Invicta’s failure to come clean over a ‘reportable irregularity’ in share buy-backs by its top brass raises problems for shareholders.
WHAT IT MEANS: Shareholders want Wiese’s board to explain events. Inference drawn that Wiese bailed out errant directors
Some uncomfortable questions have arisen over an irregular deal at Invicta Holdings, a well-oiled industrial giant chaired by retail tycoon and SA’s wealthiest man, Christo Wiese.
Invicta, once a rising industrial star, has fallen on hard times lately, its share price shedding 47% in the past three years — an opposite trajectory to the overall JSE, which has climbed 23% over that time.
It’s an unfortunate situation, made worse by the decision by Invicta’s board to keep schtum about this "reportable irregularity", allowing suspicion to sour what has traditionally been a solid relationship with investors.
In these enlightened corporate times, listed companies should be engaging frankly and openly with shareholders — especially around prickly issues such as breaches of corporate governance.
It’s also an unwelcome distraction for Wiese, a lawyer by training who has climbed to the apex of the corporate ladder from the humble beginnings of a failed chicken farm in Upington in the 1960s.
Wiese is now ranked the 169th wealthiest person on the planet, with a net worth of R102bn thanks largely to his 17.8% of retail powerhouse Steinhoff, 34% of Brait and 15.3% of Shoprite.
While Wiese also owns 38% of Invicta, it’s a far smaller chunk of his portfolio considering Invicta is only valued at R5.5bn. It owns building supplies (including Tiletoria), engineering companies (including Hyflo and Mandirk), and an agricultural machinery division, Capital Equipment Group.
The problem arose when the company’s auditors detected a "reportable irregularity" in Invicta’s accounts for the year to March.
In accounting terms, it’s a pretty big deal, defined in the Companies Act as an act by management that "unlawfully" causes material financial loss, or is related to fraud, causes the company to trade under insolvent circumstances or represents a breach of any fiduciary duty.
One fund manager says that when such an irregularity is found, shareholders get extremely concerned "about what possible misdemeanours might have transpired".
In this case, Invicta’s auditors Deloitte & Touche raised a reportable irregularity around the repurchase of shares by the company on the open market.
But Invicta has revealed little detail about that irregular event.
Some shareholders now feel the matter has been unsatisfactorily glossed over, which could throw a spanner into the works at a tough trading juncture when the company hardly needs a corporate controversy to bother investor sentiment.
It goes deeper than just a governance debate.
Two Invicta executives lost a fortune on leveraged positions in the company’s shares. In one instance, Wiese had to cough up millions of rand to extricate a fellow executive from a nasty financial squeeze.
Some investors are willing to give management the benefit of the doubt — which is understandable, since the management are highly regarded for a superb long-term-growth track record and for having generated exceptional returns.
But other shareholders insist Wiese’s board, in terms of transparency and accountability, needs to openly address events that triggered the irregularity.
Invicta directors must be deeply embarrassed by this turn of events, but surely know the consequences of not properly grasping this particular nettle. Wiese is adamant the board dealt swiftly and efficiently with the matter. "After picking up the problem we immediately called in our advisers and lawyers to deal with the matter, which was reported to the JSE. Sure, there were mistakes. It was one of those things. But I can say there was no dishonesty whatsoever."
Invicta’s year-end results, released in mid-June, contained only a small reference to the matter: a note saying that a reportable irregularity had been reported to the Independent Regulatory Board of Auditors (Irba).
"After considering the circumstances of the transactions, as a matter of good governance, the relevant transactions were cancelled at no cost to the company," it reads.
Such diplomatic corporatese is hardly enlightening. A cynical investor might even argue that without Deloitte’s intervention (and auditors face serious consequences for not reporting a reportable irregularity to the Irba), possible corporate breaches by directors might have gone unnoticed.
Investors hoped for more clarity from Invicta’s annual report. Unfortunately, the report adds little.
"After having reviewed the factual circumstances of the transactions, in hindsight after the transactions had already occurred, it became evident to the company that, due to the manner in which the share repurchases were executed, an apparent prior understanding or arrangement may have existed in respect of some of the shares which were acquired," it said.
The company says this was seen as a "breach of paragraph 5.69 of the JSE Listings" rules.
What appears to have happened is that the Invicta directors sold their own shares at the exact time that the company was buying back shares from the market in its "repurchase exercise". Wiese confirms this.
At face value it would seem the same directors who were selling their shares were also supporting the company’s strategy to buy back shares when the price offered enough value to enhance shareholder returns. But Wiese argues the contentious trades were actually triggered by financiers, who had the right — in terms of an arrangement with directors — to sell the shares.
The problem is that rules were broken. For directors to sell their shares back to the company, shareholders would have had to vote to approve a specific repurchase deal. Technically speaking, they did not do this.
The timeline is equally intriguing, as nearly three months lapsed before the "irregular" directors’ dealings were reversed by Invicta.
Wiese says it was a "helluva process" to reverse the transactions, but reiterates that the company was reimbursed all costs.
The annual report states the "apparent breach" of the JSE rules was inadvertent and was not the result of any unlawful, negligent or deliberate act or omission on the part of the company. "There has been no attempt by the company to mislead, deceive or conceal anything."
Yet Invicta’s top brass are being decidedly coy on the matter. Wiese says a disciplinary hearing was held, but no action will be taken until the JSE makes a ruling. He believes shareholders should feel reassured that Invicta’s board acted decisively to resolvethe matter.
But if the reportable irregularity is a seemingly innocuous event, why won’t Invicta engage shareholders and provide more detail about what transpired in the re-purchase?
