Companies

Inside American private equity fund ECP’s fight with Kenyan contractor

andrewross-jitendrapatel

Andrew Ross (left), former Spencon chief executive officer and Jitendra Patel, Spencon founder. PHOTO | FILE | NATION MEDIA GROUP

Summary

  • The American private equity fund and one of Spencon’s founders, Jitendra Chhotabhai Patel, have accused each other of multi-billion shilling fraud in a series of global lawsuits, including cases in Mauritius, Uganda and the United States.

US private equity fund Emerging Capital Partners (ECP) says its take-over of Kenyan construction firm Spencon was legal, deepening the ownership crisis facing the troubled company.  

ECP says Spencon’s founders defaulted on their financial obligations, which automatically saw them lose shareholding of the company.

The American private equity fund and one of Spencon’s founders, Jitendra Chhotabhai Patel, have accused each other of multi-billion shilling fraud in a series of global lawsuits, including cases in Mauritius, Uganda and the United States.

The lawsuits have also entangled KCB Group which lent Spencon Kenya more than Sh2 billion during the good times, but risks losing its latest loan of Sh871.2 million after the construction firm was placed under administration.

The fund, a $2 billion (Sh206 billion) asset manager backed by development finance institutions such as CDC Group and European Investment Bank (EIB), says it provided Spencon with  loans amounting to $15 million (Sh1.5 billion) between 2006 and 2007.

The loan fell due in 2009 and the construction firm was unable to repay the debt, with the founder shareholders asking ECP to convert it into equity.

This request, according to the fund, was meant to avoid a default that would have called in the founders’ personal guarantees to other creditors.

“ECP accepted to convert its loan and become a shareholder of Spencon but only on condition that the previous majority shareholders make certain commitments to ECP,” the fund said in a statement.

The conditions included an Put Option Agreement (POA) that committed the founders to buy out ECP if the fund was unable to get alternative buyers for the 37.4 per equity it acquired in the original conversion.

ECP says its interest subsequently rose to 38.6 per cent after shares of one of the founders, Kiran Saroop Sagaar, was redistributed to others as settlement for a fraud he executed in the company.

To secure their commitment to buy out ECP, the founders pledged their shares to the fund in the event they would not honour the POA.

The 38.6 per cent stake gave the fund the right to nominate four directors to the board, giving it equal representation with the founders. The board also had an independent chairman.

“In reality, however, the founders and JC Patel in particular, remained in day-to-day operational control of the business and repeatedly circumvented the need to obtain board approvals when that suited their needs,” ECP said.

The chairman was forced to resign in 2012 when he voted with ECP “in the interests of the company”, with the founders attacking his independence.

The founders in the same year forced the resignation of their Mauritian nominated director in a plan to deny the board quorum.

“It must therefore be considered that up to March 2014, all material decisions were taken by the sponsors and their representatives,” ECP said.

The fund says it could have exercised the POA after September 30, 2012 but did not do so, opting to work with the founders to address Spencon’s deepening financial distress.

In October 2012, ECP offered to invest a further $6 million (Sh622 million) in the company to help turn it around.

“Instead of exploring ECP’s offer, which was the only offer of funding that the company had available, the sponsors refused to discuss the proposed investment and launched a ‘notice of dispute’ alleging that ECP’s Put Agreement was invalid,” ECP said.

The fund says it realised a constructive engagement with the founders was futile, prompting it to exercise the POA in February 2013.

This set in motion a process that led to its acquisition of a combined 60.68 per cent stake from the shareholders, raising its interest in Spencon to 98.08 per cent.

ECP simultaneously referred the dispute to the London Court of International Arbitration (LCIA) in line with dispute resolution mechanism laid out in Spencon’s shareholders agreement.

The arbitration court ruled in favour of ECP in February 2014, noting that the POA was valid and binding. The court said the founders were obligated to pay the put price of $22.4 million (Sh2.3 billion) and $485,605 (Sh50.4 million) in costs by May 28, 2013.

The founders were also ordered to pay 10 per cent interest on the put price after May 28, 2013 until the time the consideration is paid.

“In 2014, after the previous majority shareholders had repeatedly refused to honour their commitments and ECP had won a ruling at the LCIA, ECP exercised its security over their shares and acquired a majority interest in Spencon,” the fund said.

“As a result, ECP lawfully became the owner of 98 per cent of the share capital of Spencon.”

ECP says Spencon had been in serious decline by the time it took control of the company, with the fund having explored the possibility of selling its stake to Delma Emirates Group in 2011.

Delma offered to acquire a 25 per cent stake in Spencon with an option to raise it to 51 per cent but the deal fell through.

Besides defaulting on their commitments, ECP has also accused the founders of defrauding Spencon over the years. Mr Patel’s son, Pragnesh Patel, for instance, emerged with a 41 per cent stake in Spencon’s subsidiary, Spedec without paying for it.

Spedec, which was previously fully owned by Spencon, has a 41.5-acre land in Nairobi’s Kasarani valued at more than Sh500 million as its major asset.

Mr Patel is seeking $50 million (Sh5.1 billion) from ECP as compensation for what he claims he has lost by the entry of the American fund into the company that was placed under administration last month.

Spencon was previously one of the largest local construction firms with more than three decades’ experience building roads, bridges and water infrastructure.

This performance saw international investors like the International Finance Corporation (IFC) and the United States’ Overseas Private Investment Corporation (OPIC) queue to lend it billions of shillings between 2010 and 2012.

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