RCL’s decision to help top executives cash out of a supposed long-term share incentive scheme has infuriated shareholder activists and embarrassed parent Remgro, which has described the plan as an "administrative nightmare".
In short, RCL Foods — a perennial underperformer — is set to fork out R149m to buy executives out of a conditional share plan after just three years, during which time its share price has fallen by more than a third.
The 14.5-million shares will be transferred to the relevant RCL executives this week, including long-serving RCL CEO Miles Dally, who receives 3.6-million shares, and financial director Rob Field, who receives 500,000 shares, while 10.4-million shares will go to other participants.
RCL argues that the company’s "extremely limited free float, low trading volumes and lack of tradability severely restrict the ability of the participants to trade in these shares".
But shareholder activists have slammed the scheme as unfair for affording executives special treatment that will not be extended to other shareholders.
Supposedly, RCL’s conditional share plan (CSP) is meant to attract individuals or retain employees with an award of shares in the company and encourage their continued service.
But activist Theo Botha asks: "How do we encourage continued service by these top employees if we are facilitating a payout? This defies logic."
Botha says Remgro — which holds a commanding 77.5% stake in RCL — should act more responsibly. "If directors want to sell, they need to come to the market. It was not approved by shareholders that RCL is the buyer of last resort."
Activist Albie Cilliers, who is also a shareholder in RCL, believes the share buyback sends the wrong signal to investors. "For me, the RCL executives decided to be paid in shares. But now they want to exit with the company paying them out for these shares. I can’t exit my shares in this manner … if I want to sell, I need to accept a discount to the buyback price."
Remgro CEO and RCL chair Jannie Durand said the CSP had become an administrative nightmare.
He explained to the FM that the participants in the CSP needed to sell shares to cover a tax liability associated with the share award.
With the risk that the RCL share price could go lower, its participants might not be in a position to cover the tax liability.
Durand said there was an initial suggestion that some of the executives sell Remgro shares in the market to raise capital to cover the tax liability, but this was not possible since the group was in a closed period.
Remgro is also trading under cautionary, related to the proposed unbundling of its interests in RMBH and FirstRand. Durand said this meant Remgro could not buy back the RCL shares "as much as we would have loved to".
In retrospect, Durand conceded RCL’s CSP should have offered a cash option.
Of course, it could be argued that a share buyback should benefit shareholders by increasing NAV and earnings a share by reducing the number of shares in issue. But what the buyback does mask is that top RCL executives are selling their shares — a development that probably won’t fill shareholders with much confidence.
What is also highly debatable is whether RCL — especially when the full economic effects of the Covid-19 pandemic have not been fully quantified and other companies are holding back dividends as a precautionary measure — should be lavishing R149m on its top management.
The proposed buyback of the CSP shares represents 1.5% of RCL’s issued shares, and the offer will be pitched at R10.29 a share.
Shareholders will be asked to vote on the proposals in late May.
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