First published in the Daily Maverick 168 weekly newspaper.

Magae Makhaya Housing (MMH) is a property development company that specialises in affordable housing. Its mandate is to increase property ownership by developing lower-cost units for Government Employees’ Pension Fund (GEPF) beneficiaries. The fund owns 25% of the company’s shares, followed by black-owned consortiums Sekepe Investments with 55%, Alchemy with 10% and Marobalo with 10%.

It forms part of the Public Investment Corporation’s (PIC’s) social infrastructure programme, providing funding to address the supply-side constraints to affordable housing delivery. The investment is envisaged to enable a steady supply of affordable housing units in various urban areas across the country.

It is also part of the PIC’s unlisted portfolio called Isibaya, which is about 5.34% of total assets under management (and includes unlisted property of 2.61%), according to the asset manager’s latest financial results.

Of its Isibaya portfolio, 33.5% of the businesses supported by this PIC cluster were declared to be in distress as of June 2020. This was according to a media briefing presentation at the beginning of November. Almost 8% of the small businesses were shown as underperforming, and almost 13% were on the PIC’s watch list.

The PIC has taken legal action against some of these laggards but has also faced some blowback from the bench in this regard. MMH is one of those. Other cases that fall within this stable and with which the asset manager faces continuous court action include 45 Million Fees, Daybreak and Afgri.

A judgment was handed down electronically by the Supreme Court of Appeal on 23 December 2020 against the GEPF and MMH in favour of the other shareholders.  

On 3 November, an appeal against a finding in the Gauteng Division of the High Court in Pretoria was upheld relating to the rights of all shareholders in the advancement of loans to fund the mutually held operation. The application to appeal was successful with costs, and the order of the High Court was set aside. The judgment stated that the GEPF, represented by its investment arm, the PIC, will provide the funding to MMH, only insofar as may be agreed by all the shareholders, in proportion to the shareholders’ holdings and in a timeous fashion. This did not happen and both parties have cited their grievances and reasons on both sides in litigation going as far back as 2017.

It all comes down to the separate loan agreements the GEPF made with its fellow appellants, where it agreed, subject to conditions, to lend considerable sums of money to the housing outfit, to enable it to meet the calls made by MMH to its shareholders for funding.

The loan commitments made by the GEPF under the loan agreements amounted to R500-million, inclusive of the amount it would itself be advancing to MMH by way of a shareholder loan.

However, according to court papers the GEPF did not make the loans available to the appellants to honour their side of the deal, after which the appellants launched an application in the High Court to seek relief, firstly to pay the shareholder loans to MMH under the shareholder agreement and utilisation notices.

In its answering affidavit, the GEPF defended its case, contending that if its failure to advance the sums sought was a wrong done to MMH, then the application should have been brought by MMH, not fellow shareholders. “And, if that was not possible because the GEPF would not consent to MMH doing so, then the appellants, as shareholders, were required to bring proceedings under s 165(2) of the Companies Act to protect the legal integrity of the claim.”

The GEPF also contended that the conditions of one of the loan agreement clauses had not been satisfied, as the fund was not furnished with the required documents as stipulated, and the GEPF stated it had no obligation to advance the loans. This included financial statements and quarterly environmental, social and governance reports.

The High Court initially dismissed the application by Sekepe and Co, where it found defences advanced by the GEPF were sound, safe and found unnecessary to resolution. But the latest ruling reversed that position.

The agreements between the GEPF and the appellants are unusual. The appellants appear to be nominal shareholders in MMH. The loans are advanced by the GEPF to the appellants solely for the purpose of the appellants advancing the same amount as loans to MMH under the shareholders’ agreement. Why the GEPF should wish to use the appellants as a conduit through which to fund the MMH indirectly, in addition to doing so directly, was not explained.

