Thursday, June 7, 2018

SA’s most spectacular case of corporate capture

SA’s most spectacular case of corporate capture
Chairman Connie Myburgh and CEO Dominique Haese take full voting control of the Nova Property Group.
Ryk van Niekerk 2018
Connie Myburgh and Dominique Haese. Picture: Moneyweb

In what must be one of the most spectacular corporate captures in South African history, Connie Myburgh and Dominique Haese, respectively the chairman and CEO of the Nova Property Group, have taken full control of the rescue vehicle of the erstwhile R4.5 billion Sharemax investment scheme.

Moneyweb can confirm the two directors, who are romantically linked according to several sources, acquired 100% of the voting rights of the company after stripping the other voting shareholders of their voting rights.

Subsequent to obtaining full voting control, Myburgh approved maximum increases of 10% for the directors for the next three years at a recent AGM, something shareholder activist Theo Botha “has never seen before”.

He added that Nova is an ideal case for a class-action suit.

100% of the vote

The Nova shareholding structure is complicated, with only the seven founding shareholders, who received their shares for free, holding any voting rights. According to this structure, each of the four directors held around 23% of the vote. The balance was held by three other individuals.

The 2 000 Sharemax investors who elected to receive Nova shares in lieu of debentures, have no voting rights.

In what may seem to be a case study in corporate capture, Myburgh and Haese annulled the voting rights of the other shareholders. This was triggered by an attempt led by Dirk Koekemoer (property director) and Rudi Badenhorst (financial director) to remove Myburgh and Haese from the board.

Myburgh and Haese foiled this attempt and instead engineered the resignations of Badenhorst and Koekemoer as directors.

From left to right: Rudi Badenhorst, Dominique Haese, Connie Myburgh and Graeme Polson. This photo was taken last year at the debenture holders’ meeting where Badenhorst claimed the listing proposal of the Nova Property Group was “daylight robbery”. It was the first public sign of significant infighting among Nova board members.

Badenhorst and Koekemoer signed a shareholders’ agreement that reduced their shareholding in the company and stripped their remaining shares of all voting rights. It is not certain why they signed this agreement.

Moneyweb has also learnt that the voting rights of the remaining minority shareholders were also rescinded.

This sequence of events left Myburgh and Haese with 100% of the voting rights in the company. According to Moneyweb calculations, their collective shareholding in Nova increased from around 46% to 60% in Nova.

Moneyweb sent questions to all the shareholders but did not receive a response.

Shareholders’ meeting

During a recent, poorly attended AGM in Pretoria, an abrasive and abrupt Myburgh acknowledged changes to the shareholding structure but refused to divulge any details, citing a confidential shareholders’ agreement.

“It is confidential information between the shareholders of the companies and I am not going to discuss that [at the AGM]. The matter has no bearing on other shareholders, nor on the affairs of the company,” he said.

Myburgh refused to answer a question on whether he and Haese obtained complete voting control of the company: “I am not going to discuss that. That is part of a confidential shareholders’ agreement.”

He later added: “I will not be cross-examined by you [the author] any further. I regard this matter as closed… The shareholding has been adequately and correctly disclosed. The company is owned by its shareholders and that is the end of the matter.”

Myburgh questioned the facts Moneyweb put to him but did not offer to provide an alternative version. He also did not respond to questions relating to the shareholding structure that were emailed to him after the AGM.

This refusal to disclose changes to the shareholding and voting rights follow the lengthy court battle between Moneyweb and Nova after Myburgh fiercely tried to keep the original shareholding secret. The Supreme Court of Appeals eventually found in Moneyweb’s favour and it was only then revealed that the founding shareholders had received 96% of the company without paying a cent.

Moneyweb will be lodging a new application to access the latest shareholder registers in terms of Section 26 of the Companies Act in due course.

Corporate capture

These events show how Myburgh completed his and Haese’s corporate capture of a company.

