Ousted CMC chairman takes shareholder war to the courts
CMC managing director, Bill Lay addresses journalists on September 14, 2011 at the Hilton hotel in Nairobi. Motor dealer CMC’s board meets Thursday morning for a potentially stormy session that is expected to reveal the full implications of the deepening rift among top shareholders over proposed changes in the company’s operations.
Motor dealer CMC’s board meets Thursday morning for a potentially stormy session that is expected to reveal the full implications of the deepening rift among top shareholders over proposed changes in the company’s operations.
CMC has claimed that Mr Muthoka was replaced in the interest of prudent corporate governance following revelations that he had vast interests in Andy Forwarders, a logistics company that is the largest single service provider to the motor dealer.
CMC also said revelations that Andy Forwarders, chaired by Mr Muthoka, had allegedly defrauded the motor dealer of millions of shillings through over-invoicing had rendered his continued chairing of the board untenable. CMC shareholders will therefore be looking up to the board for signals as to how it plans to recover nearly Sh2 billion that it has claimed Andy Forwarders received in inflated logistics billings.
The boardroom wars that have since turned into a public spat appeared to be headed for courts Wednesday after Andy Forwarders published a rebuttal of CMC’s statement in the local dailies accusing it of fraud.
Bill Lay, the CMC chief executive, Thursday held a press briefing in Nairobi where he accused Andy Forwarders of inflating freight costs to CMC by between 10 and 30 per cent – reducing the motor dealer’s competitiveness in Kenya’s price-sensitive market. “Our customers deserve the highest quality of service at a competitive price,” Mr Lay said in a statement, adding that the board will seek to open talks with Mr Muthoka for a possible refund of the excess charges.
Mr Lay said the audit report that revealed the excess billings had necessitated the replacement of Mr Muthoka as chair of the CMC board as it amounted to conflict of interest.
In a statement published on the print edition of this paper, Mr Muthoka has accused Mr Lay of making defamatory statements that have no factual grounding on Andy Forwarders.
“The allegations by Mr Lay are utterly inaccurate and not based on fact,” Mr Muthoka says in his rebuttal of a statement published in the local dailies Wednesday.
“In November 2010, an independent forensic audit report was concluded by a reputable audit firm investigating whether there were any financial improprieties in the company for the year 2009 and half year 2010. The audit report did not cast an iota of doubt on Andy’s contract or its billing procedures especially in such an important area as logistics which is core to CMC’s business.”
The public spat, however, left many questions in the minds of ordinary shareholders who have been caught in the middle of what is likely to be a long-drawn war and its possible impact on the firm’s performance.
Top in the minds of the questions that have not been answered is whether the CMC board was not aware of Mr Muthoka’s interests in Andy Forwarders when they appointed him chairman four months ago.
The fact that Andy Forwarders is also CMC’s single largest service provider raises the question as to whether the motor dealer’s management was complicit in the alleged over-invoicing for services provided during the 17-year-old partnership and what remedies are there for minority shareholders who lost the value of their investment in the process.
Mr Lay said CMC will henceforth work with multiple logistics firms such as SDV Transami and DHL to cut its reliance on Andy, whose contract could be terminated if it does not lower its charges. He said Andy has been charging the auto dealer higher rates than its competitors such as General Motors which he headed for more than 10 years before he was hired by CMC.
“CMC is going through a transformation process that will critically look at all areas of management including procurement of goods and services,” said Mr Lay.
He alleged that initial investigations had revealed that two former CMC directors had stolen millions of shillings from the auto dealer and kept it in off-shore accounts in Jersey Island that has emerged as a favourite destination for Kenyan elite’s ill-gotten wealth.
Mr Lay was the only senior CMC official at the press briefing whose guest list included Mr Kibe and finance director Mary Ngige.
Mr Muthoka’s response to the accusations and actions by the rest of the board are expected have far-reaching implications for the motor dealer, given him significant clout in the company.
For instance, Mr Muthoka could stop buying trucks from CMC, a move that could instead benefit foreign manufacturers or local dealers such as Simba Colt and DT Dobie that sell Mitsubishi and Mercedes trucks respectively.
Andy Forwarders buys tens of CMC’s Iveco and Nissan Diesel (UD) brands annually for use in its logistics business that serves big companies such as General Motors East Africa (GMEA) and Safaricom.
Mr Lay said CMC was keen on avoiding a court battle with Andy and that the company will pursue diplomacy but added that the success of that approach will depend on Mr Muthoka’s response.
On Wednesday, Mr Muthoka insisted that his removal from the chair of CMC was linked to his opposition to the salary cuts of 68 senior managers, outsourcing of sales targeted to the government and moving of the Land Rover and Volks Wagen franchise to Sameer Park, arguing that the latter two could have cost the auto firm about Sh690 million annually.
“The issue of my interest in Andy was well known to all the directors when I was elected chairman. The point now taken is obviously an afterthought and malicious,” said Mr Muthoka. “The law does not prohibit a company in which a director has an interest to do business with another company in which he is a director. What is required is disclosure of the interest.”
CMC’s share price shed over seven per cent of value in early trading session Wednesday before recovering to close at Sh13.30, 1.8 per lower compared to Sh13.50 the previous day. (Read: CMC shares rise on news of changes in boardroom)
“This followed corporate governance disclosures surrounding the resignation of the immediate former chairman in which CMC is alleged to have been overcharged for services provided by a company related to the chairman,” Standard Investment Bank said in a statement.
High turnover
At Sh13.30, however, the share price represents a 36 per cent gain in the past six months during which the company has seen a high turnover in its boardroom and executive suite as top shareholders reacted to slow sales.
Analysts say the share price gain is a signal of confidence in investors who are anticipating better results from the company in the coming years once major strategies are implemented by the new executive team led by Mr Lay.
CMC Motors has in the past two years struggled to match its 2008 peak performance when its net profit stood at Sh927.1 million.
That more than halved to Sh406.6 million last year, even as the economy expanded by 5.6 per cent, causing impatient shareholders to remove top managers in March, including long-serving chief executive Martin Forster and chairman Jeremiah Kiereini.
Mr Lay is betting on lower operational costs to reverse the firm’s dwindling fortunes. He has hired an agent to handle sales targeting the government – CMC’s single biggest client.
