In the second quarter of 2016, Fidelity Commercial Bank was experiencing a worsening liquidity crisis.
The recent collapse of three institutions –Dubai Bank, Imperial Bank and Chase Bank— had eroded confidence in small lenders.
To address its liquidity crisis, Fidelity’s directors started talks with Mauritius-based banking group SBM Holdings to have the latter acquire the Kenyan lender.
The negotiations culminated in SBM’s buyout of Fidelity for Sh100 in a controversial transaction that is now before the High Court.
The legal battle will unravel the roles, claims and counterclaims by three key parties –SBM, former owners of Fidelity and the Central Bank of Kenya (CBK).
Details of the transaction remained a secret until Sultan Khimji, a former significant shareholder in Fidelity, recently filed a case on behalf of his co-investors seeking to compel SBM to pay them a total of Sh2.5 billion.
The figure represents Sh1.9 billion of Fidelity’s alleged book value and Sh600 million worth of goodwill –a premium that an acquirer pays for things like existing customers and brand.
SBM has not made any payment to the Khimji group in breach of their agreement, the plaintiffs say in the court papers.
On November 22, 2016, the CBK published a press release announcing that SBM intended to acquire Fidelity.
Details of the proposed deal were not disclosed at the time.
In its 2017 annual report, SBM disclosed that it bought a 99.99 percent interest in Fidelity for a consideration of 35 Mauritian rupees (Sh100) “plus a contingent consideration.”
The multinational did not elaborate on the potential additional payouts in the deal that was finalized on May 10, 2017.
In its 2018 annual report, SBM disclosed that it wrote off 418 million Mauritian rupees (Sh1.1 billion at current exchange rates) worth of goodwill at Fidelity.
SBM subsequently stopped discussing contingencies relating to the transaction.
The former Fidelity owners are accusing the CBK and SBM of defrauding them by making promises they had no intention of fulfilling.
A document dated November 17, 2016, included signatures by CBK’s top leadership and outlined the broad terms of the deal such as additional compensation based on Fidelity’s net asset value.
This was a prelude to the share purchase agreement dated March 28, 2017, which provided for a maximum payout of Sh600 million to the former Fidelity shareholders.
Mr Khimji says in his supporting affidavit that SBM and CBK have maintained opacity in terms of Fidelity’s financial performance post-acquisition on matters such as impaired loans.
In its defence, CBK says that it is not a party to the share purchase agreement between SBM and the former Fidelity shareholders.
SBM on the other hand says the conditions for paying the Khimji group were not met as Fidelity suffered substantial shortfalls.
The multinational’s representatives added that Fidelity’s former owners were also informed of the status of the bank’s financial position as provided for in the agreement.
