If you were the Chairman of a firm that was spiralling into the deep doo doo why would you then sue it for £3.5 billion? Or even £3.4 billion, as in this case with Steinhof and Christo Wiese? What follows is, of course, entirely speculation, opinion only and my opinion to boot. But there’s an argument in favour of making sure there’s a seat at the table for the ex-Chairman:
Christo Wiese, former chairman of Steinhoff, is suing the retail conglomerate for £3.4bn over cash injections made in 2015 and 2016, piling further woe on a company still reeling from a major accounting scandal.
Mr Wiese’s Titan Group has launched the lawsuits in a bid to claw back some of the cash it invested in Steinhoff.
The first of the claims relates to a share purchase in 2016 which facilitated Steinhoff’s acquisition of US group Mattress Firm, and the second to Titan agreeing to take shares in Steinhoff in exchange for clothing retailer Pepkor in 2015. The total value of the claims is 59bn South African rand.
Steinhoff said it will “assess the claims and determine the appropriate course of action”.
Mr Wiese only stepped down from the chairman role at Steinhoff last December, when the company uncovered a €6bn (£5.3bn) accounting black hole, causing it to postpone publishing its results and its shares to collapse more than 90pc.
So, the company’s rapidly heading for the u-bend. Why compound the issue by suing it? The former Chairman might be expected to take some responsibility for what happened on his watch after all, no?
Again, this is speculative opinion, but the answer might be in the way that shareholders and creditors are treated in such exciting circumstances. Imagine that it does all indeed go kablooie. The shareholders are stuffed. That’s capitalism for ya, they get the profits in the good times and nothing in the bad. Lenders however are differently treated. There’s still some value inside the company, the constituent parts will be sold off for some sum.
To be crude about it, we look at the pile of debt, look at the value raised by flogging the bits, everyone who lent money takes a haircut and gets some cash back. Say there’s $10 billion outstanding, $5 billion raised for the parts, then everyone gets 50% of their lending and loses 50% of their lending.
Yes, it gets more complex. But the way this usually turns out is that instead of flogging off the bits in a firesale we parcel those bits up into a new company, free of all that debt. And all the lenders get converted from debt into equity and become the shareholders of the new company. The old shareholders are still out on their ear of course.
So, why would one of the old shareholders sue the company? That legal claim is now a debt of the company. Sure, it’s a contingent claim, it depends upon the success of the lawsuit. It’s not to be valued at 100%, not at all. But it does have some value. And thus it gains a seat at the creditors table as matters are thrashed out. Matters such as, well, which creditors get how much of the equity of the new company?
That is, one value of such a legal claim is that it converts old and soon to be – possibly – valueless equity into a claim upon some of the likely new and valuable equity. In my opinion of course.
A pretty neat trick if you can pull it off.