Ayo’s legal headaches mount

Ayo Technology Solutions, which has just had its JSE suspension lifted, is rather like one of those hapless cartoon characters to whom things keep happening; frequently, bad things. 

Mind you, it’s enjoyed a few outstandingly good things too. For instance, on December 14 2017, just days before Ayo was due to list on the JSE, the Public Investment Corporation (PIC) signed two irrevocable subscription applications subscribing for 99.8-million shares in Ayo at a price of R43 a share. The investment provided it with an immediate R4.3bn injection of capital in an otherwise cash-lite balance sheet. 

There was also that very attractive BEE deal secured with British Telkom that was going to generate lots of income for Ayo for years to come. Then there was the service agreement with Sasol, with an estimated R2bn value over the seven years it was due to run.  

So, the going was good for Ayo. Until bad stuff started happening and everything got a bit complicated. To the point that one of the highlights now of the Ayo annual financial results is the litigation section contained in the directors’ report. The recently, but very belatedly released 2024 annual financial statements, are no exception.  

Those results, which were due out by December 2024 for the end-August year-end, contain the usual rag-bag of write-offs, impairments, related party loans, “material uncertainty related to going concern”, anxiety-inducing “key audit matters” and a long list of litigations.  

Shareholders who trawled their way through the 2023 annual financial statements may have been disappointed by all the litigation, given the board’s unsubstantiated statement that year that it was optimistic “that there will be an end to the legal challenges in the new year”. Well, no sign of that. 

Probably the highest-profile legal battles being fought by Ayo relate to the slew of cases involving the banks that have withdrawn facilities from Sekunjalo-related companies. (Iqbal Survé’s Sekunjalo owns 45% of Ayo.)  

Then there’s the Mpati review application, which is concerned with “reviewing and setting aside certain issues relation to the unlawfulness of the proceedings as well as reviewing and setting aside the findings, remarks, conclusions and/or recommendations made by the Commission about the Applicants who were not the target of the Commission’s terms of reference but were referred to in the Mpati Report”.  

As you may recall, the Mpati commission was set up in October 2018 to look into the PIC. Its terms of reference included inquiring into whether there had been any alleged impropriety regarding investment decisions by the PIC. So, it might have seemed logical to many that the rather rushed decision to hand over R4.3bn to Ayo in December 2017 would fall into the Mpati commission’s remit. Particularly as the Ayo share price, launched at R43 in December 2017 thanks to the PIC’s largesse, was already tanking. (The share price is currently 40c.) 

The litigation list

Anyway, getting back to the litigation list. There’s a legal spat with one of Sekunjalo’s former great mates, the South African Clothing and Textile Workers’ Union about entitlement to dividends.  

There are defamation claims against journalist Pieter-Louis Myburgh, the Daily Maverick and amaBhungane. 

There’s a separate case against Standard Bank, unrelated to the withdrawal of bank facilities. And finally, there’s litigation against Cortex Logic and Futuretell Communication. 

To be expected, all of this litigation “together with the ongoing negative media focus on the group and heightened regulatory attention are putting the business to a serious threat, potentially threatening its longevity”.  

Rather ironically, the directors believe their legal actions are necessary to ensure the long-term sustainability of the group. This is presumably why they were prepared to fork out R58.2m in legal fees during 2024. This was higher than any other cost category and almost double employee costs of R29.2m. The next highest cost category was consulting fees at R47.4m.

These figures say a lot about the company; none of it good. Still, all of these costs are sharply down on financial 2023 when legal fees accounted for R70.3m; employee costs R66.9m and consulting fees R101.6m. 

The cuts were part of the cost-saving measures implemented in 2024, which lifted gross profit margin to 19% from 16%. Group revenue was down 17% to R1.9bn from R2.3bn. But, what with one thing and another, there was little change in the pre-tax loss – R577m compared with the previous year’s pre-tax loss of R671m. 

It’s difficult to see why it took seven months to get the figures out. The board referred rather enigmatically to the delay with the “Auditor’s Engagement Quality Control Review”. The rather sudden departure of one of its two external auditors can’t have helped, neither can the resignation of the CFO. And perhaps the need to restate many of the 2023 figures slowed them down. Still, seven months. 

