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EFFICIENT GROUP LIMITED - Cancellation of Profit Share Agreement and Renewal of Cautionary Announcement

Release Date: 05/07/2018 14:26
Code(s): EFG     PDF:  
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Cancellation of Profit Share Agreement and Renewal of Cautionary Announcement

EFFICIENT GROUP LIMITED
Incorporated in the Republic of South Africa
(Registration number 2006/036947/06)
Share code: EFG ISIN: ZAE000151841
(“Efficient” or “the Company”)


CANCELLATION OF PROFIT SHARE AGREEMENT AND RENEWAL OF CAUTIONARY ANNOUNCEMENT


1. INTRODUCTION AND BACKGROUND

   Shareholders are referred to the cautionary announcement dated 15 June 2018 (“Cautionary
   Announcement”) wherein shareholders were advised that the Company had entered into negotiations
   for the cancellation of a profit sharing agreement which would result in future profits flowing to the
   Company.

   On 12 August 2013, Efficient entered into the Joint Management and Profit Incentive Agreement with
   Robert Henry Walton (“RW”), as amended from time to time (“Main Agreement”), in terms of which,
   inter alia, it was agreed that RW would establish, contribute to and manage the businesses of the
   “Efficient Invest Companies” in return for a share of the profits of the “Business”.
   The Efficient Invest Companies comprise the Company’s wholly-owned subsidiaries, Boutique Collective
   Investments (RF) Proprietary Limited (“BCI”), Boutique Investment Partners Proprietary (“BIP”) and
   Instit Proprietary Limited (“Instit”). The Business comprises the collective businesses of the Efficient
   Invest Companies and in the case of Instit, includes Instit’s 30% equity investment in Rudiarius Capital
   Management Proprietary Limited (“RCM”).

   In terms of the provisions of the Main Agreement, RW is entitled to 66% of the net profit before tax
   (before payment of any profit share) of the Business (“NPBT”) (“Efficient Invest Profit Share”), and
   the Company is entitled to 34% of the NPBT in the Business (“EFG Profit Share”). Additionally, BCI
   and RW entered into arrangements with certain employees of the Efficient Invest Companies nominated
   by RW (“Nominees”) to participate in the Efficient Invest Profit Share, and with certain initial partners of
   BCI (“Participating Partners”) who participate in the Efficient Invest Profit Share attributable to the
   profits of BCI (“Profit Share Agreement”).

   In terms of a contracted right in favour of Efficient that it may cancel the Main Agreement at 31 August
   2018, as well as the earnings enhancing opportunity it creates for the Company by cancelling same,
   Efficient has elected to terminate, and RW and the Nominees are required to accept termination thereof
   in return for the payment of the Cancellation Fee set out in paragraph 2.4 below.
   Accordingly, the board of directors of Efficient (“the Board”) is pleased to advise shareholders that on
   3 July 2018 (“Signature Date”), Efficient, RW, BCI and BIP entered into an agreement to, inter alia,
   terminate the Efficient Invest Profit Share (“Cancellation Agreement”) on the terms and conditions set
   out therein (“the Transaction”).

   Additionally, in order to incentivise RW, the Nominees and other employees of the Efficient Invest
   Companies (“Employees”) to remain in the employ of the Efficient group of companies (“Efficient
   Group”) during the period from Signature Date until and including 31 August 2021 (“Payment Date”)
   (“Retention Period”), and in order to incentivise the Participating Partners to remain partners of BCI for
   the Retention Period, Efficient, RW, BCI and BIP have, contemporaneously with the Cancellation
   Agreement, entered into an agreement to record the terms and conditions of the incentive payments to
   be made to RW, the Nominees, the Employees and the Participating Partners at the expiry of the
   Retention Period (“Incentive Agreement”).

2. THE TRANSACTION

   2.1 Nature of the business of the Efficient Group and the Efficient Invest Companies

       The Efficient Group is a diversified financial services group focused on providing professional
       advice, custom-designed products and quality service across the entire financial services value
       chain. The Group’s offering includes financial planning services, asset management, multi-
       management, asset consulting, asset administration, fiduciary services, private client services,
       and independent employee benefits consulting services, which are offered to clients throughout
       South Africa.

       The Efficient Group structure consists of a three-pillared organisational structure which centres
       around the following clusters:

           Financial Services cluster, which comprises:
                o Efficient Wealth;
                o Efficient Independent Distribution Services;
                o Stead Wealth;
                o Exceed Asset Management;
                o W-Allen White Brokers; and
                o Secure Capital Investments,
           and is focussed on providing professional financial planning services and financial products to
           clients.

