Craig Butters is something of a legend in investment circles, given that he warned that Steinhoff emperor Markus Jooste had no clothes as far back as 2009.
Now he has staked his reputation (and a lot of money) on trying to show that the Department of Trade, Industry and Competition’s Takeover Regulation Panel (TRP) failed to properly investigate or appropriately sanction the takeover infractions allegedly committed by a group of parties clustered around the brokerage and investment firm Peresec and its powerful boss Warren Chapman.
In Part One of this series, we analysed the mechanics of a takeover spree by a group of investors tied to Peresec, the JSE’s largest broker, between 2018 and 2020. The JSE is Africa’s largest stock exchange based in Johannesburg.
We sketched out the context of allegations that expensive but legally mandatory offers to buy out minority shareholders were ignored – as well as the stout denials by Chapman that his cohort had acted in concert or deliberately flouted takeover rules.
Now we consider the meat of the case Butters has brought against the TRP, his dogged fight against the barriers put in his way – and the potential implications of the evidence and the case for the regulator, but also for Peresec and the JSE – whichever way it ultimately goes.
Background to the Butters case
The key concept is that of “concert parties” – instances where a group of cooperating investors buy a collective 35% or more of a company. If their cooperation was declared they’d have to make an offer to all other shareholders and potentially incur a massive cost running into hundreds of millions of rands.
The allegation is that the group around Peresec avoided this and seized control of billions of rands of assets on the cheap by coordinating secretly and not making these offers.
This is precisely the kind of behaviour the TRP is meant to tackle and, after a number of complaints from jilted minority shareholders, it did in fact launch an investigation into Chapman and his group which resulted in a settlement announced in April 2023.
To reiterate from our first story, the group that got investigated, led by Chapman, still denies the allegations of collusion.
Chapman maintains that he and his associates can only have been considered “concert parties” in the TRP’s opinion by using technical “deeming” provisions in the Companies Act that in certain circumstances place the onus on parties to ‘prove their innocence’.
Chapman’s argument remains that just because parties are related doesn’t necessarily mean they are acting in concert. (Read his full commentary in response to the publication of part one here.)
He insists they simply signed a settlement with the TRP to put the matter to rest and, in fact, the TRP allowed them explicitly to avoid admitting any wrongdoing.
The problem, according to Butters, is this: the settlement was not struck in any manner legally mandated by a lawful regulatory process – and in any case was way too lenient.
The case, set to proceed in the Western Cape High Court, has come to turn on a relatively technical point: is the TRP legally empowered to cut a deal the way it did with parties it assesses have broken the rules in the first place?
There is a lot at stake for Butters, given that he was an investor in two of the companies that had been subject to takeovers by Chapman’s group and that, as he has declared in his court papers, he has funded this drawn-out legal battle out of his own pocket.
But there is also a lot at stake for Peresec if Butters succeeds in enforcing his demand for a more robust, conclusive investigation and for any sanction to hurt enough to be a real disincentive.
Just how much is at stake for Peresec is perhaps exemplified by the arduous legal skirmishes Butters has had to fight to get this far.
(To give the latest example, Butters was recently forced to restart the main application when the court upheld Chapman’s preliminary objection that not all the companies that were investigated by the TRP were joined as parties to the review proceedings.)
So, it begins
Matters kicked off on 19 August 2022 when the TRP published a notice on the JSE’s Stock Exchange News Service (SENS) that it was launching an investigation concerning some of the transactions we detailed in Part One.
The SENS announcement invited interested parties to make submissions and Butters did so.
He submitted a comprehensive analysis on 1 September 2022 to assist the TRP’s investigation. He followed this up with additional submissions on 10 January 2023 and 30 March 2023 as more information became available to him.
However, on 13 April 2023 the TRP published a new SENS announcement in which it reported that the Panel and “the Investigated Parties”, “without admission of any contravention of the Companies Act… or the Takeover provisions” had “agreed to settle this matter”.
The announcement concluded that the TRP believed the settlement achieved “a careful balance between the interests of various market participants” and therefore the Panel had “closed its Investigation and issued its compliance notice to the Investigated Parties”.
When Butters began asking questions, things got murky.
When the TRP provided him with a copy of the inspector’s formal report, he discovered it was dated 25 May 2023 – long after the settlement.
On top of that, it revealed that the actual agreement was concluded on a confidential basis and therefore its detailed terms were not disclosed.
