JSE-listed Hudaco Industries’ share price climbed nearly 16% on Friday afternoon as the company announced that it would bring an end to a years-long tax challenges with the South African Revenue Service (Sars).

In a trading statement to shareholders, Hudaco revealed that it had agreed to settle the R312-million in penalties slapped on it by Sars, highlighting that this would negatively impact on the group’s earnings for the financial year ended November 30, 2014.

The group’s earnings per share (EPS) and headline earnings per share (HEPS) for the year under review were expected to decline by between 98% and 100% to between 20c and 0c each, compared with the EPS of 930c and HEPS of 928c reported in the prior financial year.

Hudaco had incurred extensive penalties and interest for the financial periods since 2007 relating to a 2007 black economic- empowerment (BEE) deal.

In 2007, Hudaco Trading, funded through the issue of a R2.2-billion subordinated debenture held by a company within the Morgan Stanley group, acquired most of the operating businesses from the old Hudaco structure.

The group had, in response to the notice and changes in tax legislation, requested Cadiz Financial Services to inject the proceeds into Hudaco subsidiary Barbara Road Investments (BRI) and invest in preference shares in a company within the Cadiz group.

The Cadiz group was not permitted to invest any of the funds with Morgan Stanley, with corporate adviser to the transaction Bravura Equity Services (BES) confirming that there was no flow of cash arising from the money invested by BRI with the Cadiz group to any member of the Morgan Stanley group and that the cash would ultimately be used to buy government bonds issued by the South African government.

However, an investigation by Sars revealed that the Cadiz group immediately invested the proceeds from the preference shares issued to BRI with an entity related to BES. The end result was that Morgan Stanley, the existing funder of the BEE transaction, received the government bonds and had put debentures into Hudaco.

As a result, Hudaco had, in effect, internally financed the BEE funding arrangements that were intended to be financed externally until August 2017.

Hudaco said it was not aware of this at the time.

The group terminated the financing arrangements on February 28, 2013.

As at May 31, 2014, the contingent liability for the worst-case scenario, including penalties and interest up to that date, had been set at R1.4-billion.

However, Hudaco said it now aimed to put the tax challenge to bed, as this negatively impacted its activities and shareholders.

“Hudaco will pay in full and final settlement, an amount of R312-million in respect of the tax challenge to the financing arrangements for the empowerment transaction, up to and including the termination of these financing arrangements in 2013,” it said in an update to shareholders on Friday.

About R120-million had already been paid through a “pay now, argue later” arrangement, with the balance payable on March 31, 2015.

“The board recognises that the settlement represents a large sum of money but [it] is of the view that, given the benefit Hudaco received, the negative impact of protracted litigation on Hudaco and the risks involved, it is an appropriate solution that will allow Hudaco management to move forward with its full focus on growing the business in the current difficult trading environment.”

Hudaco planned to evaluate its prospects of recovery in due course.

The company would publish its financial results for the 2014 financial year on January 30.

The company’s share price rose to R107.56 a share by Friday afternoon, compared with Thursday’s close of R93 a share.