           Services and Solutions cluster, which comprises:
              o Naviga Solutions;
              o Efficient Private Clients;
              o Efficient Board of Executors;
              o Efficient Benefit Consulting; and
              o Select Manager,
           and is focused on empowering and enabling the financial advisor to provide market-leading
           and value-added services to the clients of the financial advisor.
           
           Investments cluster, which comprises:
               o BCI;
               o BIP;
               o Instit; and
               o Efficient Select,
           and is focused on investing in and growing financial services opportunities where the Efficient
           Group believes it can add value for its clients through a competitive advantage.
           
           BCI is the premier provider of co-branded collective investment schemes in South Africa, while
           BIP is one of the largest independent retail multi-management investment consulting
           companies in the country.

   2.2 The rationale for the Transaction

       The Board believes that the Transaction is earnings enhancing to the Efficient Group. The
       Transaction also allows for a change in RW’s role to focus on the growth and distribution strategy
       of the broader Services and Solutions and Investments clusters, including co-branded partner
       solutions, in terms of which the Group has agreed a rewarding incentive structure with the team of
       the new division to be established, namely Solutions and Investment Distribution, based on the
       outperformance of budgeted growth in assets under administration, consultation and management.

   2.3 Conditions precedent and effective date

       The Transaction is subject to the fulfilment or waiver, as the case may be of the following
       conditions precedent by no later than the Effective Date, being 31 August 2018, or such later date
       as agreed to in writing by the parties to the Cancellation Agreement (“Parties”):
    
       2.3.1 Efficient receiving confirmation that the required funding to finance the payment of the
             Cancellation Fee as set out in paragraph 2.4 below has become unconditional. It is
             recorded that Efficient intends raising the required funding through a combination of
             finance to be provided by a financial institution and funding to be secured through the issue
             of Efficient shares to third party funders;
    
       2.3.2 Efficient obtaining the requisite approvals, including Board, shareholder and any other
             relevant approvals, including JSE Limited (“JSE”) approval, that may be required to
             conclude the transactions provided for in the Cancellation Agreement;
    
       2.3.3 Efficient obtaining a tax ruling from the Commissioner of the South African Revenue
             Services (“SARS”) confirming that the Cancellation Fee will qualify as a tax-deductible
             expense and that RW will be able to reclaim the tax portion on the Invested Portion as set
             out in paragraphs 2.4.5 and 2.4.6 below; and
   
       2.3.4 each of the Efficient Invest Companies obtaining the necessary approvals to conclude the
             transactions provided for in the Cancellation Agreement.

      The conditions precedent set out in this paragraph 2.3 are for the benefit of Efficient and any condition
      may be waived (in full or in part) (unless the condition is incapable of waiver) by the Company in its
      discretion by written notice to the other Parties to be received on or before the Effective Date,
      whereupon such condition shall be deemed to be fulfilled.

      If the condition referred to in paragraph 2.3.3 above cannot be fulfilled by the Effective Date, the Parties
      shall meet and negotiate in good faith to determine an alternate or new cancellation fee acceptable to
      RW and Efficient.

   2.4 Cancellation Fee

       As consideration for the cancellation of the Main Agreement and more specifically the Efficient
       Invest Profit Share, RW and the Nominees shall be paid a total amount of R378 453 000 by the
       Efficient Invest Companies (“Cancellation Fee”) as follows:

       2.4.1 the aggregate Cancellation Fee payable by BCI, being an amount of R349 813 000, to RW
             and the BCI Nominees as consideration for the cancellation of the BCI profit share
             arrangement forming part of the Efficient Invest Profit Share, shall be allocated and paid to
             RW as to R320 113 000 and the balance thereof, being R29 700 000, to the BCI
             Nomineesxin the ratios set out in the Cancellation Agreement on the Effective Date;

       2.4.2 a general staff payment (“General Employee Payment”) in the amount of R12 050 000,
             payable to BCI Employees in the amounts set out in the Cancellation Agreement on the
             Effective Date;

       2.4.3 the aggregate Cancellation Fee payable by BIP, being an amount of R16 390 000, to RW
             and the BIP Nominees as consideration for the cancellation of the BIP profit share
             arrangement forming part of the Efficient Invest Profit Share, shall be allocated and paid to
             RW as to R3 220 000, and the balance thereof, being an amount of R13 170 000, to the
             BIP Nominees in the ratios set out in the Cancellation Agreement on the Effective Date;

       2.4.4 a General Employee Payment in the amount of R200 000, payable to BIP Employees in
             the amounts set out in the Cancellation Agreement on the Effective Date.

