The capital markets regulator on Monday stoked the management flames at motor dealer CMC Holdings with a fresh order seeking to send the entire board packing and replace it with a new one.
CMA said it would appoint a caretaker board to replace the warring directors – a move that would effectively throw out the key protagonists in the four-month long boardroom battle that began in September.
The regulator communicated its intention to the company’s warring directors yesterday in a meeting that discussed the preliminary findings of a forensic audit report by Webber Wentzel of South Africa.
CMA said it had also relied on an earlier report by PricewaterhouseCoopers (PwC) which alleges that CMC lost more than Sh1.1 billion in inflated logistics charges by Andy Forwarders, a company majority owned by Mr Muthoka.
“The board is dysfunctional and we believe that it is not in a position to run the company,” said Kungu Gatabaki, the chairman of CMA. “Any person adversely mentioned in any of the two reports will not be a member of the caretaker board that will oversee CMC’s operations for about a year,” he said.
The decision, which was communicated in a press statement, met sharp reaction from the lead shareholder Peter Muthoka’s lawyers who termed in illegal and in breach of court orders that the Capital Markets Authority (CMA) had itself sought and was granted in November.
“The move is in total contempt of court following the orders that CMA sought and was granted on November 16, 2011,” said Fred Ojiambo of Kaplan & Stratton, the law firm that represents Mr Peter Muthoka, the lead shareholder at CMC in the suit against CMA.
Mr Ojiambo said the court had on November 16 issued two orders in response to CMA’s prayers -- that the CMC board could not be altered until the matter before court is heard and determined besides restraining the petitioner (Mr Muthoka) from holding a special general meeting.
“This means the composition of the CMC board cannot be changed until the case has been decided. CMA cannot act in breach of orders it sought and obtained from court,” he said.
But Mr Gatabaki said the decision as to whether CMA’s action is in breach of earlier court orders is a matter of legal interpretation.
CMA had its statement said the current CEO and finance director Bill Lay and Mary Ngige would remain in office and that the current board – composed mainly of major shareholders and their nominees — should propose five names to CMA for approval and appointment.
The regulator is to appoint three independent directors including the chairman, effectively replacing current chairman Mr Joel Kibe who has a 10 per cent stake in CMC.
Details of the report by Webber are yet to emerge but the stance taken by CMA are set to lock out Mr Muthoka who holds a 24.7 per cent stake in the country’s fourth largest auto dealer.
CMA’s latest action could make it difficult for CMC’s long-serving chairman Mr Jeremiah Kiereini to return to the company’s board after his ouster in March last year.
Mr Kiereini, who has a 12.5 per cent stake in CMC, has been linked to irregular multi-million-shilling offshore accounts together with former CEO Martin Forster who was sacked a few days before Mr Kiereini’s ouster.
The fact that CMA has left the warring major shareholders to propose five people to sit in the caretaker board is expected to ignite fresh battles among the rival camps led by Mr Kibe and Mr Muthoka.
CMA says integrity will be the main criteria for qualification of directors to the interim board but the matter is expected to boil down to shareholding power between the two camps that have accused each other of fraud.
We understand there is bad blood between them. They may not agree but we still have power as a regulator to constitute the board ourselves,” Mr Gatabaki said.
Mr Lay, who enjoys the support of Mr Kibe, engineered the ouster of Mr Muthoka as CMC chairman on September 8 on grounds that his logistics firm, Andy Forwarders, had overcharged the auto dealer by up to Sh2 billion.
Mr Lay also cancelled Andy’s contract, fuelling a boardroom war in which Mr Kibe and two other directors are targeted for expulsion in an extraordinary general meeting called for by Mr Muthoka but whose approval lies with the courts.
Mr Muthoka has accused Mr Lay for paying millions of shillings in inflated invoices to Pewin Motors, a firm he hired on his first day at CMC to handle sales as an outsourced agent.
The unpredented move by CMA could also spark a new fight between the regulator and Mr Muthoka who insists that the PwC report is not a forensic audit and should not be relied on for regulatory or court actions.
“The PwC report was commissioned by Mr Lay without involving the board of directors,” Mr Muthoka said.
“The auditors were given specific terms of reference to focus on Andy’s contacts with CMC, relying on documents provided by management which they did not verify,” he added. Mr Muthoka also cites a disclaimer by PwC in dismissing the reliability of the report.
“The procedures we performed did not constitute an examination or a review in accordance with generally accepted auditing standards or attestation standards and therefore we did not audit or otherwise verify the information supplied to us,” PwC said in the report.
CMA says the caretaker board should pave way for prudent management of the company and the resumption of trading of its shares which have been suspended at the Nairobi Securities Exchange (NSE) since September last year.
The regulator cites six corporate malpractices for its decision: breach of capital markets laws, bad corporate governance, weak internal controls, questionable procurement procedures, poor oversight of the board, and irregular establishment and operation of offshore accounts.