As you may be aware, the GEPF cancelled the various loan facilities with Marobalo, Sekepe and Alchemy pursuant to the breaches committed and the GEPF proceeded to exercise its securities including but not limited to taking over the shares held by Marobalo, Sekepe and Alchemy in MMH. Any other attempt to hold any shareholder meeting other than in accordance with the provisions of clause 27 of the MMH MOI would be unlawful. We put it on record that the PIC … will not participate in any unlawful and illegitimate meetings which do not comply with the provisions of the constitutional documents of MMH.

But none of the parties contended that the shareholding of the appellants, nor the shareholders’ agreement or the loan agreements, were sham transactions. It therefore proceeded on the basis that these agreements were valid.

“None of this derogates from the fact that the appellants asserted their rights to have the GEPF make the advances to them. Nor should it be forgotten that the assertion of these rights and securing the advances burdens the appellants under the loan agreements with the respective obligations to pay interest and repay the advances as indebtedness owing to the GEPF, albeit on terms that few commercial lenders would accept,” the ruling says.

That is, that the appellants would pay interest and capital when and if they received dividends from MMH. However, once the appellants seek the specific performance of the obligations owed to them under the loan agreements, they plainly have standing to do so. That the proceeds of the advances will accrue to MMH does not alter the standing of the appellants to enforce their rights.

The relief sought by the appellants in the notice of motion, which seeks to direct the GEPF to make payments to MMH in terms of the shareholders’ agreement, stands on a somewhat different footing. The parties to the shareholders’ agreement are the shareholders and MMH. The shareholders agree to fund MMH by way of shareholder loans in proportion to their shareholding. True enough, MMH must request this funding. But if the shareholders agree to this request, then the shareholders become obliged to fund MMH by way of shareholder loans, proportionate to their shareholding, and to do so simultaneously. And that is where the GEPF was found wanting.

PIC spokesperson Adrian Lackay had not responded to DM186 queries at the time of writing. In the meantime, in a letter dated 11 January 2021, Abel Sithole, acting chief investment officer of the PIC, declined the requests of appealing parties for a shareholder meeting to finalise the execution of the stipulations of the judgment, stating that the shareholders’ meeting for MMH could only be called in terms of the provisions of clause 27 of the memorandum of incorporation (MOI) of MMH, which means only the GEPF and PIC directors of MMH were able to do so. A list of the directors was attached to the letter. The only director of MMH listed is an RN Qhobosheane. Former listed directors PB Madungandaba and KS Maponya, who are representatives of the other shareholders, no longer appear on the list.

The letter also states that the other shareholders are not entitled to requisition a shareholders’ meeting of MMH.

“As you may be aware, the GEPF cancelled the various loan facilities with Marobalo, Sekepe and Alchemy pursuant to the breaches committed and the GEPF proceeded to exercise its securities including but not limited to taking over the shares held by Marobalo, Sekepe and Alchemy in MMH. Any other attempt to hold any shareholder meeting other than in accordance with the provisions of clause 27 of the MMH MOI would be unlawful. We put it on record that the PIC … will not participate in any unlawful and illegitimate meetings which do not comply with the provisions of the constitutional documents of MMH.

“Sekepe Investments chairman Sekepe Maponya says that despite them offering an olive branch order to move forward … they were disappointed to receive your response and the spirit with which it was communicated. What they are doing is illegal, he says, and in contravention of the Supreme’s Court’s orders.” Sekepe responded to the letter, saying that a criminal case was opened against the PIC directly.

“We … request you to allow the Rule of Law to take its course rather than perpetuating your organisation’s criminal conducts in contravention of South African Law and also in contempt of the judgment of the Supreme Court of Appeal … and implore you to respect and comply with the Rule of Law and to end the era of impunity by the PIC.

“The lawfully appointed directors of MMH representing 75% shareholders of MMH who are the lawful shareholders of MMH … shall continue with the shareholders’ meeting on the 18th of January 2021 in terms of Law, as scheduled.” DM168

This story first appeared in our weekly Daily Maverick 168 newspaper which is available for free to Pick n Pay Smart Shoppers at these Pick n Pay stores.