Butters wrote to the TRP with a list of questions regarding the report, including why the settlement agreement should be kept confidential, but was told that he must approach the Takeover Special Committee (TSC), which is empowered to review compliance notices.
A street-by-street assault on a citadel of secrets
Butters then entered a Kafkaesque hall-of-mirrors, which marked the start of his efforts to obtain the full record of the TRP process.
The TSC ordered the disclosure of the full record to Butters.
The affected companies (represented in the current case by Chapman) had objected – but were overruled. In response they launched an urgent interdict to set aside the TSC’s disclosure ruling.
Then came a twist.
Butters was forced to withdraw his TSC review after the regulator’s Executive Director delivered an affidavit swearing that – notwithstanding what was stated in the SENS announcement – he had never issued a compliance notice, but had instead “made a ruling” when he concluded the settlement agreement.
This meant that the TSC had no jurisdiction to deal with a review of a compliance notice, because there was supposedly none.
As a result, Butters launched the present case to ask the Cape High court to set aside the settlement and to order the Deputy Executive Director to “continue his investigation to finality” and prepare a proper report, whereafter the TRP be required “to consider the report and to take lawful action as is appropriate in the circumstances”.
But to buttress his arguments questioning the probity of the process, Butters still needed access to the record of the TRP’s entire decision – to which he was entitled under court rules.
The resistance to this disclosure continued.
First the Panel provided Butters with only “non-confidential” documents comprising 285 pages (out of some 9000 pages of the record) and refused to provide him with the full record without the consent of the Chapman parties.
Butters was forced to launch an application to compel disclosure. According to his papers the Chapman parties subsequently agreed to the disclosure of “the confidential aspects of the record”.
The TRP then provided Butters with a record consisting of 7556 pages but which still did not include the confidential records – and it was evident that other documents were missing.
The TRP attorneys provided a further 1481 pages finally including the “confidential aspects of the record”, consisting of 235 pages.
However, certain documents were still missing and the Chapman parties insisted that these last missing documents would not be provided.
It may or may not be significant that these were the share registers of two of the affected companies (African Phoenix and enX) during key periods and correspondence regarding irrevocable undertakings to support certain board changes.
(As we’ll see, even the TRP was rebuffed by Chapman’s lawyers when it tried to obtain some of the same information during its own investigation.)
Nevertheless, Butters decided to go ahead with what he had, rather than fight for the last scraps of disclosure.
Chapman has lashed out at the fact that so much of the record of the TRP investigation, including documents he says were provided on a confidential basis, has now made it into the court record.
He calls the whole affair part of an orchestrated campaign aimed at forcing some kind of extortionate deal out of him.
Butters counters that this is simply a diversionary personal attack on him and all he wants is for the TRP to do its job lawfully and properly.
What was investigated
The TRP probe mostly targeted events after the alleged secretly coordinated takeovers amaBhungane previously wrote about.
What it investigated was:
1. An April 2020 repurchase of shares by African Phoenix Investments after its allegedly secret takeover.
This happened long after the Chapman group allegedly ganged up to take control of African Phoenix the previous year.
The important part is that a mandatory offer at the earlier time would have given all other investors 80c per share. When they were later given the opportunity to get bought out they were offered 40c.
Chapman told us that the proper context is that the lowish offer came in the middle of the Covid-19 pandemic and many shareholders accepted it.
In response to our first story he told us, “Whatever view one takes of the price, an offer that nearly a quarter of the entire register accepted, funded in cash at the worst moment of the pandemic, is a material fact in a story about whether minorities were ever offered an exit.”
2. A general offer made in September 2020 to buy out all the other shareholders in Zarclear, another one of the companies taken over.
The price was judged to be low by independent experts roped in to carry out a valuation in accordance with JSE rules.
But Chapman again points out that almost all the other shareholders scrambled to take up this offer – likely another effect of the market conditions brought about by the Covid-19 pandemic.
3. Again, at Zarclear, a scheme of arrangement in August 2021 whereby the company repurchased shares, effectively using its own resources to buy out minority shareholders.
4. Another transaction in April 2022 where the Chapman group belatedly did make a mandatory offer to shareholders of enX
5. And another scheme of arrangement involving both African Phoenix and Zarclear in April 2022.
The common denominator is that, assuming mandatory offers were indeed due, they were missing or belated, while minority shareholders got bought out later for less money than they might have been entitled to.
In Butters’s court account, Chapman’s rationalisations do not address the main issue: “Individuals who systematically engaged in unlawful schemes to gain control of four targeted companies have suffered no consequences.
