When BEE schemes become kingmakers

The JSE has entered an intense takeover season with several black economic empowerment (BEE) investment schemes positioned to be kingmakers.

This positioning of BEE schemes is patently clear in two cases being the Bidvest offer to takeover pharmaceutical group Adcock and Eqstra’s bid for construction company Protech Khuthele.

These cases are interesting as test grounds to indicate the future of the surviving BEE equity participation schemes on the JSE. The pertinent questions are: Will these schemes fizzle out amidst increased corporate action? How do the bargain hunters consider BEE in their ventures?

In answering these questions one needs to consider this fact. BEE schemes are most vulnerable to bargain hunters because most are positioned to be desperate for realisation of their investments. This seems to be the case in the Eqstra/Protech situation.

Eqstra has made an offer to takeover Protech at 60c per share. The Protech board is of the view that this offer significantly undervalues their company. As such the Protech board has advised that shareholders reject the offer. But then Eqstra claims to have an irrevocable undertaking to support the offer from the Protech Khuthele BEE Trust which controls about 20% of Protech shares. If it holds up, this undertaking will prove critical if the Eqstra’s bid turns hostile.

Protech is questioning the authenticity of this undertaking by its BEE trust. In a letter to shareholder Protech’s chairperson Terence Rensen says “Protech has attempted to gather information about the circumstances surrounding the irrevocable undertaking to accept the Eqstra offer, which was given on behalf of the Protech Khuthele BEE Trust by Protech Khuthele Black Economic Empowerment Proprietary Limited (SPV)…”

Rensen says the Trust was established to allow employees and other parties engaged in Protech’s business to benefit from Protech’s activities and growth. “Importantly, the Trust was established for purposes of black economic empowerment”. He said Protech is of the view that a sale of the Protech shares held by the Trust would not fulfill these objectives.

“Protech is also concerned that proper governance processes were not followed in granting the irrevocable undertaking, and has not received information it has requested from various parties to answer the legitimate questions it has raised.

On legal advice Protech is of view that the trustees of the Trust did not have the power or authority to approve the disposal by the SPV of the shares in Protech. “Also, the SPV did not have the authority to give the irrevocable undertaking to Eqstra”.

On the Bidvest/Adcorp saga there are concerns that Bidvests move will compromise Adcock’s BEE scheme. These are expressed by Adcock chair person Khotso Mokhele. In dismissing the Bidvest offer as “opportunistic” Mokhele also said the Independent Board has fundamental legal and material prudential concerns with the Bidvest move.

Mokhele said “…the Independent Board has material prudential concerns with the Bidvest letter and the resultant potential prejudicial impact on Adcock Ingram shareholders. In particular, the Independent Board is concerned about the high level of conditionality, including “walk-away” rights, the absence of comparable offers for two of our other key stakeholders, namely our BEE partners and employees, who are participants in our group share incentive scheme.”


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