Part 1: ‘Corporate capture’ of Sharemax rescue vehicle How four Nova directors snatched 87.1% and kept it under wraps for five years.

Part 1: ‘Corporate capture’ of Sharemax rescue vehicle How four Nova directors snatched 87.1% and kept it under wraps for five years.
Ryk van Niekerk / 21 November 2016 00:04

The directors of the Nova Property Group, once portrayed as white knights riding to the rescue of 33 000 former investors in the failed Sharemax investment scheme, appear to have pulled off one of South Africa’s greatest-ever corporate captures.

The four directors managed to seize absolute control of the company, which according to the 2016 financial statements has a net asset value of R1.2 billion, for the princely sum of R40.

The directors have managed to keep this from public view since 2011, possibly even in contravention of the shareholding disclosure provision in the Companies Act.

This may be why the directors aggressively fought Moneyweb’s legal efforts to access the group’s shareholder registers for more than three years, after former Moneyweb journalist Julius Cobbett applied for access in terms of Section 26 of the Companies Act.

The directors claimed in their defences that Moneyweb was waging a vendetta against the group and they had a constitutional right to privacy. These defences were rejected when the Supreme Court of Appeal found that the directors have no choice but to open their registers, and the Constitutional Court denied them leave to appeal against this judgment.

Open shareholder registers

The directors recently gave Moneyweb access to the registers and it revealed that the Nova directors Connie Myburgh (chairman), Dominique Haese (CEO), Rudi Badenhorst (financial director) and Dirk Koekemoer (operations director) own a collective equity stake of 87.1% in Nova. These directors, who are the only directors on the Nova board, also have 91% of the voting rights. Three other existing and former senior Nova managers own another 8.6%. They are Nel van Zyl, Matthew Osterloh and Corrie van Rooyen. These seven “founding shareholders” only paid R10 each for their shares, meaning that four directors only paid R40.

The remaining 4.3% of the shares belong to around 2 000 former Sharemax investors who, at the inception of the scheme, elected to receive Nova shares in lieu of their debentures. This means they paid somewhat more than the founding shareholders. They ‘paid’ R94.9 million for their collective 4.3% interest as debentures to the value of this amount were cancelled. (See the shareholder structure)

Print

BDO announces “extensive investigation” into Nova affairs

During the course of the investigation Moneyweb sent through a range of questions to Nova’s auditor, BDO. BDO has been Nova’s auditor since inception and most critically provided a fair and reasonable report when the scheme was proposed and implemented in 2012.

On Friday BDO responded by issuing a holding statement on Nova and announced an “extensive investigation” into the accounts of Nova “covering the period of the last five years”.

History

But let’s go back six years to show how the directors managed to pocket the dominant shareholding for a mere R40. This whole saga began in 2010, when the controversial Sharemax investment scheme imploded. At the time it was the biggest-ever collapse of a property syndication scheme in South Africa, in which 33 000 investors invested an estimated R5 billion.

The collapse left these investors, mostly elderly people who invested their life savings in the various Sharemax schemes, in dire straits as they not only lost their monthly income, but also faced the possibility of losing their investments.

They were left with two options. The first was the liquidation of the underlying property assets which, according to some estimates at the time, would have yielded around 10c on the rand.

Enter Connie Myburgh

The second option – the one that was eventually approved by investors and sanctioned by the North Gauteng High Court – was a proposed section 311 scheme of arrangement. This option proposed that all the historic Sharemax properties be consolidated in one company (Nova) and that the investors would be allocated debentures in Nova based on their initial Sharemax investments. Nova would then manage the properties and use the profits to repay the debenture holders over a period of a decade or more.

This scheme was the brainchild of Connie Myburgh, a well-known corporate lawyer and registered business rescue practitioner. At the time, the scheme was pitched aggressively to investors as the only viable option to ‘save’ their investments as liquidation would have led to massive capital destruction.

Unfortunately, it does not seem that Myburgh is the white knight he was portrayed as. Apart from being royally rewarded for penning the plan, he also became the chairman of the Nova board (which earned R17.3 million in salaries and bonuses over the past four years) and acquired a beneficial equity stake of 21.8% in the rescue vehicle he designed. He therefore has a claim of nearly R280 million on the revalued net asset value of the company as of February 29 2016, if the director valuations of Nova’s properties can be relied upon. Each of his three fellow directors have also benefitted by similar amounts. This is in comparison to the 2 000 investors who own shares who all together can lay claims to the net asset value to the value of only R53.2 million, or an average of R 26 600 each.

