Publications
Partners
Cape Town - The Hudaco group has instituted legal proceedings against Bravura Equity Services (BES), Cadiz Asset Management and others to recover alleged secret profits of R180m with regards to the financing arrangements for Hudaco’s empowerment transaction announced in January 2015.
In a shareholder announcement on Tuesday, Hudaco Industries [JSE:HDC] alleged that there had been intentional misrepresentation and/or negligence involved in the structuring of the BEE deal.
Hudaco is a South African group specialising in the import and distribution of industrial and electronic products.
BES, which was the corporate adviser of Hudaco in the empowerment transaction, confirmed in a statement on its website that it has been served a summons by Hudaco claiming damages relating to its advisory services in respect of Hudaco’s BEE transaction finalised in 2007.
"Bravura and its directors reject the allegations made by Hudaco as inaccurate, groundless and without merit," it said, adding that it is seeking legal advice.
"Bravura and its directors intend to contest any legal action brought against them. Bravura looks forward to clear its name and reputation in court. As this is a pending legal matter, no further comment will be made," Bravura said in the statement.
The other respondents being sued by Hudaco include certain other entities within the Bravura and Cadiz groups as well as executives of the Bravura group and certain former executives of the Cadiz group.
Hudaco said its board firmly believes that the group has been wronged, "ultimately to the detriment of shareholders, and that from an ethical perspective to seek redress is the right thing to do".
The legal action is also aimed at recovering payment of R312m Hudaco made to the SA Revenue Service (Sars) in settlement of a challenge under the general anti-avoidance rule, also relating to the empowerment transaction.
Hudaco shares were traded at R104.77 at 14:25 on Wednesday, 0.38% higher than the previous close, but at the lower end of its 52-week trading range.
READ: Hudaco to settle R312m tax debt
Hudaco said it entered into a leveraged empowerment transaction in 2007 which enabled empowerment shareholders to acquire a 15% unencumbered interest in the main operating subsidiary, Hudaco Trading. The listed company Hudaco Industries retained the remaining 85% interest.
"A key objective of the empowerment transaction was to introduce the empowerment shareholders in such a way so as to avoid the need for them to have to borrow money on onerous terms wherein their ability to repay such debt would have been dependent on the receipt of dividends from Hudaco Trading or the increase in the value of their shares in Hudaco Trading," the group said in a statement.
Tax scrutiny
"The structure of the empowerment transaction meant that the empowerment shareholding was sustainable and was not dependent on the economy tracking upwards or a constant dividend flow to settle the purchase price."
Hudaco Trading funded the purchase price through the issue of a R2.2bn subordinated debenture held by a company within the Morgan Stanley group. The proceeds of the sale were placed in a ring-fenced subsidiary, Barbara Road Investments (BRI) and invested in preference shares in a company within the Cadiz Financial Services group.
As corporate adviser of Hudaco to the transaction, BES inter alia arranged the participation by Morgan Stanley and facilitated the preference share investment that was made by BRI with the Cadiz group.
According to Hudaco its management at the time "sought extensive expert advice as to whether these transactions would stand up to tax scrutiny". They were advised that it would do so.
"To the great surprise of Hudaco, Sars informed it in November 2012 that, after extensive investigations both locally and internationally, it had uncovered a highly elaborate web of arrangements that were established at the time by various Bravura-related entities, individuals related to BES and its associates," Hudaco claims.
According to Hudaco, the Sars investigation found that funds effectively "flowed in a circular fashion" and that no real external funding was introduced by any third party, something that Hudaco claims it was not aware of at the time.
"Pursuant to the role played by the Bravura transactors, interest was effectively converted into preference dividends, apparently without significant tax being paid in any country. Had the transaction run over its intended ten-year life, the difference between the amounts that were received by these entities and the amounts they would have paid would have been approximately R300m," Hudaco said.
Over the period that the so-called "circular structure" was in place, Hudaco paid out about R180m more than it received back and wants that money to be accounted for.
After receiving revised assessments by Sars, Hudaco claims it took steps that resulted in the termination of the financing arrangements in February 2013. By the end of May 2014 the contingent liability for the worst case scenario, including penalties and interest up to that date, was disclosed at R1.4bn, according to Hudaco.
The Hudaco board recognised that, as a result of the role of the Bravura Transactors, which included the use of special purpose vehicles with no apparent commercial role but to effectively convert interest into exempt preference dividends and to provide cross security, there were significant risks associated with the transaction that were not apparent at the time the transaction was entered into in 2007.
After constructive discussions with Sars, a compromise was reached whereby the parties agreed that Hudaco would pay in full and final settlement, an amount of R312m in respect of the tax challenge to the financing arrangements for the empowerment transaction, up to and including the termination of these financing arrangements in 2013.
Hudaco Trading’s BEE shareholders were not affected by this settlement and its credentials remained in place, theb group said.
ALSO READ: Consortium to set up SA's 2nd stock exchange