“With regards to the four mandatory offers that the [TRP] found ought to have been made between January and May 2020 … control was gained at extremely favourable prices and without a mandatory offer being extended…
“This afforded the new directors to operate and control these companies predominantly for their own benefit and to reap significant commercial advantages … in each of the four targeted companies.”
The point was not just the prejudice to minority shareholders; it was the allegation that team Chapman was effectively able to hijack the companies and their balance sheets for its own purposes and benefit. And that this alleged material misconduct was not punished in any significant way via the contested settlement – a debate we’ll get to.
The TRP: From combat to capitulation
Somewhere during the TRP investigation there was a palpable shift in attitudes.
The probe was announced in August 2022 after which the TRP started its information gathering process, among other things demanding extensive documents from the Chapman group.
Pretty early on, the regulator seems to have taken the view that the group was being uncooperative.
The communications between the investigated parties’ lawyers and the TRP’s lead investigator on the case, deputy executive director Zano Nduli, were often terse or outright combative.
From September 2022 to January 2023 Ndluli pressed the Chapman group for information to establish whether there was “concert party” collusion.
This comprised complete share registers and trade records, the correspondence soliciting irrevocable undertakings to replace the boards of the target companies (which would give the Chapman group board control) and the investment mandate of Sui Generis, a Peresec fund used in the impugned takeovers.
By the beginning of November 2022 Nduli started complaining that the Chapman group was dragging their heels – complaints that were repeated several times until he finally, in January 2023 signed off an email with “Consider this my final warning”.
On 1 February 2023 he recorded that material remained outstanding.
The TRP’s suspicion about the Chapman group’s bona fides is dramatically demonstrated by scribbles a TRP investigator made in the margins of an affidavit provided by one Peresec executive.
The unknown investigator drew what looks like an incredulous emoji with the word “lie!” below it.
Fast forward to April 2023 when Nduli sent an email to his boss, TRP executive director Andile Nikani, declaring “We have a settlement! Please give me the go-ahead to approve”.
The settlement was duly published the very same day.
In stark contrast to the exchanges cited above, the settlement announcement lauded the “cooperative manner in which the Investigated Parties conducted themselves, which ultimately resulted in an amicable resolution”.
The investigative record documents this about-face – but does not explain it.
The back-track
Butters’s court papers set out the timeline.
On 22 February 2023 a meeting “to understand the TRP’s views/preliminary conclusions… and to discuss possible ways forward” took place. No minute of it exists.
On the eve of the meeting, a member of the TRP’s staff sent Ndluli a summary of the investigation correspondence with the documents still not received “noted and highlighted in yellow”.
A mere four days later, Ndluli circulated a draft settlement announcement internally, and on 27 February 2023 sent it to the Chapman group attorneys, despite the fact, Butters avers, that none of the outstanding information had been provided (nor ever was).
On 4 April 2023, nine days before the settlement was announced, the TRP sent Butters an email stating that the investigation was ongoing.
But in truth, it seems, the capitulation was the thing in motion.
The investigation record shows how the TRP team, even after already acceding to a negotiated settlement, repeatedly backtracked on key punitive clauses before arriving at the watered-down version that was ultimately publicised.
Nduli’s draft settlement announcement was strongly worded, at least compared with what was to follow.
An assertion that the group of alleged corporate raiders “will joint and severally, admit to having acquired control… by acquiring shares above the prescribed percentage (35%)” got cut in the final version.
As things turned out, Chapman & co did not admit any such thing – and still don’t.
They got the TRP to parrot this position in the final version which read that the whole settlement was based on “the Panel’s interpretation” of the law – and made no admission of any contravention of any law.
Ndluli’s draft announcement had cited “the fact” that those involved “proceeded to pursue various other affected transactions which had the effect of concealing the fact that mandatory offers had been triggered and were outstanding”.
That got cut too.
The original also expressly mentioned the “individuals associated with the Impugned Parties, whether as directors or otherwise” and insists that they should “bring to the attention of the Panel any other regulated companies not covered by the Investigation to which the conduct complained off in the matters under investigation may be said to find equal application”.
That statement also disappeared.
In another email to the Chapman group’s lawyers, Nduli drew another line in the sand that was unceremoniously erased.
The draft agreement included a threat to apply to have individuals declared delinquent directors if they committed any new contraventions within 36 months.
Ndluli noted the Chapman lawyers had deleted this from the draft that had been shared with the lawyers.