Issuing of shares and voting rights

But how exactly did the seven founding shareholders get these shares?

It is all in the fine print, or rather one paragraph in an appendix, of Myburgh’s original scheme of arrangement document. When the scheme was implemented in 2012, the investors received Nova debentures in exchange for their Sharemax investments. They then had an option to either hang onto their debentures and be entitled to regular interest payments, or an option to swop their debentures for shares, which would not receive regular interest payments.

Only around 2 000 of the 33 000 investors elected this share conversion option and they received 97 million Nova D shares. The number of shares issued to them was determined by a formula that appeared in an appendix (Appendix ARR8) contained in Myburgh’s scheme of arrangement document.

In the process, these investors surrendered debentures worth R94.7 million – which means that they ‘paid’ around 98c a share.

But these 97 million shares were not the only shares that were issued.

2.2 billion free shares for directors

Another 2.2 billion B shares were issued for free to the seven founding shareholders. This was done in accordance with a single paragraph that appeared below the formula in Appendix ARR8. This paragraph stated that the founding shareholders would receive all the Nova shares that were available to the 31 000 investors who decided not to exercise the option to swop their debentures for shares.

Since only 2 000 investors elected the share option and received 4.3% of the shares, the founding shareholders, including the author of the scheme, pocketed the balance of 95.7% without paying a cent.

The paragraph not only states that the founding shareholders will receive the shares not taken up by debenture holders, it also justifies this allocation. It states that founding shareholders “will have the responsibility to procure funding and other actions required (sic)” to repay debenture holders.”

This was echoed by Myburgh during the meeting with Moneyweb, when the shareholder registers were revealed. He said the shares were issued to the seven individuals, as “they were the individuals who were steering the ship”.

Voting rights

The four directors not only received 87.1% of the shares. They also unilaterally stripped the class D shares issued to the 2 000 investors of all voting rights, while retaining the voting rights of the class B shares that were issued to themselves and the other founding shareholders.

This means that the 2 000 investors have no voting rights in the company, and that the four directors hold 91% of the voting rights.

Read a more detailed analysis of the voting rights here.

Closely guarded secret

This shareholding structure has apparently remained a well-kept secret since the inception of the scheme. It was not even disclosed in Nova’s financial statements despite a clear provision in the Companies Act that states that the shareholding of individual directors in a public company must be disclosed.

In response to a question regarding this apparent oversight, Haese denied that the directors’ shareholding had to be disclosed. “Firstly, No Class B shares were ever issued to any individual director of Nova Holdings and, as already explained to you on a number of occasions, all Class B shares were issued to a private company, Nova Nominees Proprietary Limited. Contrary to your views as expressed above, by virtue of the aforegoing, it was not required to make any disclosure as contemplated by section 30(4)(d) in the 2012 Annual Financial Statements. (sic)”

However, while it is correct that Nova Nominees is the nominee owner of the 2.2 billion B shares and the seven founding shareholders in turn own 100% of Nova Nominees, Haese confirmed in a subsequent email that the seven founding shareholders are the beneficial owners of the B shares, and not Nova Nominees.

In response to a question as to whether the shareholding has ever been disclosed to debenture holders or other Nova stakeholders through any other platforms, Haese said: “We reiterate that disclosures were made in the scheme documentation. In addition, disclosures have been made, as and when required, to relevant Nova stakeholders.”

The only disclosure that was made about the Nova shareholding in the scheme documents, is the issuing of the 70 A shares to the seven founding shareholders.

Totally in the dark

Despite Haese’s notion that the shareholding was selectively disclosed, it seems very few people knew about it. Not even the well-known and respected economist Dawie Roodt – a former director of a number of the historic Sharemax syndication companies, and who played a key role in the implementation of the scheme of arrangement as he was the official spokesperson of the board – had any inkling of that the scheme of arrangement would allocate shares to the founding shareholders.

