How the state capture project washed up on Capitec’s door

It was a bad day in court for Capitec on Tuesday after Judge Bashier Vally found the bank in breach of contractual and common law when it sought to block its BEE shareholder, Coral Lagoon Investments, from selling its shares to settle a R500 million claim from the Transnet Second Defined Benefit Fund (TSDBF).

Coral Lagoon is ultimately owned by Regiments Capital.

Some of these names will be familiar to followers of state capture.

Coral Lagoon and the Transnet pension fund found themselves on the same side in the case against Capitec, but for entirely different reasons.

The Transnet pension fund says it was a victim of state capture where Regiments “fleeced various arms of the state, state-owned enterprises and pension funds of employees employed by state-owned enterprises”.

Rather than fight the matter, Regiments and its shareholders decided to settle with the Transnet pension fund for R500 million, discounted from the original claim amount of R825 million.

‘Largest single recovery of state captured funds’

But for this deal to go smoothly, Capitec would have to be on board. Email correspondence between the bank and the pension fund and its attorneys suggested this settlement agreement was “of substantial national importance and prominence” as it was the “largest single recovery of state captured funds”.

In some of the correspondence before the court, it seemed Capitec was initially amenable to the settlement, but quickly changed its tone, informing the BEE shareholders that they were prohibited from disposing of their shares in terms of a BEE share subscription agreement of 2006. The purpose of this restriction was to maintain Capitec’s BEE shareholding.

Capitec had invoked a share subscription agreement from 2006 to block the sale of the shares. This agreement required that the shares could only be sold to another qualifying BEE shareholder so as not to dilute its BEE shareholding. Coral Lagoon had earlier sold some of its shares in Capitec in settlement of a loan to the Industrial Development Corporation and to pay off a tax bill with the South African Revenue Service.

Here is a choice quote from the judgment:

“By refusing to grant consent for the sale on this basis means that it [Capitec] is quite willing to retain Regiments as a shareholder, even though it recognises that Regiments has stolen more than R1 billion from indigent pensioners belonging to the TSDBF.

“The logical conclusion of its position is that the loss of 0.7% of its B-BBEE rating is so important that it would rather keep its links with a shareholder who is tainted by dishonesty than reduce the rating.”

‘Legally wrong’

Judge Vally wasn’t finished with the bank just yet. Capitec also claimed it would have to seek shareholder approval for the sale in terms of the JSE Listing Requirements.

“The TSDBF pointed out in its papers that this is simply legally wrong,” reads the judgment.

“Capitec made no effort in its answer to explain why [Capitec chair] Ms [Santie] Botha misleadingly claimed that the JSE Listing Requirements was an obstacle to it consenting to the sale.”

Botha also claimed that the sale of shares would be prejudicial to Capitec, as it would benefit certain individuals who were involved in alleged criminal activities. The Transnet pension fund replied that this was incorrect and that none of the parties guilty of unlawful conduct in the “state capture” would benefit from the sale.

There was more. There were a number of ancillary court actions along the way: one judgment required Regiments to provide security to the pension fund, and another prevented it from dissipating its assets. The alleged victims of the state capture project were circling Regiments.

Inconsistent action

The judgment does not read well for Botha or Capitec: on the one hand they were issuing threats against the BEE shareholders who wished to sell some of their shares, while at the same time saying they wished to engage with the pension fund. The purpose of these inconsistent statements was the issuance of threats, said the pension fund in its court papers.

Capitec had made a number of changes in its approach to the sale of the shares, at one point agreeing to an “open offer” where some of the shares could be sold on the open market, with the balance subject to restrictions (they could only be sold to a qualifying black person). The open offer was rejected by Coral Lagoon.

This change in stance towards its BEE shareholders undeniably demonstrated that Capitec had acted in bad faith and was in breach of its duty of good faith, said the pension fund.

Here are some more choice words from the judge: “Having changed its stance on more than one occasion, it became incumbent upon Capitec to explain why it had contended in the letters and emails referred to, and quoted from, above that Coral Lagoon was ‘prohibited’ from selling the shares. In this regard it simply said that the averments made therein ‘were incorrect’.

“But saying they ‘were incorrect’ is not an explanation: it is either a statement of fact or an opinion. An explanation would have to furnish reasons for why the contentions were made. It would also have to focus on why it was followed up with the forceful threat that litigation would ensue should the sale proceed without its consent.

“The contention and the threat were made on more than one occasion and were made by its attorney and the chairperson of its board.

“These are senior persons. Any reasonable person who received them would be entitled to accept that the contention was correct and the threat was real. After all they emanated from persons who would be expected to have the skill, knowledge and experience to present a true and correct account of the subscription agreement and who would be careful before making threats.”

Successfully dissuasive

The threats made by Capitec against the BEE shareholders were designed to intimidate, and they succeeded in dissuading other BEE shareholders, namely Rorisang and Lemoshanang.

“With regard to the common law duty of good faith, I find Capitec’s claim that no such a duty exists in our law to be incorrect. Any person changing its stance so radically and not explaining itself cannot be said to be acting in good faith. It is also not acting with due regard to its duty of candour to this court.”

Judge Vally found that Capitec’s refusal to consent to the sale of the shares was in breach of its contractual and common law duty of good faith to the BEE shareholders.

Asked to comment, Capitec Bank replied: “We are aware of the judgment and will comment after we have had a chance to study it and discuss it with our legal team. We expect to make a statement in the week.”

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