       2.4.5 subject to paragraph 2.4.6 below, an amount of R50 000 000 of the Cancellation Fee to be
             paid to RW on the Effective Date will be invested by RW (“Invested Portion”).

             The after-tax portion of the Invested Portion (i.e. after provision has been made for the
             payment of the applicable tax to SARS), will be invested by RW into Collective Investment
             Schemes for the Retention Period and will be managed by RW for RW’s own benefit.
             
             During the Retention Period, the after-tax portion of the Invested Portion invested will be
             ceded in security by RW to Efficient and will only be released by Efficient on 31 August
             2021.

       2.4.6 In the event of RW terminating his employment within the Efficient Group or such
             employment being terminated due to dismissible conduct, RW shall be liable to repay the
             full R50 000 000 to Efficient and RW shall recover the tax paid over from SARS and pay
             over that portion of the Invested Portion, as and when the amount is refunded or credited
             by SARS to RW.

             Should RW die, become disabled or is dismissed under circumstances other than for
             reason of dismissible conduct, at any time during the Retention Period, RW or his estate
             shall be and remain entitled to his share of the Invested Portion as and when that amount
             becomes payable in accordance with the provisions of the Cancellation Agreement, as if
             he remained employed in the Group for the full Retention Period.

   2.5 Restraint Payment

       2.5.1 It has been agreed by the Company, RW and certain Nominees (“Restraint Nominees”)
             that the Restraint Nominees shall be paid an amount of R19 730 000 (“Restraint
             Payment”) in consideration for providing the restraint undertakings as set out in the
             Cancellation Agreement (“Restraints”) on the Effective Date, in accordance with the
             provisions set out therein.

       2.5.2 The aggregate Restraint Payment payable to the Restraint Nominees by BCI, being an
             amount of R13 300 000, will be paid to RW as to R8 000 000 and the balance thereof,
             being R5 300 000, to the Restraint Nominees of BCI in the ratios set out in the Cancellation
             Agreement.

       2.5.3 The aggregate Restraint Payment payable to the Restraint Nominees by BIP, being an
             amount of R6 430 000 will be paid to RW as to R2 000 000 and the balance thereof, being
             R4 430 000, to the Restraint Nominees of BIP in the ratios set out in the Cancellation
             Agreement.
 
       2.5.4 In terms of the Restraints, it has been agreed, inter alia, that from the date of termination of
             employment with the Efficient Group as the case may be:

             2.5.4.1    RW, being a Restraint Nominee, will not compete with the Business for a period
                        of 10 years; and
             2.5.4.2    the Restraint Nominees will not canvas business or supply cobranded collective
                        investment portfolios or any of the services rendered by BIP, for a period of five
                        years.

   2.6 Payment and interest

       All payments that are due and payable in terms of the Cancellation Agreement, being a total
       amount of R398 183 000 comprising the Cancellation Fee and the Restraint Payment, shall be
       paid within 60 days of the Effective Date. Interest shall accrue on the outstanding balance of such
       amount calculated at the Prime Rate from the Effective Date to date of payment, both dates
       inclusive.

3. INCENTIVE AGREEMENT

As set out in paragraph 1 above, Efficient, RW, BCI and BIP have entered into the Incentive Agreement.

   3.1 Conditions precedent
       The Incentive Agreement is subject to the fulfilment or waiver, as the case may be, of the following
       conditions by no later than the Effective Date, or such later date as agreed to in writing by the
       parties to the Incentive Agreement:

       3.1.1   Efficient obtaining the requisite approvals, including Board, shareholder and any other
               relevant approvals, including JSE approval, that may be required to conclude the
               transactions provided for in the Incentive Agreement;
       3.1.2   each of the Efficient Invest Companies obtaining the necessary approvals to conclude the
               transactions provided for in the Incentive Agreement; and
       3.1.3   the Parties having concluded the Cancellation Agreement and such agreement becoming
               unconditional in accordance with its terms.

       The conditions set out in this paragraph 3.1 are for the benefit of Efficient and any condition may be
       waived (in full or in part) (unless the condition is incapable of waiver) by the Company in its
       discretion by written notice to the other parties to the Incentive Implementation Agreement to be
       received on or before the Effective Date, whereupon such condition shall be deemed to be fulfilled.