“That is not negotiable, unfortunately. Your clients must undertake not to do any of the conduct contemplated there for 36 months as a deterrence. This was clear from the outset, we are not dropping that now.”
However, that was in fact dropped – and the final announcement makes no mention at all about acting against individuals.
Butters also records that the Chapman parties prevailed on the TRP to depart from the highest-price takeover rule for the enX takeover agreeing to R6.41 per share, against the benchmark R11.7694 paid by Sui Generis, a party the Panel itself regarded as a concert party.
Butters calculated this discount reduced the mandatory offer due by the offerors to minority shareholders by R499 413 548.00.
Punishment?
The record of the investigation and settlement now disclosed seems to show the TRP repeatedly backpedalling and watering down the sanction it threatened to impose on the Chapman group.
The ‘punishment’ agreed in the end was a set of belated mandatory offers to the remaining minorities (and in fact most had already moved out of the companies at issue and therefore were not eligible).
As we pointed out in Part One there had been massive capital reductions after the takeovers involving the payout of hundreds of millions of rands – to a large extent to the “raiders” themselves.
The TRP tried to suggest in its announcement that the agreed sanction “sent an important message to the market that no one (even the most prominent market participants) is above the rules, and if you get caught, you will be punished”.
Butters scoffs at this in his papers, calling it “patently incorrect” and excoriating the TRP’s remedial action of requiring ex post facto mandatory offers “at such levels” as “tying a ribbon around their unlawful scheme”.
At the time the TRP trumpeted the alleged value of the settlement as “an estimated aggregate value of R680,534,155.26” that the companies involved in the takeovers would supposedly have to shell out in belated mandatory offers.
But Butters argues the actual terms were so unfavourable that almost no minority shareholders took them up: “Predictably, acceptances by the minority shareholder were paltry… And for all the headline aggregate of R680 534 155.26, the near-total rejection of the offers meant that only some R5.06 million was in fact paid to minority shareholders.”
He argues that, effectively, there was no punishment at all: “Instead of ensuring the integrity of the marketplace and fairness to minority shareholders, the Panel astonishingly proceeded to facilitate Mr Chapman’s control of each of these companies.”
The TRP response
It is perhaps instructive that the TRP’s defence is almost entirely technical: Butters lacks standing; he brought the review in the wrong forum; the Promotion of Administrative Justice Act (PAJA), which Butters relies on, does not apply – etc etc.
The TRP’s core argument is essentially that even though the law does not expressly allow it to make settlement deals it also does not prohibit it.
Instead, according to Nduli (who deposed to the TRP’s affidavit), the Companies Act gives the TRP “wide discretion” to deal with matters using an “implied statutory power” to, among other things, conclude settlements.
Other defences include an insistence that the courts should not intrude “into a specialist regulator’s polycentric, resource-constrained decision-making” and the court should rather pay deference to “expert administrative bodies”.
Trust us, in other words.
“[Butters’s] complaint, at bottom,” the TRP argues, “is that he would have preferred a different investigative and enforcement path, or a more punitive one. That, we submit, is precisely the species of complaint the rationality standard is designed to exclude from judicial second-guessing.”
The Chapman response
Chapman’s argument is typically more muscular, dwelling as it does on allegations that Butters has an ulterior motive.
“This application does not arise in a vacuum. It forms part of a sustained campaign, spanning some four years, by [Butters] and his associates… comprising at least fifteen complaints and review proceedings arising from the same underlying events and a barrage of correspondence to the company respondents, their stakeholders, and regulators including the JSE, the Panel, the CIPC and IRBA [the Independent Regulatory Board for Auditors], with information generated in one proceeding routinely recycled in the next.”
Chapman traverses the point that the TRP must implicitly have the power to conclude a settlement – and, on top of that, argues that once it has made a ruling it cannot legally revisit that decision – as Butters is demanding.
Trenchantly, he argues that Butter’s “real complaint is about the outcome, not the process – an impermissible appeal dressed up as a review”.
“And even if [Butters] could establish a reviewable irregularity – which he cannot – no consequential relief should follow… The mandatory offers have been made, accepted, and paid; share registers have been amended accordingly. As [Butters] himself acknowledges, the egg cannot be unscrambled.”
Butters, Chapman argues, “wants individuals named and shamed, and the investigation reopened in pursuit of a harsher result. That is not what review under PAJA exists to deliver”.
That is clearly the view of Peresec and the TRP – it remains to be seen whether or not, on all the facts, the trial judge assesses the interests of justice cut a little deeper.
