Industrial products business Hudaco is throwing the book at its advisers over a highly leveraged BEE transaction that saw it having to cough up R312 million to settle a tax avoidance charge.
The company is suing Bravura Equity Services, financial services group Cadiz, certain Bravura executives and former Cadiz executives. It wants to recover R180 million it claims the parties earned in “secret” profits, as well as the R312 million tax charge that arose from the funding arrangements for the empowerment deal.
The BEE transaction, struck in 2007, was specifically structured to allow the empowerment shareholders to acquire an unencumbered 15% of the company. This meant they would not have to borrow money on onerous terms. Bravura Equity Services was the corporate adviser, while Cadiz was the investment manager.
The transaction saw Hudaco raise R2.2 billion from Morgan Stanley. This was invested in preference shares in a Cadiz subsidiary. Through an elaborate web of onshore and offshore transactions these funds found their way back to Morgan Stanley, according to the SA Revenue Service, which investigated the transaction as a result of its unnaturally low corporate tax rates.
This web effectively meant the funds flowed in a circular fashion (accruing interest and fees) while no real external funding was introduced. Hudaco, which had been advised this transaction would withstand tax scrutiny, was unaware of these details. “We believe that there was intentional misrepresentation or negligence,” says Clifford Amoils, Hudaco’s financial director.
The Sars investigation revealed that interest was effectively converted into preference dividends, apparently without significant tax being paid. Over the period the circular structure was in place, Hudaco paid out about R180 million more than it received back. Cadiz Asset Management and Bravura Equity Services have strongly denied any wrongdoing.
Bravura rejected the allegations, adding it will contest the litigation. Cadiz is under new management and the directors named as respondents, including Ram Barkai and Frank Cadiz, have exited the business. Charles Pettit, CEO of Cadiz shareholder Stellar Capital, said: “The current operational Cadiz Asset Management is not the entity included in the summons.
That entity is currently named Cadiz Specialised Asset Management.” He said the empowerment transaction had an investment management agreement “which gave specific instructions on how to invest the funds”.