Debate on minority rights re-ignited

RECENT clashes between the Securities Commission of Zimbabwe (Sec) and Lifestyle Holdings (Lifestyle) have re-ignited the debate on minority shareholders’ rights in listed companies, with the Sec charging that the envisaged Lifestyle transaction, where the company plans to delist from the Zimbabwe Stock Exchange, is potentially prejudicial to minority investors.

Report by Clive Mphambela

The ZSE itself is caught in the eye of a storm as the Sec, in a recent court challenge that sought an injunction against the Lifestyle scheme meeting cited the exchange as a second respondent in the matter. Sec contends the ZSE did not provide adequate oversight on the matter.

However, Lifestyle Holdings on Monday published the results of the Extra Ordinary General Meeting held on March 15 2013 where shareholders approved a scheme of arrangement whose essential element is that the company’s shareholders will exchange their shares in the company for shares in TN Harlequin Luxaire International Limited(TNHLI) at an exchange rate of one TNHLI ordinary share for 235,12 Lifestyle ordinary shares, or alternatively a cash consideration of US$0,00645 per one Lifestyle ordinary share held.

Whilst shareholders voted in favour of the transaction terms of the provisions of corporate law, the Lifestyle transaction seems to leave a sour taste in the mouth of the regulator, who maintains the whole deal is flawed and should be regularised.

Sec chairperson Willia Bonyongwe, who spoke to businessdigest this week, maintained that the regulator’s tough stance against the transactions was motivated primarily by the need to uphold the fundamental rights of all investors on the country’s markets, including minorities.

“In our view, the Lifestyle transaction is one of the very big scandals that are going unnoticed and we cannot sit by and watch it go through in the form that is being proposed. Our interest as Sec is not in personalities but the fundamental rights of all investors, including minorities, who we think have not been afforded adequate and rightful disclosures to enable them to make informed decisions,” Bonyongwe said.

“Unfortunately, the judge ruled against our injunction. We feel that he should have heard us and that has complicated issues,” Bonyongwe added.

She described the deal as murky, saying the regulator was fundamentally opposed to the EGM going ahead owing to a number of identified flaws in procedure, inadequate disclosures, non-compliance with ZSE listing rules and perceived corporate governance shortcomings, particularly with respect to related parties being engaged by the major shareholders as independent advisors for the transaction. Sec is particularly uncomfortable with TN Financial Services, a subsidiary of Lifestyle and a law firm closely linked to its chairman, Tawanda Nyambirayi, being appointed as legal advisors to the deal.

“There is a stated exchange ratio for the local shares and the foreign entity, which means there has been a valuation. Even before we probe who did the valuation, there is no disclosure as to what the assets and liabilities are in the new entity and even to tell us what they are going to do with the company after removing it from the exchange,” Bonyongwe argued.

Sec is concerned that should the deal be allowed to go ahead in its current form, and Lifestyle delists, the company will essentially go under the radar as both Sec and the ZSE will lose oversight over its affairs. Without this information, Sec says shareholders may have been asked to vote on a deal that could potentially prejudice them.

However, whilst Lifestyle founder and major shareholder Tawanda Nyambirayi maintains that his proposal to minorities is fair, and that the court-sanctioned scheme of arrangement will offer greater protection to minorities, analysts are of the general view that his justification for the issues raised by Sec is weak. Tetrad Group, in a research note issued earlier this month, charged that Lifestyle’s rationale for having the proposed scheme did not make sense, especially for resolving the sovereign risk issue.

Tetrad suggests Lifestyle’s efforts to raise funding from international investors to facilitate its operations, having failed to secure funds in the local market, will be futile given challenges in understanding the company’s business model. Tetrad’s note cites other companies that have used similar justifications such as Cambria, incorporated in the Cayman Islands, which has not succedded in shaking off the sovereign risk associated with Zimbabwe.

“The major issue is that capital usually follows viable business models. A case in mind is Delta, which despite the highly perceived country risk has received a cumulative US$200 million invested by its foreign shareholders since dollarisation. Cambria Plc incorporated in the Cayman Islands and listed on the AIM-exchange meant to facilitate funding has nonetheless failed. The major hindrance was their business model, which most investors felt was not viable and was also unclear.

Investors regard Cambria as a collection of assets as also is the case with the Lifestyle stable,” reads Tetrad’s research note.

Bonyongwe raises the same argument.
“The fact that the new company is registered in Mauritius does not take away the sovereign risk that Lifestyle purports to be the main reason for delisting. What will make international investors more keen to invest money in an unlisted shell company in Mauritius as opposed to investing in a publicly-listed company on the ZSE where there is oversight?” Bonyongwe queried.

Nyambirayi says the deal is an innovative way to circumvent Zimbabwean sovereign risk and raise capital on the international markets. He argues that the Mauritian company, TNHLI , which will now run Lifestyle’s Zimbabwean operations, will result in the company being able to set up operations in foreigncountries owned directly by the Mauritian company. These foreign companies will be used to raise capital internationally, based on their operations, which will be separate from the Zimbabwean operations. Capital raised by the group will flow to the Zimbabwean operations.

“It is commendable that Lifestyle has chosen to do a court-sanctioned scheme of arrangement which offers more protection to minority shareholders rather than a straight reconstruction, considering that TN-aligned shareholders are clearly in the majority,” Nyambirayi said in an e mailed response to inquiries by businessdigest.

The scheme of arrangement will result in minorities being paid a significant 61% premium over the Sec base price and analysts and the Sec has queried why the proposal involves a lengthy repayment.

Sec argues that there are no guarantees to protect those investors after the company has delisted. Shareholders are losing the opportunity for a transparent pricing mechanism for their shares in exchange for an IOU issued by an unlisted offshore company.

“One thing that also concerns us is that it is not quite clear who is going to pay out the minorities, is it the Mauritian company, or is it the current major shareholders in Lifestyle, or is it a third party that is going to assume the current minority shareholders rights for cash? All these issues need to be clarified and adequate disclosures made before delisting can go ahead. Shareholders maybe potentially prejudiced if, for example, the new company uses internal resources to pay out minorities,” Sec CE Tafadzwa Chinamo said.

Other questions are that the last reported financials of Lifestyle Holdings were in June 2012 and these incorporated TN Bank, which was subsequently demerged from the former TN Holdings.

“We are not convinced that minorities have been given an adequate opportunity to decide if delisting was indeed the only option open to the company, and that the valuations and advisory have been done by entities that pass the sufficient test of independence,” Chinamo said.

As Sec, therefore, we will still insist that before delisting, these issues are addressed. We will require the publication of a full circular containing both financial and non-financial information and an opinion expressed by independent financial advisors, not related parties,” he added.


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