Last week Famous Brands released a Sens announcement that one of its directors, John Halamandres, had sold 150 000 shares at R121.01 each for just over R18 million. The announcement explained that this was an “on market disposal of shares to settle a financing obligation entered into in August 2015”.
Halamandres is a member of the founding family, which has been selling shares in the company over a number of years now. There was therefore nothing remarkable about the sale itself.
However, the explanation behind it raised some eyebrows amongst market watchers, including JustOneLap’s Simon Brown:
what "financing obligation entered into in August 2015"
Nothing on SENS from August 2015 ?? https://t.co/xwnqkjjQ1g
— Simon Brown (@SimonPB) August 15, 2017
The company had never made shareholders aware that the director had entered into this financing obligation, either through Sens or its annual reports. When Moneyweb asked company secretary Ian Isdale why this was, he explained that:
“The contract was not known to the company until the director requested approval for the transaction. Our sponsors advise there was no obligation on the director to inform the company at the time the contract was concluded.”
There was therefore no compliance breach. However, what happened next caused an even bigger stir.
The very next day – August 16 – Famous Brands released a poor trading update that warned that conditions were tough, margins were under pressure, and that its six month results to August 31 would therefore be weaker than for the comparable period last year.
This bad news immediately impacted the share price. It fell almost 8% over the day.
Given this drop, market watchers didn’t take long to question the appropriateness of Halamandres’ selling shares on the eve of such a clearly price sensitive announcement. Vunani Securities analyst Anthony Clark raised his concerns on twitter:
On the face of it, this certainly didn’t look good for either the company or its director. How could approval for the transaction have been granted under the circumstances?
When questioned by Moneyweb, Famous Brands’ company secretary however explained that the settlement date on the obligation entered into by Halamandres had been set two years ago:
“The director entered into a finance agreement in August 2015,” Isdale said. “The contract had a predetermined settlement date of August 11 for the 150 000 shares. The price was predetermined based on a volume weighted average price (VWAP) prior to the settlement date. As the contract was entered into in 2015 at a predetermined price the approval for the transaction was granted.”
This explanation was also shared with Clark:
Highly appreciative of @FamousBrandsSA clarifying recent share sale. Deal was cast 2yrs ago @ set trade VWAP @ set date. Just unkind timing
— Small Talk Daily (@SmallTalkDaily) August 17, 2017
While the episode may, ultimately, have just been a case of very unfortunate timing, it still left a number of people feeling a bit uncomfortable. Clark himself questioned whether the compliance requirements around something like this aren’t a little too vague.
“I think it needs to be tightened up,” he told Moneyweb. “I think directors should have a gentlemen’s understanding that if they enter into any formal transaction or structure that could have a negative impact on the company’s share price or even market sentiment, it should be disclosed in the annual reports or at least every six months. This issue just highlights once again that when something like this pops up, it makes the company, which in theory is an innocent party, look bad.”
The point is that if shareholders had known about the obligation in advance, there would have been no issue.
“Your first reaction is not to question the director when something like this happens,” said Clark. “The first thing you ask is why didn’t the company know about it? I think the ambiguity of directors’ dealings can have negative connotations for companies, even if it wasn’t their fault.”
Given how poorly this episode reflected on Famous Brands, it is worth bearing in mind that directors have a legal duty to always act in the best interests of the company. It’s not difficult to argue that that should include taking shareholders into their confidence when entering into these kinds of transactions.
As Clark put it:
“There’s a moral obligation to negate any form of corporate ambiguity which could necessitate questions being raised about the company’s governance.”
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