RioZim Ltd shareholders lost out on an opportunity to cash out of Murowa Diamond mine when Rio TInto Plc sold its 78% equity stake as provided for by tag-along rights in a shareholders agreement, businessdigest has established.
RioZim shareholders was never offered the right to sell the company’s 22% equity stake in Murowa Diamonds at the same terms as Rio Tinto Plc in line with a Murowa shareholders agreement of July 8 2004.
According to a shareholders’ agreement, RioZim shareholders had both pre-emptive and tag-along rights in Murowa Diamonds.
Rio Zim claimed the board waived its pre-emptive rights to Murowa because it could not pay the purchase price. But minority shareholders say the board misdirected itself as it unsurped the rights of shareholders and did not even consider the value of the deal.
A tag-along right provides that when a majority shareholder sells his/her stake, minority holders have the right to join the deal and sell their stake at the same terms and conditions as would apply to the majority shareholder.
This right protects minority shareholders.
Murowa was valued at US$279 million by Deutsche Bank AG in 2013. At that valuation, Rio Tinto could have pocketed as much as US$217 million.
RioZim could have made US$61 million at the same valuation had they tagged along on the deal.
However, RioTinto has not disclosed how much they made from the deal. Given that the global mining behemoth also sold 50% equity in Sengwa, it could have made a hell lot more.
Clause 3 (3) (a-b) provided that: “Should Rio Tinto or any other member of the Rio Tinto group enter into a contract with a person other than a member of the Rio Tinto Group or the RioZim Group (such person other than the shareholder) such a member being in this clause 3(3) the new controlling shareholder for the transfer of more than 50% of the share capital of any other company or companies in the Rio Tinto group whose only substantial assets, directly or indirectly, is more than of the ordinary shares in the company, Rio Tinto shall ensure that such transfer shall be completed unless the controlling shareholder: 1) Offers to purchase from RioZim and/ or such other members of the RioZim group as holds ordinary shares as is contained in the same price per ordinary share as is contained in the contract with Rio Tinto or another member(s) of the Rio Tinto group referred to above all the ordinary shares in the company then held by shareholders in the RioZim group and gives Rio Zim 30 days from the days from the date such offer of the new controlling shareholder as is referred to in 1) above is delivered to Rio Zim to elect to accept on its own behalf or on behalf of the relevant shareholders in Rio Zim group as appropriate such offer.”
The Murowa shareholders agreement also provided that before any transfer of shares in Murowa occurred in the event of a sale to a person or company that is not a member, RioTinto and RioZim would be bound by clauses 2,3 and 4.
Rio Tinto was bound to honour its agreement with RioZim of 2004 with respect to pre-emptive rights and tag-along rights for Murowa.
RZ Holdings, a British Virgin Islands (BVI)-incorporated company, controlled by GEM Holdings would not have been eligible to buy the equity without the matter being put to the vote.
In line with the Zimbabwe Stock Exchange rules, RioZim did not obtain the approval by resolution of its shareholders either prior to the transaction being entered into or prior to the completion of the transaction in line with ZSE regulations.
RioZim should have issued cautionary statements followed by an EGM to okay the sell to a related party.
Clause 2 relates to pre-emptive rights provided to RioZim shareholders.
According to the shareholders’ agreement between Rio Tinto and RioZim Ltd, the shareholders of RioZim had pre-emptive rights for the same 78% Murowa Diamonds shareholding which was sold to RZ Murowa. These pre-emptive rights and treatment thereof are spelt out in Clause 3(2)(a-d) of the shareholder’s agreement.
Clause 3(2)(a) of the agreement relating to Murowa Diamonds reads: “No party to this agreement shall and each party to this agreement shall procure that no other member of its group shall, complete any relevant transaction unless such party (in this Clause 3(2), the ‘offeror’) shall first deliver to the parties (in this Clause 3(2), each an ‘offeree’) a notice, to be accompanied by a copy of the signed or executed contract with the third party, offering to transfer to the offeree or such other member or members of its group as it may nominate the relevant securities in question at the same or cash equivalent price (with payment to be in the same or other freely convertible currency) and on the same or equivalent terms and conditions as are set out in the contract with the third party (such notice being the ‘Offeror’s Notice’).”
It also says it shall be a condition of any transfer of ordinary shares in the company by shareholders which are companies in the RioZim group or the entire issued share capital of any company in the RioZim group whose only substantial asset, directly or indirectly, consists of ordinary shares in the company that the purchaser shall undertake to be bound by and entitled to the benefit of clauses 2,3(1),3(2),this 3(4) and 4 At completion of any transfer of ordinary shares referred to in (a) or (b) above of this clause 3(4),each of Rio Tinto and RioZim shall execute or sign and the party which is itself the seller of the shares referred to in (a) or (b) above this clause 3(4) or whose group the seller is a company shall procure that the purchaser shall execute or sign all such deeds and documents as may be necessary to carry out the intent and accomplish the purposes of the clause 3(4).
The agreement also provided for 30 days within which a party that has been offered shares in Murowa could notify the offeror whether they are interested in the equity.
RioZim has not commented on tag-along rights.
Although the company claimed an AGM held on August 28 2016 discussed the Murowa pre-emptive rights, the issue of pre-emptive rights was never on the agenda.
According to the Annual General Meeting (AGM) notice, eight items were on agenda under ordinary business. Under special business, four items relating to an EGM of February 19 were on agenda. Pre-emptive rights were never on agenda, according to the AGM statement. As a rule, companies cannot insert resolutions for items that were never on the agenda.
In line with ZSE guidelines governing related party transactions, RioZim should have issued cautionary statements, given notice of an Extraordinary General Meeting (EGM) and convened a meeting to okay the sell to a related party.
ZSE CE Alban Chirume had not yet responded to businessdigest’s enquires despite promising to do so two weeks ago at the time of writing.
“We acknowledge receipt of your questions which we will respond,” Chirume said in an e-mail.