Issue: Mar/May 2011
Editorials

SHAREHOLDER RESPONSIBILITY

Kept in suspense

ArcelorMittal was supposed to have sought approval last September for its contentious BEE transaction. By mid-February it had still not given a date for the delayed shareholders' meeting. Has it run into a Companies Act problem that will allow South African institutions to defeat the proposal?

Damned if it does and damned if it doesn't, JSE-listed ArcelorMittal South Africa (AMSA) is in a cleft stick over its proposed black economic-empowerment transaction. If AMSA changes the terms, it could risk alienation of those expecting largesse. Hell might have no fury like expectant beneficiaries scorned, especially when they're close to people in high places.

But if AMSA doesn't change the terms, it faces an altogether different series of risks. One, in particular, is inferred from a Q&A with Today's Trustee (see box). AMSA says that, for approval of the transaction by shareholders, it requires a majority vote of only 50% plus one share because "this is not a related-party transaction".

Were this the case, it would almost certainly be a done deal as AMSA's overseas parent owns slightly over 50%. However, this is not the case. A leading authority on South African corporate law is "absolutely convinced" that a 75% majority vote is required for approval. In other words, AMSA needs not the ordinary resolution that it claims but a special resolution that follows from the transaction's proposed structure.

Whether it will succeed in obtaining the 75% majority for a special resolution is moot. Some powerful South African institutional shareholders have already indicated the improbability that they will support it (TT Oct '10-Jan '11). Amongst them are the Public Investment Corporation (on behalf of the Government Employees Pension Fund), RMB Asset Management and Sanlam Investment Management. According to the latest AMSA annual report, 39,7% of the company's shares are held in South Africa.

By holding to the line on a 50%+1 majority, AMSA has produced a justification that's irrelevant. "Related parties" is a JSE concept covered by JSE rules. What applies in this instance, by contrast, is the Companies Act which provides at s228 for the disposal of assets. AMSA intends to dispose of most of its assets to a new operating company (OPCO) that will be 74%-owned by AMSA and 26%-owned by empowerment consortia

To quote s228: Notwithstanding anything contained in its memorandum or articles, the directors of a company shall not have the power, save by a special resolution of its members, to dispose of (a) the whole or the greater part of the undertaking of the company; or (b) the whole or the greater part of the assets of the company.

The specific purpose of this section is protection of minority shareholders; in this instance, AMSA minority shareholders. Although it might be submitted by AMSA that the assets disposal will take place in two stages – first to the new OPCO as a wholly-owned subsidiary, then by the OPCO to the empowerment consortia – such an argument would be disingenuous if it's designed to elude s228.

An exception to the special-resolution requirement is allowed where the assets disposal is to a wholly-owned subsidiary. But here, this is one and the same transaction – part and parcel of a single objective – despite being conducted in stages. Its intention and effect is for an AMSA disposal of assets to a subsidiary that it does not wholly own.

Thus AMSA faces the embarrassing prospect of its empowerment proposal being rejected. Even without a preponderance of South African institutional shareholders voting against the special resolution, to deny it the 75% majority, AMSA can have egg on its face from other directions that arise from its contentious relationship with Imperial Crown Trading (ICT).

  • AMSA parent ArcelorMittal Holdings (AMH), which can vote at the shareholders' meeting, is itself accountable to its own set of institutional shareholders through a range of such blue-bloods as J P Morgan and Credit Suisse. They too have codes related to corporate investment. And a guiding principle that AMH propounds, in compliance with the Global Reporting Initiative, is to "work against corruption in all its forms";
  • For its part, AMSA will need to exhibit consistency with the commitment in its annual report: "The board ensures that the conduct of its business is done according to the highest standards of corporate governance. The board strives to foster a culture that values and rewards exemplary ethical standards, personal and corporate integrity."

How does this stack, for example, in the context of its ICT deals? Or participation of Gupta family members, who aren't previously-disadvantaged South Africans, in the proposed empowerment transaction? AMSA's defence that they hold a "very small percentage of the consortium" rings hollow. Size doesn't matter.

What matters is the principle of wealthy people, and their connected ICT associates, getting a free ride at the expense of existing shareholders. These shareholders substantially include South African pension funds represented by their institutional asset managers.

