Buyouts leave shareholders in pain
During the past two weeks, two separate groups of investors united by the pain of buyout deals gone sour straddled the corridors of justice praying for a way out.
Both transactions involved bank buyouts that ended up in pain for shareholders, some of whom have for 24 years nursed the hope of getting their fair share of benefits from the takeovers.
In one of these feuds, former shareholders of Guilders International Bank are crying foul decades after the lender was bought by rival Guardian Bank but with no monetary compensation to them—turning the spotlight on shareholder benefits and pitfalls of corporate acquisitions.
In the case of Guilders International Bank against Guardian Bank, the gist of the dispute is a claim that shareholders of Guilders were not paid Sh196 million being the consideration price for the sale of 200,000 shares to Guardian during a takeover in 1999.
Guardian Bank, which was founded by top business mogul Chandaria family in 1992, started as a Finance Company before converting into a Commercial Bank in May 1996 and buying Guilders in 1999. Shareholders of Guilders - Shivali Investments Limited, Naval Holdings Limited, Ketty Investments Limited, and Saaf Holdings Limited –sued and got a favourable ruling from the court directing Guardian to pay the sum of Sh196 million with interest from 2001.
They have since laid a claim of Sh2,543,910,234 and sought to attach properties of Guardian but the intention was stayed by the court. The dispute has also gone to the Court of Appeal.
As the dispute escalates, Guardian has also raised a claim of dishonesty against former shareholders of Guilders as it fights an order for a return of loan securities.
Court documents indicate that some of the loan securities transferred to Guardian Bank by Guilders Bank during the acquisition, were illegal as they belonged to properties unlawfully acquired from the public.
It says the High Court erred in awarding shareholders of the defunct lender the payout.
“The court erred in directing Guardian Bank to discharge the securities provided by shareholders of Guilders Bank and to return the same or pay their value as of the date of their submission. Some of the securities, having been found to have been illegally acquired by the High Court, were surrendered to the Registrar of Lands for cancellation,” says Guardian Bank in the appeal. The Court of Appeal is also expected to determine what is superior between a memorandum of understanding and a sale agreement.
Another high-profile dispute on buyout and cries of shareholders involves the acquisition of Fidelity Commercial Bank in 2017 by Mauritius-based banking group SBM Holdings.
Former owners of Fidelity Bank are in court seeking Sh2.5 billion compensation from the Central Bank of Kenya (CBK) and SBM Holdings amid claims that the banking regulator bullied the investors at night to sell the troubled lender for Sh1.
The deal was meant to save Fidelity Bank from liquidity headwinds it was facing in early 2016 and the transaction was sealed on March 28, 2017.
But the bank’s largest shareholder Sultan Khimji is crying. He claims in court papers, that the shareholders of the lender were under duress and undue influence.
In the talks, Mr Khimji says the Mauritius-based banking group SBM Holdings, allegedly promised to pay him Sh600 million and goodwill of a similar amount.
Days have since turned into months and months into years and no payment is forthcoming, raising concerns among shareholders of the bank.
Mr Khimji move to court in October 2022 seeking among others, compensation of Sh2.5 billion, alleging the Central Bank of Kenya (CBK) bullied investors at night to dispose of the troubled lender for Sh100.
The suit was set for hearing only for SBM to file an application before the High Court seeking to suspend the case and refer the matter to arbitration as per the Share purchase agreement, dated March 28, 2017.
CBK has equally filed another application, seeking to be removed from the case, arguing that its role in the deal was solely in its capacity as the banking sector regulator hence the claims against it have no basis. “It remains unclear how the plaintiff holds the defendants jointly and severally liable for compensation of Sh2.5 billion as well as other claims without a scintilla of evidence. Consequently, and in light of the foregoing, we submit that the plaintiff's suit against the 2nd defendant ought to be struck out with costs,” CBK states.
The banks' regulator further says tthe share purchase agreement between Fidelity Commercial Bank and SBM Holdings did not constitute a transfer of assets and liabilities, as alleged.
Mr Khimji recalls CBK Governor Patrick Njoroge announcing the buyout after the issuance of the requisite regulatory approvals.
“CBK has also approved the change of name from Fidelity Commercial Bank Limited to SBM Bank (Kenya) Limited, under Section 3 of the Banking Act,” the regulator said in a statement in 2017.
Dr Njoroge welcomed the entry of the Port Louis-based lender into the Kenyan market, saying it would stimulate a sector rocked by failure of three banks.
“SBM will bring its experience and expertise from Mauritius and other markets, to enhance the competitiveness and resilience of Kenya’s banking sector,” said Dr Njoroge.
Mr Khimji argues that the CBK forced the directors to dispose of the bank for a song, under threats of criminal charges, regulatory sanctions, and closure.
Other shareholders pray for Sh2.5 billion compensation, being the full market value of Fidelity Bank as of December 2016.
Alternatively, the shareholders want the court to compel SBM to comply with the share purchase agreement that set out Sh1 initial consideration, Sh600 million deferred payment, an additional Sh1.3 billion for undervaluation of the lender plus Sh600 million goodwill.
Mr Khimji has also asked for restitution of profits earned from the sale as well as damages compounded at an annual interest of 12 per cent from January 2017.
Another high-profile dispute involved the merger of juice makers Kevian Kenya Ltd (KKL) and Squishy Drinks Limited (SDL) in October 2018.
The two companies had agreed that the merger would be through consolidation of the manufacturing process and the creation of a new entity, which was to be known as Squishy Distribution Limited.
The new entity was for the sale and distribution of the juice, known as SQUISHY a brand that was targeting children.
To put into effect that merger, the parties agreed to enter into three agreements -an asset purchase agreement, a shareholder deal for the creation of the new entity Squishy Distribution Limited and an exclusive distribution agreement granting Squishy Distribution Limited exclusive rights to sell the juices on behalf of the parties.
But SL later sought termination of the merger on grounds that KKL delayed on its part to the agreements, a move that set the stage for the current legal battle.
Squishy sought restitution of the plant equipment and machinery, which had been delivered to Kevian, but Kevian had failed to deliver them.