( . J.P. Morgan in South Africa: Supporting the Apartheid Economy Through ADRs April 4, 1991 Amalgamated Clothing and Textile Workers Union, AFL-CIO Office of Corporate and Financial Affairs J.P. MORGAN IN SOUTH AFRICA: SUPPORTING THE APARTHEID ECONOMY THROUGH ADRS Prepared By: THE OFFICE OF CORPORATE AND FINANCIAL AFFAIRS of the AMALGAMATED CLOTHING AND TEXTILE WORKERS UNION, AFL-CIO 1808 Swann Street, N.W., Second floor Washington, D.C. 20009 April 4, 1991 J.P. MORGAN IN SOUTH AFRICA: SUPPORTING THE APARTHEID ECONOMY THROUGH ADRS TABLE OF CONTENTS -; _PAGE I. EXECUTIVE SU'MM.ARY. • . • . • . 1 II. J. P. MORGAN & COMPANY-- A LEADING INTERNATIONAL FINANCIAL INSTITUTION . ............................................. 2 III. AMERICAN DEPOSITARY RECEIPTS FUNCTION AS AN INVESTMENT VEHICLE IN THE UNITED STATES. 2 IV. MORGAN GUARANTY TRUST: BRINGING SOUTH AFRICAN ADRS TO U.S. MARKETS • ••••••••••••••••.••••••••••••• • ••••••••••.•••.• 3 V. THE ADR BUSINESS INVOLVES MORGAN IN CONTINUING RELATIONSHIPS WITH THE SOUTH AFRICAN COMPANIES, BANKS AND CURRENCY MA.RKETS • • . • • • • • • • • • • • • • • • • • . • • • • • • • • . • • • • • • • • . • 4 VI . ADRS, FOREIGN INVESTMENT, AND SOUTH AFRICAN CAPITAL MA.RKETS •••••••.••••..••.•••••••••••.•••••••.•••.•.•.••••• 6 VII. J.P. MORGAN AND SOUTH AFRICAN CORPORATE FINANCE TODAY .... 7 VIII. SEC FILINGS IN 1990 REVEAL MORGAN STOCKPILING NEW SOUTH AFRICAN ADR REGISTRATIONS ................................ 8 IX. SOUTH AFRICAN COMPANIES WITH MORGAN ADRS: CORNERSTONES OF THE APARTHEID SYSTEM ................................•.... 9 A. Mining Companies B. Industrial Companies X. J.P. MORGAN AND THE RISE OF THE MODERN APARTHEID ECONOMY . 11 APPENDICES: APPENDIX I THE SOUTH AFRICAN ANTI-APARTHEID MOVEMENT CONDEMNS MORGAN'S ADR BUSINESS ............................. 12 p.. APPENDIX II SOUTH AFRICAN COMPANIES FOR WHICH MORGAN GU~RANTY IS AN AMERICAN DEPOSITARY ............................ 18 APPENDIX III SOUTH AFRICAN BANKS WITH CORRESPONDENT BANKING TIES TO MORGAN GUARANTY TRUST .......................... 20 APPENDIX IV SAMPLE AMERICAN DEPOSITARY RECEIPT ISSUED BY MORGAN FOR BUFFELSFONTEIN GOLD MINING COMPANY LTD ....... 21 NOTES ..•..•....•.....•..•.••...••••..•.•..•••••.•.•..•••••.•. • •. 2 4 A Note on Sources Research for this report relied upon documents and published material readily available to the public. Interviews were also conducted with sources in government and industry in the United States, the United Kingdom, and South Africa. In those cases where confidentiality was requested, we have honored that request. The information contained herein is believed to be accurate but does not purport to be complete. EXECUTIVE SUMMARY • J. P. Morgan & Co., Incorporated and its principal subsidiary Morgan Guaranty Trust have a long and historic role of promoting u.s. investment in South African companies. Today it maintains its position as a leader in facilitating U.S. investment in over~ifty South African companies through American Depositary . Receipts (ADRs) . • ADRs behave like public stock and are traded on u.s. markets. They provide a simple method for American investors to gain equity ownership in South African companies. • Currently outstanding South African ADRs exceed in value all U.S. investments in South African subsidiaries and affiliates. The South African ADR market in the U.S. is valued at over $1 billion. • Over the last ten months, J.P. Morgan has increased its inventory of registered ADRs, adding 160 million ADRs in South African. companies in filings the U.S. Securities and Exchange Commission. • J.P. Morgan's ADR business causes the company to maintain nominee accounts in three of South Africa's largest banks and to trade South African currency. In addition Morgan has correspondent banking relationships with six other South African banks. • American investment through ADRs provide as much as 20% of the equity of some South African companies. • J.P. Morgan issues ADRs for South African companies that represent some of the pillars of the apartheid system, including mining companies that engage in numerous racially discriminatory employment practices. • The African National Congress, South Africa's leading anti­ apartheid political organization (headed by Nelson Mandela) and the Congress of South African Trade Unions (COSATU), the country's largest trade union federation, have publicly condemned Morgan's role in the ADR business and have asked for increased pressure against Morgan and other banks involved in channeling u.s. investment in South African businesses. • In August of 1990, the Security Pacific Corporation withdrew from acting as an American Depositary for South African firms after coming under scrutiny from municipalities with anti-apartheid ordinances. -2- J.P. MORGAN & CO.