Myburgh’s involvement started when he penned the original Section 311 Scheme of Arrangement that was designed to “rescue” the R4.5 billion that about 18 000 mostly elderly pensioners invested in Sharemax.

Here are the key developments in this process:

In 2011, Myburgh penned the original Section 311 Scheme of Arrangement after the collapse of Sharemax. This saw the transfer of all former Sharemax properties from investors to Nova.
During this process, Myburgh became chairman of the Nova board.
Myburgh, Haese and the remaining five founding shareholders collectively received 96% of the shares in Nova, as well as 100% of the voting rights, without paying a cent.
Myburgh had a stranglehold on the company from the outset and, together with Haese, controlled 46% of the vote.
In 2017, Badenhorst and Koekemoer, supported by some of the minority voting shareholders, tried to have Myburgh and Haese removed from the board. Myburgh and Haese managed to foil this attempt and later engineered Badenhorst and Koekemoer’s resignations. Their shareholding was reduced and they lost the voting rights attached to their remaining share.

This effectively means Myburgh and Haese have full voting control and own 60% of the 20 remaining Sharemax properties, which according to the latest financial statements are valued at nearly R2.5 billion. Total assets amount to R2.87 billion, while total liabilities stand at R2.62 billion.

Theo Botha response

In response to these developments, shareholder activist Botha said Nova represents an ideal case for a class action. “Where is our judicial system in all of this? Where are our A-grade attorneys who would take this on risk and take on the directors? This is a prime class-action case because people have lost their rights. There is significant value in the properties of the company and this should be returned to investors.”

10% salary increase for three years

The AGM also saw Myburgh, who was appointed as proxy for all shareholders with voting rights, approve all normal and special resolutions. The most controversial was the approval of salary increases of 10% per annum for three years.

The remuneration structure of the non-executive directors that was approved at the Nova AGM.

This is on top of the exorbitant salaries the directors already receive, and the approval of financial statements that were significantly restated due to the previously massive overvaluation of two properties, and the filing of two reportable irregularities (RI) at the Independent Regulatory Board for Auditors (Irba).

In response to Moneyweb questions, Botha said he had never seen anything like this. “Investors should ask why the board would want increases in advance. We don’t know where inflation is going. It doesn’t make any economic sense for shareholders to approve this. An increase of 10% is well above inflation and a 30% increase over three years makes no sense for shareholders to approve.”

Write-down of R1.3 billion valuation of Villa and Zambezi

In response to a question, Myburgh said no disciplinary action was taken against any of the directors related to the restatement of overvalued properties and the unlawful composition of Nova’s audit committee.

Moneyweb earlier raised these transgressions with auditor BDO. In reaction BDO launched an extensive investigation into the allegations, which resulted in the restatement of the financial statements.

This restatement includes a write-down of more than R1.3 billion of an overvaluation of the Villa and Zambezi properties in a process where an independent valuer’s valuation was seemingly ignored.

Unlawful composition of Nova’s audit committee

BDO also reported another reportable irregularity with Irba in relation to the unlawful composition of Nova’s audit committee. This was rectified by the appointment of five new directors to the board, after which the IR was withdrawn.

Myburgh said in response to a question related to the audit committee: “All the years that position was expressly explained and dealt with every single year and at every single AGM as to why the situation existed. The reasons for this were accepted. This situation was rectified mid last year (2017).”

He denied that this was only done after it was found to be in contravention of the Companies Act. “Your facts are incorrect… I am not going to elaborate. I don’t want to elaborate. You can speculate if you so wish. The position was rectified in consultation with the auditors.”

BDO resigned as Nova’s auditor after signing the 2017 statements citing inadequate capacity to continue as auditor.

Justice for All? Oosthuyzen Sharemax Case

Justice for All? Oosthuyzen Sharemax Case

Company Listing: Moonstone Compliance (Pty) Ltd »

Was justice fully served in the Oosthuyzen case before the High Court in Bloemfontein last month?

