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ECSPONENT CASE: ESW IMMUNITY UNLAWFUL – LIKHWANE FUND

13/09/2023 15:48:00 Kwanele Dlamini

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MBABANE – The preferential ESW Investment Group Limited shareholders’ resolutions, including that the company would not be taken to court while rebuilding its financial position, were allegedly unlawfully adopted.

This is according to the Chief Executive Officer (CEO) of Likhwane Beneficiary Fund, Peter Shongwe. In Likhwane’s application to authorise substituted service upon the about 1 140 holders of preferential shares in ESW by publication in both the Times of Eswatini and Eswatini Observer, Shongwe said ESW/Ecsponent would purport to rely on the resolutions to prohibit them from approaching the court. Likhwane opted to serve the shareholders in this manner because they do not have their residential addresses. If the order is granted, Likhwane will proceed to institute court proceedings to recover its over E63 million investment in ESW. Shongwe stated that Likhwane’s attorney, Mlungisi Khumalo of Khumalo Attorneys, enquired from ESW legal counsel, Sandile Mthethwa, and established that there were 1 140 investors and they were all residents of Eswatini. Khumalo filed a confirmatory affidavit.

Restructuring

Shongwe told the court that in February 2023, in a written response to a demand to ESW from Likhwane to return a significant portion of its investment, ESW purported to inform Likhwane that during certain investor meetings, held in August 2021 and June 2022, decisions were taken with regard to ‘restructuring of the initial investment classes, reduction in interest paid on dividends, as well as the suspension of dividends from December 31, 2021’. He alleged that no resolutions underpinning these purported decisions were provided to Likhwane. According to Shongwe, ESW also informed Likhwane that it (Likhwane) was not entitled to approach the court for the relief it was seeking. “It says so on the basis that certain shareholders’ resolutions were adopted by the preferential shareholders of ESW, at various general meetings, including a resolution barring shareholders from litigating against ESW, while it attempts to rebuild its financial position,” Shongwe submitted. The veracity of these allegations is still to be tested in court.

The special resolutions, according to ESW, were adopted during meetings of June 17 and 18, 2022. The terms of the adoption of the resolutions included that ‘the Linked Loan Unit Holders hereby adopt a moratorium on all legal proceedings against the company (ESW), to allow the full implementation of the business rescue strategy, i.e. Project White Knight’.
Shongwe alleged that Likhwane was neither given notice of this resolution, nor of the forementioned ones dealing with the purported restructuring of investment classes, reductions in and suspensions of dividends.

Resolutions

“Equally, Likhwane has had no sight of the minutes of these alleged meetings. At this stage, we cannot say whether the process followed in those meetings was appropriate and lawful. In any event, the purported special resolutions are unlawful and ineffective,” Shongwe added. He informed the court that ESW held its annual general meeting (AGM) on March 24, 2023 and he noted that no circular explaining the proposed resolutions was sent before the AGM. He said only an agenda was circulated before the meeting. The resolutions that were sought, according to Shongwe, were never explained, and minutes of the AGM have not been made available to Likhwane. Shongwe told the court that ESW, in a letter to Likhwane dated May 11, 2023, communicated that a series of additional special resolutions were adopted at that AGM. They included that the Lihhoko shareholding allocation as proposed by the investor relations committee be approved specifically as it relates to MHMK Limited (20 per cent) and Ndumiso Mamba (8.5 per cent).

It was also resolved that ESW shall not sell its 49 per cent shareholding in GetBucks (Pty) Limited, and this position shall remain in place until ESW and the Linked Loan Holders decided otherwise. It was further resolved that there shall be no distinction between the pre and post March 2020 Linked Loan Holders and that all investors would be treated equally. The fourth resolution was that the chairperson and the CEO of ESW, and any two members of the investor relations committee, be authorised to sign any documents necessary to give effect to the above resolutions.

Obligation

These resolutions, according to Shongwe, purported to alter the status and preferences of prevailing classes of shareholders. Shongwe said Likhwane anticipated that ESW would rely on the resolutions to contend that its contractual obligation to return Likhwane’s investment had somehow been negated. “However, like the earlier special resolutions, these are unlawful, invalid and ineffective. In respect of the resolutions purportedly adopted on June 17 and 18, 2022, and on March 24, 2023, the following is critical. Those resolutions were preceded by, and dependant on, a process in August 2021, through which ESW sought to change the structure of ‘Linked Loan Unit’ shareholders. The process took the form of a circular, followed by a ‘Prospectus Amendment’.

“That process was fatally flawed, for want of the quorum requirements for a special resolution, and for want of the timeous registration of the special resolution in accordance with the prescripts of Section 177(1) and (4) of the Companies Act. In addition, the special resolutions purportedly effecting the amendment of the investor classes have not been approved by ESW’s own auditors,” Shongwe submitted. Shongwe informed the court that the purported amendments to the rights and dividends of investors, by virtue of resolutions in June 2022 and March 2023, and the purported ousting of the right to seek redress through the courts, were the product of special resolutions by the class of investors created by the allegedly unlawful and invalid August 2021 resolutions.

“In addition, and in relation to the purported moratorium on legal proceedings, the company cannot purport, whether by special resolution or otherwise, to oust the right of any creditor to approach a court for relief. In the main application then, Likhwane will resist any attempt to argue that it is prohibited, by virtue of a special resolution, from approaching the court for the implementation of the contractual rights that relate to its investments,” the CEO submitted. He said since the status of certain shareholder resolutions was relevant to the main application, and indeed impugned in that application, it was necessary to give the preferential shareholders of ESW notice of this application. He said it was for that reason that Likhwane approached the court for an endorsement of its proposed mechanism of substituted service. The matter is pending in court.