Who’s the boss of FlySafair?

FlySafair, South Africa’s dominant budget airline and subsidiary of Irish company ASL, may have been the architects of its own noncompliance to local ownership and control laws.

The airline was already sanctioned by the Domestic Licensing Council after it found that the airline was 74.86% controlled by its foreign parent. The company was given 12 months to sort it out.

It was also found noncompliant in terms of ownership laws by the International Air Services Licensing Council (IASCL), which is yet to rule on the matter. Mauritius, Zimbabwean, Zanzibar and other international flights are also at risk of suspension or cancellation by the council.

FlySafair noncompliant in terms of ownership laws

An investigation by The Citizen has shown FlySafair may be directly and indirectly controlled, potentially 100%, by Irishbased parent company ASL using clever legal manoeuvring to skirt the rules.

Based on a transcript of an IASLC hearing on 16 May last year, the primary cause of the airline’s noncompliance is a transaction involving the Safair Investment Trust.

This entity originally held shares of 25% for the benefit of FlySafair’s South African employees and management. It also ensured legal compliance vis-à-vis ownership and control laws.

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That changed when two trust beneficiaries, chief executive Elmar Conradie and chief financial officer Pieter Richards, sold their interests in the trust to the Irish entity. This effectively altered the airline’s compliance status, while netting an alleged payout north of R90 million between them.

By selling the beneficiary interests to the Irish, it changed the nature of the trust and, consequently, FlySafair’s compliance to legal requirements.

This, said opposing counsel to the transgressor in the hearing at the time, raised concerns about whether Conradie and Richards breached their fiduciary duties by prioritising financial gain over the intent of the trust, which was to maintain local ownership control and keeping the airline legitimately South African.

Change had real-world implication for control of airline

At the time, the IASLC hearing also made it clear that this change in beneficial interest had real-world implications for control of FlySafair, despite arguments that voting rights remained technically unchanged.

“They have never told you why they sold the shares trust to an Irish company,” counsel acting for Lift/Global Airways, said at the time, describing the transaction as “the proverbial elephant in the room.”

South African law require a majority measure of local control. Locally, foreign companies are limited to 25% control.

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Notwithstanding Fly Safair’s repetitive arguments that despite the trust sale, voting rights remained unchanged and that the ownership shift due to trust beneficiary status was merely procedural, IASLC members challenged this logic in the hearing.

“So, you mean the voting rights have not changed, regardless of you saying that [previously] the beneficiaries (ASL) would instruct the trustees on how to vote?” FlySafair at the time replied in the affirmative.

South African trust law requires trustees to always act in the best interests of the benefciaries of a trust. After the sale, with Conradie and Richards still acting as trustees, they would have had to bear this in mind.

Closer look at ownership and control structure further complicates matter

A closer look at the ownership and control structure of Safair Operations, the entity that runs FlySafair, further complicates the matter. The Safair Investment Trust owns 49.86%, while B4i Safair, an empowerment vehicle, holds 25.14%, and Irish parent ASL directly owns 25%.

Until now, it was thought ASL effectively controlled only 74.86% of FlySafair. However, the reality of control shifts dramatically when factoring in ASL’s matured and discounted call option on B4i Safair’s shares, as noted in ASL’s financials.

By exercising the call option, ASL can take control of B4i Safair’s 25.14% stake, adding to the equity it already acquired indirectly through the trust’s sale and its direct shareholding.

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The mere existence of a discounted call option could give Irish parent ASL de facto absolute control over FlySafair. This, irrespective of structures within the business and well before any call option on equity it is exercised.

B4i Safair shareholders, aware ASL can acquire their shares at any time for less, may vote in alignment with ASL’s interests, effectively extending its influence and skirting the full extent of the law.

Safair did not dispute the substance of the disclosures

Safair did not dispute the substance of the disclosures at the hearing when put to the company by The Citizen. It only suggested they should have remained secret.

Spokesperson Kirby Gordon raised concerns that details revealed during the hearing were protected under a non-disclosure agreement, particularly information disclosed about the sale of Conradie and Richard’s beneficiary interest in the trust for R90 million plus.

Gordon said FlySafair has always acted in good faith, guided by legal counsel and established precedent.

“We remain confident that the company’s structure and actions have consistently adhered to … the relevant legislation. While the councils have found us non-compliant, it is important to note that these findings are not yet established fact, and the relevant parties reserve the right to challenge these findings through the courts.”

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