From the perspective of the plaintiff, possibly yes, albeit it 7 years later. Delayed, but at least not denied. See here for more on the case.

What about the advisor? Was he lulled into a false sense of security, being a representative of the Unlisted Securities South Africa FSP Network (Pty) Ltd (t/a USSA) in order to render financial services regarding unlisted securities under an exemption granted by the FSB? He regarded speaking to his Sharemax consultant as sufficient confirmation that all was in order. What else he did he expect to hear?

The USSA network was specifically formed to sidestep legal obligations. Why did no authority question a nation-wide network with thousands of representatives, and only one key individual and one compliance officer?

The judge ruled that the decision by his PI cover provider to reject the claim was wrong. The insurer, though, intends appealing the finding.

What about the promotors? Apart from the failed attempt by the FAIS Ombud to pierce the corporate veil, they have gone along their merry way, sailing the high seas without a care in the world.

The recent admission that some properties, and particularly the Villa, were grossly overvalued, is nothing new. This was the essence of the late Deon Basson’ criticism as early as May 2004, and is perhaps an indication of the increasing impunity that marked later syndications, and not only contributed to their downfall, but also to even bigger losses for investors. It is reminiscent to what we see in the current state capture debacle, where audacity grows as a result of the lack of regulatory intervention.

Can the regulators wash their hands in innocence, claiming that the structure of syndications schemes did not reside under their jurisdiction? Did the fact that all those representatives of USSA were also registered with the FSB not imply at least a wary eye on their conduct with regard to selling unlisted shares which, after all, does fall under the auspices of the FSB?

In the preamble to this judgment is a quote from the ground-breaking Durr case, where the Appeal Judge said: “Hindsight is not vouchsafed the common man as he picks his course through life. This must be kept constantly in mind in a case like this one, where all is so obvious now.”

Agreed, but why does it take so long for hindsight to lead to action?

Source: Paul Kruger: Moonstone Compliance (Pty) Ltd

Public protector takes on FSB Boss - FSCA

Sipho Masondo
City Press

The Office of the Public Protector is investigating allegations of corruption, extortion, fraud, bullying, intimidation and mismanagement by the head of the country’s financial services regulator.

Public Protector Busisiwe Mkhwebane’s spokesperson, Cleopatra Mosana, confirmed this week that the office is investigating a complaint against Financial Services Board (FSB) boss Dube Tshidi, laid by Economic Freedom Fighters (EFF) president Julius Malema.

Malema laid the complaint in April last year and accused Tshidi of “gross misconduct, abuse of power and perjury”.

“We have seen substantial documented evidence indicating that for years he has been responsible for gross misconduct, material abuse of the powers of the FSB, perjury, withholding information and ongoing efforts to cover up wrongdoing, intimidation of members and corporate institutions, and breaches of his fiduciary duties,” Malema said in his complaint.

The FSB is responsible for licensing and regulating the entire financial services sector, excluding the banks.

Malema accused some senior FSB staff, including deputy chief executive officer (CEO) Jurgens Boyd and chairperson Abel Sithole, of being “unfit” for office.

FSB spokesperson Tembisa Marele said Tshidi offered Mkhwebane a comprehensive response to the EFF’s allegations.

He said the Public Protector gave the chair of the FSB board the task of answering questions, which he did in writing, and appeared for examination by the Public Protector and Tshidi.

The complaint

The basis of the EFF complaint stems from the alleged relationship between lawyer Anthony Mostert and Tshidi regarding 10 pension funds, which the FSB placed under curatorship between 2005 and 2011. The High Court in Pretoria appointed Mostert as curator of all 10 funds at the recommendation of Tshidi.

The FSB’s placement of the funds under curatorship followed a 2001 decision to introduce new pension fund surplus legislation, which it backdated to 1980. The effect of the legislation was that certain transactions concluded by pension funds and their administrators became irregular. As a result, the FSB placed the 10 funds under curatorship and appointed Mostert to look after them.

