Meeg Bank Ltd v Nkonki

• Jurisdiction: South Africa
• Judge: Pickering J
• Judgment Date: 06 November 2009
• Docket Number: 1412/2008
• Court: Eastern Cape Division
• Hearing Date: 30 October 2008
• Citation: 2009 JDR 1200 (E)

Pickering J:

On 26 June 2008 an order was granted by this Court authorising the calling of a meeting in terms of s 311(1) of the Companies Act 61 of 1973 of share holders of the applicant (other than Absa Group Limited and its subsidiaries) on 31 July 2008 for the purpose of considering and, if deemed fit, approving with or without modification, a scheme of arrangement in terms of s 311 of the Companies Act proposed by Absa between the applicant and applicant's shareholders (other than Absa and its subsidiaries.)

It appears from the affidavit of the chairman of the board of directors of applicant, Professor Nkuhlu, that there had been a protracted deterioration in the business performance of applicant and that applicant found itself in a position where it needed additional capital to maintain growth and sustainability. As early as November 2005 applicant's board of directors had approved a turnaround strategy which included a process to recapitalise applicant by soliciting new investments both from its existing major shareholders as well as from new, preferably BEE investors. The desired objectives could not, however, be achieved with the result that applicant's continued sustainability came under severe threat. This situation was aggravated by the introduction of additional minimum capital adequacy requirements by the South African Reserve Bank as a result of the introduction of new so-called Basel II capital adequacy requirements. The purpose of Basel II was to create an international standard for the regulation

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of the amount of capital held by banks in order to guard against financial and operational risks. Compliance by South African banks with the Basel II capital adequacy requirements became compulsory with effect from 1 January 2008 in terms of the Banks Amendment Act, no 20 of 2007. During June 2007 Absa Group Limited ("Absa") which was the majority shareholder in applicant holding 49,7% of its issued share capital, raised certain alternatives with the National Treasury. It advised Treasury that its preferred strategy was to acquire 100% of applicant's share capital and to amalgamate applicant with Absa; alternatively (option 1) to purchase the shares of other shareholders in the applicant at a price equal to 120% of net asset value; further alternatively; (option 2) to sell its shareholding in applicant to a third party acceptable to the Registrar of Banks provided that such third party and the existing shareholders of applicant could clearly demonstrate that the transactions would promote BEE objectives.

Applicant's board of directors thereafter resolved that the second alternative was the preferred option. A mandate was given to Pan Africa Capital Holdings Limited to put together a proposal for submission to applicant's board. On 5 October 2007, however, Pan Africa advised that after a limited due diligence investigation it was not satisfied that the risks and requirements necessary to grow the applicant were commensurate with its desired returns.

During November 2007 certain proposals from, inter alia, Teba Bank (a black owned bank) were considered by applicant. Applicant's management was mandated to engage with Teba Bank without delay with a view to obtaining regulatory approval for a comprehensive plan by no later than 27 February 2008. Teba Bank indicated that it too would require to perform a due diligence investigation.

At a meeting on 10 January 2008 the Deputy Registrar of Banks advised Absa that the capital adequacy requirement as from January 2008 would be 14,5% which would result in applicant having a capital shortfall of R30 million. On 23 January 2008 the Registrar of Banks again informed applicant that the amount of R30 million would have to be injected prior to 31 January 2008.

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The Registrar stated unequivocally that it was clear that the only option was the aforementioned option 1, namely, for Absa to acquire 100% of applicant and amalgamate applicant in terms of section 54 of the Banks Act. In terms hereof Absa would buy the shares of all other shareholders at a price equal to 120% of the net asset value of the shares. Such option "should be implemented as a matter of urgency without any further delay."

On 24 January 2008 Teba Bank set out a proposed time line for the conclusion by it of a transaction with applicant, namely 21 April 2008. The implementation date of such transaction was reflected therein as being September 2008. The matter was discussed by applicant's board of directors at a meeting on 25 January 2008 at which it was resolved that given Teba Bank's time-line and the fact that applicant had to be in compliance with the Basel II capital adequacy requirements by 21 February 2008 at the latest applicant's only option was to accept Absa's offer (Option 1). Absa thereupon proposed the scheme of arrangement in terms of s 311 of the Companies Act referred to above.

The object of the scheme is to procure that upon such becoming operative Absa would acquire all the shares in the issued share capital of the applicant not already held by Absa and its subsidiaries for a consideration equivalent to the net asset value of a scheme share as at 31 March 2008 plus a premium of 20% thereon, being an amount of R35,13 payable in cash. ("the scheme consideration"). Following implementation of the scheme Absa and its subsidiaries would hold the entire issued share capital of applicant and the applicant would be a wholly-owned subsidiary of Absa.

Paragraph 6.8 of the explanatory statement in terms of s 312(1)(a)(i) of the Companies Act provides that the rights of the scheme participants to receive the scheme consideration will be rights enforceable by scheme participants against applicant only. Scheme participants will in turn be entitled to require applicant to enforce its rights in terms of the scheme against Absa. Applicant undertakes, in paragraph 6.9, in favour of the scheme participants to enforce all its rights in terms of the scheme against Absa. The order provided further

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that the chairman should report the results of the scheme meeting to this Court on 14 August 2008.

The scheme meeting, chaired by Adv. Maleka SC, was duly held on 31 July 2008. In his report the chairman stated, inter alia, that at the meeting he had received a letter from a certain Mr. D.Z. Nkonki who had raised a number of issues both verbally and in a letter. The issues raised...