw.”
During the court proceedings Trevo’s advocate, Alasdair Sholto-Douglas SC, summed up what many in the court may have been feeling after days spent attempting to make sense of the ‘straw man’ transaction.
“With great respect to all the advisers and in no way attributing any malafides on anyone’s part, but no matter how much lipstick you put on a pig, it’s still a pig,” Sholto-Douglas said.
Bozalek was more circumspect in his description of the transaction but you could sense his frustration in court as he battled to make out the nature of the pig behind the lipstick.
His was an heroic effort, and the 75-page judgment released last Friday – just a few short weeks after the closing of the case – is compelling reading for anyone trying to make some sense out of the Steinhoff saga.
Complex, obtuse, confusing …
There was certainly no mention of a pig in his judgment; instead he described the legal documents that recorded the obligations of the various parties to the crucial transaction as “not only complex and voluminous but in key areas [they] are obtuse or confusing”.
While Bozalek did not rule entirely in Trevo’s favour he did rule crucially in its favour.
He ruled that the obligation that steinhoff took on to pay the financial creditors more than 100c in the euro, which is at the core of steinhoff’s proposal to resolve the various claims against it, is void.
Puzzlingly the judge did not grant the requested interdict that would prevent Steinhoff from making any of the payments planned in terms of Section 155 of the Companies Act. However, Bozalek did note that the Section 155 process “has some way to go before it is sanctioned by a court”.
One leading legal expert told Moneyweb it would be unheard of for a court to provide the necessary sanction for the Section 155 process, given Bozalek’s ruling that the central transaction is void.
It is therefore difficult to imagine how the much-trumpeted plan to make payments to three categories of creditors is not now dead in the water.
In its Sens announcement released on Friday, just hours after the court ruling, Steinhoff confirmed that the court had declared “the SIHPL CPU and SIHPL’s board resolution authorising entry into the SIHPL are void in terms of section 45 of the South African Companies Act”.
It added: “SIHPL and the company are considering the implications of the judgment, including for SIHPL’s proposed section 155 proposal, and will provide an update in due course.”
And, while they did not win everything they were looking for, the judge did order Steinhoff to pay full costs for both Trevo and Hamilton.