The asset managers, entitled and arguably obliged to vote, might also be discomfited by AMSA's admission that a goal of the transaction is "to ensure that at least 10% of the BEE holding finds itself in the hands of broad-based groups". By implication, therefore, some 90% won't be. So much for "broad-based".

Take heart, however, that some serious rethinking must be taking place at AMSA. The shareholders' meeting, first announced on August 10 for September 28, was rescheduled for a date still undecided. In a statement last October, AMSA said that "consideration of matters relevant to the BEE transaction is ongoing" and promised merely that a revised timetable will be made available "in due course". A similar cautionary was issued again in December.

Whatever the outcome of its due-diligence investigation into ICT, and other "matters relevant" to the BEE transaction, AMSA will be hard-pressed to move with confidence into the shareholders' meeting. Either it revises the BEE proposal, to narrow the odds on obtaining 75% majority support; or it doesn't, to take its chances with a deal which might be unsanctioned and hence prove incapable of delivery.

For South African institutional shareholders, subscribing to principles for responsible investment that include public disclosure of how and why they vote, their about-to-be-adopted code is in for a baptism of fire.

  • This article, by TT editorial director Allan Greenblo, is slightly modified from its original publication in Business Report on Nov 2. For readers' convenience, the attached box of the Q&A with AMSA is reproduced from the previous TT edition.

AMSA'S VIEWS

These questions were put by Today's Trustee to AMSA. The responses are from AMSA investor relations manager Hennie Vermeulen and communications manager Themba Hlengani.

TT: The AMSA shareholders' meeting, to vote on the proposed BEE transaction, was postponed from September 28. When will this meeting be held?

AMSA: An indicative timeline was announced but no shareholder general meeting was scheduled. Shareholders will be informed of the revised timetable once all the details of the proposed transaction have been finalised.

Have shareholders in ArcelorMittal Holdings AG (AMH) been apprised of the legal and political controversy surrounding this transaction as comprehensively reported in South African media? If so, have they nevertheless indicated their support of it?

AMSA has closely monitored developments and AMH is fully apprised. Like other shareholders, AMH is also awaiting the finalisation of the transaction detail to be in a position to make a final consideration.

Will AMH exercise its right to vote at the shareholders' meeting, or will it allow AMSA's South African shareholders to decide whether the transaction should proceed?

AMSA encourages all shareholders to exercise their rights on all material matters affecting the company.

For approval of the BEE transaction, where significant assets are being transferred from one company (AMSA) to another (OPCO), is a majority vote of 75% or of 50% plus one share required?

50% plus one share. This is not a related-party transaction.

What criteria were used by AMSA in selecting its proposed BEE consortia?

These are business people with a variety of interests in South African businesses that we believe will bring added value to the company. AMSA believes that it will benefit from the perspectives and business experience of its new partners. The key objective was to identify BEE candidates who could enhance the commercial success of AMSA. A further goal was to ensure that at least 10% of the BEE holding finds itself in the hands of broad-based groups.

How does AMSA justify the inclusion of non-South Africans in the BEE transaction?

It must be remembered that Oakbay Investments (Gupta family members) holds a very small percentage in the consortium.

Since AMSA is conducting a due-diligence investigation into Imperial Crown Trading (ICT), what outcomes from this investigation will cause AMSA to withdraw its offer to purchase ICT?

This is a confidential due-diligence process; suffice to say that the due diligence is being conducted according to the highest possible ethical standards and non-compliance at any level would automatically nullify the proposed transaction.

Why is the purchase of ICT not a condition precedent for the inclusion of ICT shareholders in the BEE transaction?

As you are aware, ICT is now the holder of the prospecting rights for the Sishen mine that were previously held by AMSA. These rights are strategically very important for AMSA and, when it became apparent that it would be possible to acquire them, we decided to pursue that option. The possible purchase of ICT was structured at a time when the BEE proposal was being packaged. Having secured the Sishen rights, the ICT owners were obvious candidates for the BEE transaction, but their inclusion was based on more than just the ICT transaction. Hypothetically speaking, failure to pass the due-diligence test could put a question mark over the continued participation of ICT in the BEE transaction.