One Invicta minority shareholder (who asked not to be named) isn’t taking it lying down. He has lobbied Invicta, unsuccessfully, for more detail on what went wrong and how. He has also petitioned the Irba and the JSE.
He is now on a mission to establish minority shareholder rights in such a matter, probing the roles of the JSE and the Irba in ensuring that the critical details around matters like reportable irregularities are easily accessible to investors.
Invicta’s response to its reportable irregularity stands in stark contrast to that of fellow industrial counter, Distribution & Warehousing Network (Dawn).
In its accounts for the year to March, Dawn went to great lengths to detail the nature of reportable irregularities raised by the company’s auditors.
Though recognising that the circumstances triggering the events were vastly different, Dawn chairman Diederik Fouche contended that there was no question at board level that full disclosure of the reportable irregularities was needed.
"At Dawn we not only needed to reassure our auditors that the matters were not ongoing, but (also) make clear to shareholders and other stakeholders that there is no further risk to the company," said Fouche.
Dawn is also contemplating whether to take legal action against certain people.
Invicta’s reluctance to provide more detail on the reportable irregularity has inevitably spurred theories.
It’s abundantly clear that during the year to March, Invicta’s directors were actively trading in the stock.
Notices from the JSE detail trades by a handful of directors — including nonexecutive chairman Wiese (who speaks for 38% of the issued shares), executive deputy chairman Arnold Goldstone and CEO Charles Walters.
Digging deeper, it seems to suggest that certain executives were then involuntarily closed out of their Invicta share positions by financial institutions.
The biggest clue lies in an announcement on November 30. It shows that Walters sold around 380,000 shares at R51.50/share to raise R19.6m to "satisfy margin calls".
Goldstone, via the A&A Family Trust, sold 1.5m shares at R51.50/share to raise R77.3m, also to satisfy margin calls. A week later, Goldstone (again through the trust) sold another 472,000 shares at R49/share to raise a further R23m. It seems reasonable to assume that Walters and Goldstone were selling shares they’d bought during Invicta’s rights offer in early 2015.
Oddly, Invicta then announced that these dealings had been cancelled due to "an error". A few weeks later, the duo "resold" those shares at markedly lower prices.
On February 26, Goldstone (via the trust) sold 3m Invicta shares at the rock-bottom price of R38.10 — raising R114m after "a sale of shares by financial institution upon close out of equity linked note by associate".
Walters did the same, selling 698,648 shares to raise R27m.
On the same day Wiese, via his Cream Magenta and Metcap entities, appeared to buy the shares sold by Walters. The clear inference is that Wiese bailed out one of his executives.
While Invicta’s reluctance to elaborate on these deals doesn’t breach any JSE rules, it is problematic.
Without detailing the events which triggered the reportable irregularity, Invicta can’t really expect some shareholders not to speculate that, possibly, the share buy-back referred to in the reportable irregularity was not a legitimate allocation of capital.
A scenario that may well unfold in the mind of an "in-the-dark" minority shareholder, whose scepticism has been heightened by the lack of information, is that Invicta’s top brass could have taken leveraged positions to buy shares, before suddenly finding themselves under pressure as the Invicta share price fell. As it fell further, these directors were then forced to sell the stock. Only, it’s not always easy to place such large tranches of Invicta shares in the market, especially with investor sentiment so brittle.
In this context, an observer might believe that the directors would then have tried to mobilise Invicta’s balance sheet to mop up the shares they were trying to sell. The problem is that those directors would be on both sides of the deal — a big no-no.
Of course, this may verge on investor paranoia, and Wiese dismisses this scenario as a conspiracy theory. But this is what happens in an information vacuum.
As it stands, a summary of the Invicta board’s handling of the reportable irregularity might well be: "Something went wrong, we fixed it ... you don’t need to know more, just trust us."
Wiese believes that adding more detail on the reportable irregularity would not necessarily be helpful to shareholders. "It’s a bit like catching flies. I would have thought shareholders would be happy we reported the matter to the regulatory authorities. Why would they want to dig more?"
Of course, Invicta could have done it within the rules, as Johnny Copelyn’s Hosken Consolidated Investments (HCI) recently did. In that case, HCI asked shareholders to agree to a "specific share repurchase" to allow directors to transact in their shares. That way, shareholders could have benefited from Invicta buying back big chunks of shares cheaply.
But it didn’t go this route — though Wiese concedes he might have been tempted, had he realised the squeeze his executives were in, to offer to buy back the shares that were inadvertently sold into the share repurchase programme.
One asset manager at a large investment house (who requested anonymity) believes the irregularity is not a reason for shareholders getting their knickers in a knot.
Then again, it is easy for larger shareholders that are taken into the confidence of executives to formulate a clearer picture of what might have transpired.
"The directors explained it to me in a lot of detail, it’s not a big issue," he said. "I don’t think there is anything sinister — though it is an unfortunate incident in that key directors have seen their shareholdings in the company reduced."
That asset manager argues that Invicta’s reportable irregularity was an oversight rather than a transgression.
"No-one did anything wrong. The board simply did not put two and two together."
Shareholder activist Theo Botha is of a different opinion. He argues that the detail disclosed by Invicta on the reportable irregularity is insufficient for shareholders.
"We don’t know which board members were involved or whether anyone was censured for seemingly holding their own interests above those of shareholders. At this point it’s not possible for shareholders to hold anyone to account ... there’s simply no accountability here."
With so many questions around the reportable irregularity, there may be an uncharacteristic edge to the normally staid proceedings at Invicta’s AGM next week.