-- A LEADING INTERNATIONAL FINANCIAL INSTITUTION J.P. Morgan & Co. is the fourth largest bank holding company in the United States, with assets of more than $80 billion. 1 Its principal subsidiary is Morgan Guaranty Trust Company of NewYbrk. One of the dominant names in American corporate finance since the 19th century, J.P. Morgan has specialized in serving weal thy individuals, large corporations, and governments worldwide. Recently the chairman of J.P. Morgan's Executive Committee, Lewis T. Preston, has been recommended by President George Bush to serve as President of the World Bank. His term is expected to begin in September. AMERICAN DEPOSITARY RECEIPTS FUNCTION AS AN INVESTMENT VEHICLE IN THE UNITED STATES The American Depositary receipts are securities issued by banks. which correspond to actual shares in foreign companies held by the banks in depositaries outside the United States. J.P. Morgan & Company invented the ADR in 1927 as a vehicle for foreign companies seeking capital to gain access to U.S. equity markets. 2 • ADRs entitle the beneficial holder to many of the rights of stockholders in the foreign company. • ADRs trade on American stock markets, pay dividends, and entitle the holder to vote on corporate governance issues. •ADR holders have the right to claim the actua1 underlying shares of the foreign company, should they so desire. 3 •Most foreign companies' stock cannot be traded directly on American markets because of our accounting and disclosure requirements and other aspects of U.S. securities laws. While Americans can buy stock on foreign exchanges, most do not because direct purchases are too expensive and legally cumbersome. Euromoney estimates that only three out of five foreign transactions ordered from the United States are succesfully completed. 4 -3- MORGAN GUARANTY TRUST: BRINGING SOUTH AFRICAN ADRS TO U.S. MARKETS J.P. Morgan's principal subsidiary is Morgan Guaranty Trust Company of New York. Morgan Guaranty's South African ADR business relies upon its international network of offices and subsidiaries inv6lved in banking, investment management and currency dealing.. Morgan offices in New York and London, and Morgan's accounts with banks in Johannesburg all play a role in linking South African companies and u.s. capital markets. • Shares in South African companies are often registered and traded in London, where the securities law allows the stock of companies from many countries to be traded on its exchanges. • Brokerage houses operating in London accumulate shares of South African companies for which they believe there is a market in the United States. • These brokerage houses then deposit the shares with Morgan Guaranty Trust Company of New York. • Morgan Guaranty transfers the shares to Morgan's nominee accounts in South African banks, while the brokerage houses retain ownership. • Morgan maintains these nominee accounts with the First National Bank of Southern Africa Ltd., the French Bank of South Africa Ltd., and the Standard Bank of South Africa Ltd., all in Johannesburg. • Morgan pays the South African banks a 10 financial rand fee (about $3) for each share deposited. • Filings with the Securities and Exchange Commission indicate that Morgan Guaranty Trust also deposits underlying shares of South African companies with other U.S. banks. 5 • Morgan Guaranty Trust issues American Depositary Receipts for these South African companies, which it sells to American investors through American brokerage houses. • Morgan charges American brokers and investors a fee of $5 per hundred shares of new ADRs it issues. 6 -4- THE ADR BUSINESS INVOLVES MORGAN IN CONTINUING RELATIONSHIPS WITH THE SOUTH AFRICAN COMPANIES, BANKS AND CURRENCY MARKETS • Dividends issued by the South African company are deposited· in Morgan's nominee accounts in the three South African banks, less a 15% tax paid to the South African government. 7 • The dividends are paid to Morgan in commercial Rand. • Morgan converts these payments in the nominee accounts from Rands to dollars by trading on the Rand markets. 8 • Morgan deducts a $1 per hundred share fee and passes the dividends along to the holders of the ADRs. 9 • Morgan is responsible for the transfer of materials that allow American holders of ADRs to cast the votes of the underlying shares in the South African companies' annual meetings. 10 Chart 1 -5- Morgan's South African ADR Network South African Company Broker obtains underlying:~-----........._ Deposits dividends in ~ > • shares Morgan's accou.nt Foreign South African Brokerage Bank Broker Morgan maintains accounts at, deposits underlying deposits shares with, and pays fees to shares South African banks, and receives dividends in rands. Morgan Trades currency, Rand Guaranty Trust converts