       If the condition referred to in paragraph 2.3.3 above cannot be fulfilled by the Effective Date, the
       Parties shall meet and negotiate in good faith to determine an alternate or new incentive payment
       acceptable to RW and Efficient.

   3.2 Incentive Payment

       As an incentive to remain as employees of the Efficient Group or partners of the relevant Efficient
       Invest Companies for the Retention Period, as the case may be, RW, the Nominees, the
       Employees and the Participating Partners shall, subject to paragraph 3.2.6 below, be paid the
       Incentive Payment, being a total amount of R69 567 000, as set out in paragraphs 3.2.1 to 3.2.5
       below.

       The “Future Value” referred to in this paragraph 3.2 means the value of the amounts reflected in
       the Incentive Agreement as at the Effective Date (“Present Value”), adjusted with the rate of
       return equal to the annual rate as published by BCI Money Market Fund (class B, JSE code
       BMMFB) as if that amount was invested in the relevant Money Market Fund for the period over
       which the future growth must be determined.

       3.2.1   BCI shall pay to RW and the BCI Nominees the Future Value of the aggregate Incentive
               Payment payable by BCI to RW and the BCI Nominees as incentive to remain employees
               of the Efficient Group, being an amount of R40 220 000, which amounts shall be allocated
               and paid to RW as to R26 720 000 and the balance thereof, being R13 500 000, to the BCI
               Nominees in the ratios set out in the Incentive Agreement, on the Payment Date;

       3.2.2   the aggregate Future Value of a further General Employee Payment (“Further General
               Employee Payment”) payable by BCI, being an amount of R12 050 000, shall be
               allocated and paid to the BCI Employees employed with the Efficient Group on the
               Payment Date in the ratios set out in Incentive Agreement on the Payment Date;

       3.2.3   BCI shall pay to each Participating Partner who is still a partner of BCI on the Payment
               Date, who has not given notice to terminate its co-branding agreement and whose portfolio
               assets are not less than certain predetermined thresholds, as incentive to remain a
               Participating Partner of BCI, the Present Value of the “Participating Partner Incentive
               Payment”, being an aggregate amount of R19 567 000, which amounts shall be allocated
               and paid to the Participating Partners in the ratios set out in the Incentive Agreement on
               the Payment Date;

      3.2.4    BIP shall pay to RW and the BIP Nominees the Future Value of the aggregate Incentive
               Payment payable by BIP to RW and the BIP Nominees as incentive to remain employees
               of the Efficient Group, being an amount of R9 780 000, which amounts shall be allocated
               and paid to RW as to R1 380 000 and the balance thereof, being R8 400 000, to the BIP
               Nominees in the ratios set out in the Incentive Agreement on the Payment Date;

      3.2.5    the aggregate Future Value of the Further General Employee Payment payable by BIP,
               being an amount of R200 000, shall be allocated and paid to the BIP Employees employed
               with the Efficient Group on the Payment Date in the ratios set out in in Incentive
               Agreement on the Payment Date.

      3.2.6    Should RW or a Nominee or an Employee terminate his employment within the Efficient
               Group, or such employment is terminated due to such an Employee being found guilty of
               dismissible conduct during the Retention Period, he shall forfeit his share of the Incentive
               Payment or the further General Employee Payment, as the case may be, and his share
               shall accrue to and be paid over to RW on the Payment Date, and in the case of RW, to
               EFG.

               Should any Employee die, become disabled or be dismissed under the circumstances
               other than for reason of a dismissible conduct, at any time during the Retention Period,
               such Employee or his estate shall be and remain entitled to his share of the Further
               General Employee Payment, as and when such amount is payable in accordance with the
               provisions of the Incentive Agreement, as if the relevant Employee remained employed in
               the Efficient Group for the full Retention Period.

   3.3 Payment and interest

       All payments that are due and payable in terms of the Incentive Agreement, being a total present
       value of R81 817 000 comprising the Incentive Payment and the Further General Employee
       Payment, shall be paid on the Payment Date, failing which, interest shall accrue on the outstanding
       balance of such amount calculated at the Prime Rate plus 2% from the Payment Date to date of
       payment, both dates inclusive.

4. ACCOUNTING AND TAX TREATMENT

   The Transaction and associated Cancellation Fee will be treated as an expense in terms of International
   Financial Reporting Standards. Additionally, in terms of paragraph 2.3.3 above, in the event that the
   Efficient Group obtains a tax ruling from SARS that the Cancellation Fee will qualify as a tax-deductible
   expense, the Cancellation Fee as apportioned will be eligible for deduction from taxable income in BCI
   and BIP, respectively in the financial year in which it is incurred and, to the extent taxable income is less
   than the apportioned Cancellation Fee, in subsequent years.