After his appointment Mostert appointed his law firm AL Mostert to advise him on matters relating to his curatorship.

“It is a clear conflict of interest when a curator of a company briefs his own law firm to act in any manner and this has been confirmed by a high court judgment,” said Malema in his complaint. In 2013 Judge Caroline Heaton-Nicholls harshly criticised Mostert for using his own law firm to brief him in matters relating to the 10 pension funds.

Malema stated in his complaint that, between his appointment and 2011, Mostert was paid R188m in curator fees and a further R48m in legal fees.

Mostert sent a four-page threatening lawyer’s letter saying the EFF’s complaint was a “perpetuation of a defamatory and vexatious smear campaign”. While acknowledging that Mostert had given answers to the Public Protector, the lawyers claimed that the matter was still sub judice as no findings have been issued.

“We point out that any publication ... not founded on factual matter and in proper context may be aiding and abetting unlawful conduct, and our client’s rights in this regard are and remain reserved,” the letter reads.

Marele said Mostert was “also summoned by the Public Protector to respond to similar types of accusations and appeared in Cape Town in a separate hearing”.

Court papers obtained by City Press show that when Tshidi appointed Mostert in around 2005, it was agreed he would be paid standard hourly rates for lawyers. But two years later Tshidi and Mostert signed another agreement, backdated by two years, authorising Mostert to charge the pension funds his apparently inflated curatorship contingency fees.

In April last year the High Court in Pretoria declared the contingency fee agreement and the money Mostert earned as illegal and invalid and set them aside. Mostert and the FSB are appealing the judgment.

In his submission Malema said he didn’t understand why the FSB was defending Mostert when the regulator’s duty was to protect pension funds.

Eight years in court

The court action to set aside the contingency fee agreement was launched in 2013 by Simon Nash, Cadac International’s executive chairperson. Cadac is one of the 10 funds the FSB placed under administration.

Mostert and Nash have been fighting each other in court for eight years. In 2010 Mostert laid a complaint of fraud, theft and money laundering against Nash, regarding pension fund surplus transactions which he concluded between the Sable Industries and Powerpack pension funds in the 1990s. These two funds are among the 10 the FSB placed under Mostert’s curatorship. Nash is a former trustee of the Sable Industries and the Powerpack pension funds.

The settlements

Alongside Nash and about 30 others, Mostert also laid complaints of fraud, theft and money laundering against Sanlam, Alexander Forbes and Old Mutual, which administered some of the 10 pension funds. Allegedly under pressure from Mostert and the FSB, and without admitting any guilt, the three companies paid a collective R670m settlement in 2008.

Of these settlements, Malema said: “Tshidi, to the benefit of Mostert, has used his office to threaten and intimidate large institutions with the possible withdrawal of their licences unless these institutions withdraw from litigating against Mostert and the FSB and paid settlement payments to Mostert.

“Legal representatives of both Sanlam and Alexander Forbes complained to Tshidi that the letter he had sent to their client was a threat to use the FSB’s statutory powers against the companies should they act contrary to that as required by the FSB.”

Malema said he interpreted Tshidi’s actions as state extortion to the benefit of Mostert.

‘Misleading Parliament’

Malema also accused Tshidi of “purposefully misleading” Parliament.

In 2009 Tshidi told Parliament he had provided authorisation for Mostert to be paid through contingency fees on one fund.

“The answers provided by Mr Tshidi were untrue and purposefully designed to mislead Parliament and the public,” Malema stated.

Malema further alleged that Tshidi allowed a “fraudulent inspection report” to be drafted, which Nash stated in court papers was done to place the Cadac Pension Fund under curatorship.

“It is our contention that Mr Mostert has captured the FSB through its CEO and thus he is empowered to act with impunity,” stated Malema, adding that an “unholy alliance” existed between Tshidi, the FSB board and Mostert.

“This alliance pointed to the statutory mandate of the FSB being ignored and places the financial services sector at risk.”


Do you think the FSB boss is doing enough to protect our financial sector?