Kgosi’s acquisition of shares is legit


The Isaac Kgosi story, which hogged newspaper headlines throughout 2014, is a textbook example of what happens when journalists bombard the reader with an avalanche of information that does not necessarily enrich the universe of discourse. In journalese it is called clutter, or obfuscation.

Last month a certain Liver Tembo wrote a rather over-cooked rebuttal, in the Weekend Post, to a series of allegations published in various newspapers where his identity was mixed up with that of a certain Harry Tembo, who died in Phakalane under mysterious circumstances a couple of years ago. 

It turns out that the Tembo who died is not the same Tembo who was engaged as a building contractor for Kgosi's house located in Phakalane as was persistently reported, erroneously, in the press. Interestingly enough, even after this clarification was made none of the newspapers concerned, including this one, acknowledged that they were wrong.

Worst still, the press has always maintained that the late Tembo was shot and killed by DIS.  Some journalists actually accused Kgosi of killing Tembo using an Uzi sub machine gun. This is not borne out by facts. The post-mortem results do not show any evidence of gun-shots on Tembo’s body. This is something that the press should have verified with the relevant authorities before they engaged in untested conspiracy theories about the cause of Tembo’s death.

However, for me, the worst form of clutter and obfuscation that continues to cause confusion is the one relating to Kgosi's acquisition of Choppies shares. The notion that Kgosi was given the shares as a freebie because he did not fork out money to pay for them is fallacious. Anyone who has an appreciation of how financing transactions are structured would not find anything wrong with the deal.

In a statement circulated to the press last September, Kgosi admitted that he acquired the shares on the understanding that he would pay for them with the dividends earned from Choppies. Fact of the matter is there is nothing wrong with that.

A brief background is in order here. At the time when Kgosi acquired the shares, Choppies was reaching out to citizens whom, as a business, they wanted to be associated with, either because of their skills, intellect or experience, while at the same time empowering Batswana as a way of broadening its ownership base. Mind you, this was before the company listed on the Botswana Stock Exchange. When Choppies did list in 2012 it affirmed its founders' wish to broaden ownership of the company to ordinary Batswana. 

Of course the question may be raised as to what criteria the founding owners of the company used to select the people they approached to offer shares. But again, this was a private company. It was their prerogative whom they chose to approach. It does not look like there was coercion.  I am told some people who were approached declined the offer because they thought the company's success was not sustainable in the face of stiff competition from South African chain stores. 

Financing the acquisition of shares in a company with future dividend earnings may seem novel but it is a normal way of conducting business. In the last 20 years the law in South Africa has evolved to institutionalize such financing transactions in the context of the black economic empowerment drive in that country. Section 38 of the Companies Act in that country prohibits a company from giving any type of financial assistance directly or indirectly, in connection with the purchase or subscription for its shares or shares in its holding company, unless the assistance is specifically authorized by a special resolution of shareholders and the board is satisfied that the company will be liquid and solvent following the giving of the financial assistance. 

The amended Act (2006) permits a company to give financial assistance for the purchase of or subscription for its shares or shares in its holding company, provided that the company's board is satisfied that following the giving of the financial assistance, the company will remain solvent and it will have sufficient liquidity to pay its debts. 

The new Companies Act (2011) in South Africa allows the issuance of shares to be transferred to a third party, to be held in trust, where the consideration for the shares is in the form of an instrument with a future value or in terms of an agreement for the provision of future services, payments or other benefits. This in effect allows for shares to be issued in trust on credit or for so-called "sweat capital" in the form of services. The shares are therefore held in trust by a third party for an agreed period or subject to specific conditions contained in the trust agreement and are transferred to the intended beneficiary as and when payment is made, value of benefits are received or services performed. 

While the shares are held in trust, the trust agreement regulates the extent and manner in which shareholders rights may be exercised and if the shares were issued against future payment or credit, dividends paid on the shares can be used to pay the debt. 

The Companies Act of Botswana also provides for similar type of financing for acquisition of shares. Regarding the consideration for shares Section 53 (2) of the Act  states: "The consideration for which a share is issued may take any form and may be cash, promissory notes, contracts for future services, real or personal property, or other securities of the company and may be issued in part for cash and in part by way of some other form of consideration."  

Section 76 (2) states: "A company may give financial assistance for the purchase of, or in connection with, the acquisition of its own shares, if the Board has previously resolved that giving the assistance is in the interests of the company; the terms and conditions on which assistance is given are fair and reasonable to the company and to shareholders not receiving that assistance; and immediately after giving the assistance, the company will satisfy the solvency test". Sub section five (5) of the Act then states that, for the purposes of this section, "financial assistance includes giving a loan or guarantee, or the provision of security".  

According to our own law and South African law, therefore, Kgosi has not committed any offence in so far as the acquisition of Choppies shares is concerned. It is not a common way of acquiring shares in a company but that does not make it illegal or wrong.  

The other thing that is not clear from this clutter is as to what class of shares Kgosi acquired. This is an important element to the puzzle because companies can issue different kinds of shares. There are ordinary shares or equity, preferential shares, and debentures. These classes of shares carry varying rights as to dividends, voting, conversion or redemption. It is easy, without being privy to that detail, to rush to conclude that Kgosi was given the shares for free. 

The test in any transaction involving acquisition or transfer of shares is that whatever happens, at the very least there should be value-maintenance, and at best there should be value-enhancement for the company. The question is, at the point when Kgosi acquired the shares, did the transaction erode value for the company? It does not look like there was an erosion of value. On the contrary, indications are that the company continued to grow. When all things are considered, therefore, there was nothing untoward regarding Kgosi's acquisition of shares in Choppies.

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