“Under no circumstance would I have allowed a director to become a shareholder in Nova. It is a gross conflict of interest,” Roodt said.

He added that there was no mention of this structure in the scheme of arrangement. “The directors did not have a claim against the companies that would have justified a shareholding. How could they have received shares?”

Appendix ARR8

But there was such a provision. Only one. It was the single paragraph hidden away in the aforementioned appendix.

Though only 193 words, this paragraph is probably the most important in the 250 or so pages of the scheme and other explanatory documents. Despite its importance, there is not a single reference or explanation to this paragraph in any of the scheme documents.

There were numerous references to the debenture/share conversion formula that appears above the paragraph, but not a word on the implications of the paragraph below it.

One of the questions Moneyweb asked BDO was whether their fair and reasonable statement regarding the scheme included the effects this paragraph had on the total ownership structure of the company.

formula-for-exchange Appendix ARR8

Debenture holders at the mercy of directors

All of this means that the 31 000 Nova debenture holders are totally at the mercy of the four directors. It seems clear that the board, under the chairmanship of Myburgh, have put their own interest ahead of the interests of 31 000 debenture holders.

One example is the directors’ remuneration. Since the inception of the scheme in 2012, the four directors have paid themselves R66.2 million in salaries and bonuses. During the same period, the board approved interest payments to the 31 000 debenture holders of R86.6 million.

Director salaries and bonuses


2012

2013

2014

2015

2016

Dirk Koekemoer

R73 500

R3 027 576

R3 873 734

R3 879 171

R4 596 630

Rudi Badenhorst

R54 000

R3 001 956

R3 877 210

R3 882 044

R4 518 801

Dominique Haese

R111 000

R3 628 486

R4 660 178

R4 491 527

R5 276 724

Connie Myburgh

R-

R2 965 868

R4 652 285

R4 493 085

R5 190 946


R238 500

R12 623 886

R17 063 407

R16 745 827

R19 583 101



Payments to debenture holders


2012

2013

2014

2015

2016



Capital payments

R-

R31 165 739

R-

R35 670 247




Interest payments

R3 557 033

R39 738 278

R18 712 788

R10 496 891

R14 107 744



% yield on debenture fair value

0,17%

0.1.95%

0.75%

0.42%

0.53%




More startling is that total interest payments made to debenture holders in the 2015 and 2016 financial years amounted to R10.5 million and R14.1 million respectively. This is less than the R16.7 million and R19.6 million the directors paid themselves.

Much more to follow.



Illphil 9 hours ago
Well done Ryk and MW team!!!

Not only did you make legal history, you have unearthed dynamite

I am comforted by the Auditors now waking up – hope IRBA and the other regulatory bodies take a very close look at hoe the audit reports were compiled.

Knowing some of the persons mentioned, i expect there will be more to come.

This story has legs – as they say in journalism – run it – it contains the stuff for a good book

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Bylo Selhi 9 hours ago
Well done Moneyweb. Hope these slimy criminals pay the price one day for all the devastation they caused in the lives of so many pensioners.

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Dude 9 hours ago
This makes “State of Capture” look like amateur hour!

Congrats on this investigation; this information is dynamite!

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HS 8 hours ago
Im normally not prone to foul language. All I can think to say at this point is: “what an arrogant bunch of C&$ts; as….les, etc etc

Well done Ryk and team. Great journalism!!!

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Commentor 7 hours ago
Di nokwane tse. Great work Ryk and your team. Now to see some justice

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Blunderor 6 hours ago
A good friend remarked recently: it was so cold in London, he saw an attorney with his hand in his own pockets.

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Dan 5 hours ago
Well done Moneyweb… well done. I am told that this must surely overshadow the worst dishonest malpractice in the history of this country….far in excess of what our leaders are acused of?

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TheInvestorLife 4 hours ago
Well done MW team, the faster we rid the rotten apples from the bunch, the better for our country!

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roix 4 hours ago
Absolutely disgusting. Myburgh, Haese, Koekemoer, Badenhorst, van Zyle, Osterloh, van Rooyen. I hope you are reading this in cold sweats. May your families shame you.

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financial virgin 51 mins ago
Not only is that sentence re: the Formula for Exchange probably the longest sentence I’ve ever read, but also the most unintelligible piece of drivel as well….

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