August 1, 2019


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By Jessica Bates, Equity Analyst, STANLIB Equity Team

Shoprite’s recent proposed transaction to shareholders sparked an interesting debate among investors. On the face of it, a transaction to dismantle an unequitable voting structure, that has been in place for decades and continues to detract from the quality of corporate governance of a company, should receive a favourable vote. But is this a fair price for shareholders? Do we as shareholders choose to live with the consequences of the unknown should we vote against?

Responsible investing is important to us as custodians of clients long-term capital. STANLIB equity team incorporates a comprehensive process to understand the Environmental Social Governance (ESG) risks and opportunities when investing. This includes deriving an ESG score for each company based on specified factors. Our score for Shoprite while acceptable, is weaker than the rest of our universe driven by poorer scores for key governance factors.

With this in mind we carefully considered the proposed transaction before casting our vote

Shoprite’s overall ESG score according the STANLIB Equity ESG Framework

The Decision

On 18 April 2019, Shoprite released an announcement detailing the proposed transaction for the potential acquisition or redemption and cancellation of Shoprite’s deferred shares. The proposal stated that if at least 15% of shareholders indicated their intention to vote against the proposed transaction by 31 May 2019, the company may choose not to proceed.

Our ESG approach means we actively engage business stakeholders to effect change when dealing with ESG concerns. After extensive research, internal discussion, and consultation with the board of Shoprite, STANLIB to decided vote against the proposed transaction.

Despite widespread media coverage of the negative sentiment of local investors towards the transaction, we recognised that a very strong rationale existed for both voting in favour, and voting against the proposed transaction. Guided by our ESG framework, we made every effort to determine what we considered to be in the best interest of shareholders. We concluded that although we valued the positive corporate governance implications of the elimination of the current voting structure, we could not vote in favour of the deal in its current form

Creating the Shoprite deferred shares

The Shoprite Deferred shares were created by a transaction in 2000, when the PEPGRO pyramid structure, of which Shoprite was a subsidiary, was collapsed. New, unlisted redeemable shares (the deferred shares) were issued to Dr Christo Wiese’s private company Thibault Square Financial Services. Over time Dr Wiese’s effective control reduced from over 50% to approximately 40%.

2019: Shoprite’s Proposed Transaction

Before

After

 

STANLIB’s considerations

1. Shoprite’s stated rationale

2. The nature of the Deferred shares and the spirit of this transaction

The Shoprite Memorandum Of Incorporation (MOI) outlines very clearly the characteristics of these shares, and the process to be followed to acquire and cancel them. These shares were not intended to be transferred or attract any economic value. Therefore we would not wish to engage in any transaction that is inconsistent with the process defined in the MOI.

3. The interests of minority shareholders

We fully acknowledge the contribution Dr Wiese’s passion for his businesses and entrepreneurial capabilities have contributed to the success of Shoprite over the years.

There are, however, examples of historical transactions and proposed transactions for Shoprite and other related businesses, that indicate that minority shareholders’ interests may not always be prioritised, such as:

  • The 2007 attempt to take Shoprite private;
  • The 2017 attempted transaction between STAR (Pepkor), Shoprite and Steinhoff, and the associated prepayments made by Steinhoff (€325) million to Dr Christo Wiese (of which €200 is still to be repaid).

Additionally, over and above the JSE listing requirements, enhanced disclosure of related party transactions and increased scrutiny by asset managers is required, to ensure that transactions are indeed at arm’s length and interests are not being pursued at the expense of minority shareholders.

Conclusion and the way forward

We concluded and communicated our intention to vote against the proposed transaction.

On 3 June 2019, Shoprite announced that they had received indication from more than 15% of shareholders that they intended to vote against the transaction, and have accordingly decided not to proceed.

We will continue to engage with the board on initiatives to improve the corporate governance at Shoprite, and expect that the board, led by the lead independent director, will pursue initiatives that both improve governance and uphold the interests of minority shareholders.

 

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