The good news on the litigation front is that the State Information Technology Agency has withdrawn its action in the Eastern Cape High Court. In addition, the battle with the PIC has been settled following an agreement approved by shareholders in June 2024. 

Or at least it seemed PIC-related litigation was a thing of the past until late last year when Howard Lowenthal applied to the Western Cape High Court to have Ayo wound up. Lowenthal’s action does not feature in the litigation list contained in the 2024 director’s report; you have to dig down to Note 44 (“events after the reporting period”) to find it, though the company did issue a Sens back in January.  

The latest case

As you might expect, it’s an unusual case. 

Lowenthal is acting in his capacity as the executor of the estate of his late father, who was former chair of the JSE, Norman Lowenthal. When Ayo listed in 2017 Lowenthal’s 1.1-million shares were worth R44m; they’re currently worth R440,000. 

So, Lowenthal is acting as a shareholder not a creditor, which is probably the most unusual aspect of the case. But the Companies Act provides for this where the action is “just and equitable”.  

In his affidavit Lowenthal is emphatic: “It is just and equitable for the Respondent (Ayo) to be wound-up in terms of section 81(1)(d)(iii) of the Companies Act 71 of 2008 due to the irretrievable breakdown of trust between the Respondent and its shareholders given the conduct of the Respondent and its management …” 

He also alleges that Ayo’s assets are being “misapplied or wasted”. 

Lowenthal says the “severe decline” in share value “must be attributable to gross mismanagement and proven misconduct by the Respondent’s board and officers”, and goes on to describe the several scandals that essentially amount to a potted history of Ayo’s life as a listed entity. 

Inevitably, the “settlement agreement” with the PIC, in which Ayo repurchased 17.2-million of its shares from the PIC for R619m, plays a central role in Lowenthal’s case.  

Lowenthal says after Ayo paid the PIC in March 2023 its cash resources were slashed to R491.5m from R1.1bn. He describes this as an extreme payment, given that the interim figures for February 2023 reflect a cash balance of only R599m and that Ayo would have been unable to meet the solvency and liquidity test required for such a payment, “unless extraordinary circumstances arose in the four weeks prior” to the payment. 

Regardless of the solvency situation, Lowenthal queries why Ayo paid the equivalent of R36 for a share that had a market value at the time of only R4.70. “In effect, the Respondent has depleted a substantial portion of its cash and cash equivalents in exchange for an asset which was worth approximately 13% of the actual value paid for such shares.”  

There was also the matter of the payment being made before shareholders had approved it. That approval only happened in June 2024.  

Lowenthal says the disparity in treatment of the PIC “is unfair, arbitrary and unjust and inequitable”, particularly as the share subsequently slumped to 83c and finally 40c. The only just and equitable solution, argues Lowenthal, is for Ayo to be wound up and shareholders paid the pari passu value of their shares. 

In its answering affidavit, Ayo’s legal team dismisses Lowenthal’s action as an attempt to force Ayo to repurchase his father’s shares on similar terms to those enjoyed by the PIC. The team notes there was no attempt to dispose of the shares before the PIC deal, though Ayo had faced some seriously worrying issues. 

Rather strangely Ayo’s team goes on to list these challenges: a JSE investigation in 2019, the Mpati commission, the bank terminations, the plunge in the share price in 2019, the JSE disqualifying some directors and members of Ayo’s audit committee in 2022, the JSE imposing a censure on Ayo’s former CFO in 2022 and another censure on one of Ayo’s directors in September 2023. 

Despite all of these troubles Ayo’s legal team contends there is no irretrievable breakdown of trust between Ayo and its shareholders. “The view of the shareholders with a majority stake is that the company remains able to realise its objectives … Ayo remains a leading B-BBEE ICT investment holding company … Its revenues remain considerable…There is no basis to wind-up the company.” 

Presumably, “shareholders with a majority stake” is Sekunjalo. 

Ayo’s team says Lowenthal is not himself a shareholder and therefore does not have locus standi, noting that the Companies Act confers no legal standing on an administrator. Furthermore, they contend, his arguments are largely based on hearsay, which is inadmissible.  

All in all, it looks as though things are going to keep happening to Ayo. 

_{Top image: Sekunjalo chair Iqbal Survé. Picture: Gallo Images/Wessel Oosthuizen.}