5. NET ASSETS AND PROFITS

   The values of the net assets of each of the Efficient Invest Companies, being BCI, BIP and Instit, as at
   31 August 2017 were R16 million, R4 million and R0.04 million, respectively. The profits after tax
   attributable to each of BCI, BIP and Instit for the year ended 31 August 2017 were R26 million, R3 million
   and R0.03 million, respectively.

   During the 12 months ended 31 August 2017, R83 million (six months ended 28 February 2018:
   R45 million) was paid to RW and the Nominees in terms of the Efficient Invest Profit Share relating to the
   Efficient Invest Companies. The after-tax effect of the profit share payment on the Efficient Invest
   Companies was R59 million (six months ended 28 February 2018: R33 million).

   If the Cancellation Agreement had been in effect at the beginning of the 2017 financial year, the net
   assets of each of BCI, BIP and Instit as at 31 August 2017 would have been R70 million, R10 million and
   R0.1 million, respectively, and the profits after tax attributable to each of BCI, BIP and Instit for the year
   ended 31 August 2017 would have been R80 million, R9 million and R0.09 million, respectively.

   If the Cancellation Agreement had been in effect at the beginning of the 2017 financial year, the net
   assets of Efficient as at 31 August 2017 would have been R299 million, (they were R262 million), and
   the profits for the year ended 31 August 2017 would have been R84 million (they were R47 million).

   The Cancellation Fee is a once-off expense and will not have a continued effect on the statement of
   comprehensive income and is not included in the illustration above.

   The following financial information is based on management accounts and has not yet been reviewed by
   the Company’s auditor and could be subject to change. The following numbers are shown prior to the
   impact of the Efficient Invest Profit Share i.e. for 100% of net assets and profit after tax of the
   aforementioned companies. The values of the net assets of each of the Efficient Invest Companies,
   being BCI, BIP and Instit, as at 28 February 2018 were R46 million, R9 million and R2 million,
   respectively. The profits after tax attributable to each of BCI, BIP and Instit for the half year ended
   28 February 2018 were R42 million, R5 million and R2 million, respectively.

6. RELATED PARTY IMPLICATIONS

   As RW is an Executive Director of the Efficient Group and a material shareholder of the Company, he is
   considered to be a ‘related party’ in terms of paragraphs 10.1(b)(i) and (ii) of the JSE Listings
   Requirements. Accordingly, the Transaction constitutes a ‘related party transaction’ in terms of the
   Listings Requirements and is subject to an independent majority of Efficient Group shareholders voting
   in favour thereof in general meeting. As related parties, RW and his associates are precluded from
   voting on the Transaction. However, as shareholders in the Efficient Group, they may be taken into
   account in determining a quorum for the purposes of the general meeting.

7. CLASSIFICATION OF THE TRANSACTION AND FURTHER DOCUMENTATION

   As the Transaction is classified as a Category 1 related party transaction, in terms of paragraph 10.4(f)
   of the JSE Listings Requirements, the Company is required to obtain a fairness opinion on the
   Transaction from an independent expert (“Fairness Opinion”) and the Board is required to include a
   statement in the circular to be issued to shareholders confirming whether the Transaction is fair to
   shareholders.

   Accordingly, a circular containing full details of the proposed Transaction, including, inter alia, the
   Fairness Opinion and a notice to convene a general meeting of shareholders of the Efficient Group in
   order to consider and, if deemed fit, to pass with or without modification, the resolutions necessary to
   approve and implement the Transaction, will be sent to shareholders in due course.

8. RENEWAL OF CAUTIONARY ANNOUNCEMENT

    Further to the Cautionary Announcement, and as set out in this announcement, shareholders are
    advised that as negotiations are still in progress in respect of the funding required to finance the
    cancellation of the Main Agreement, and which if successfully concluded, may have a material effect on
    the price of the Company’s securities, they are advised to continue exercising caution when dealing in
    the Company’s securities until a further announcement is made.

Johannesburg
5 July 2018

Sponsor and Joint Corporate Advisor to the Efficient Group
Merchantec Capital

Joint Corporate Advisor to the Efficient Group
Bravura Capital

Media Contact
Bridget von Holdt
Business Director, Burson-Marsteller
E: Bridget.vonholdt@bm-africa.com
M: +27 82 610 0650
T: + 27 11 480-8680

Date: 05/07/2018 02:26:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE'). 
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