The curse of the minority shareholders in Kenya

By Morris Aron and Jevans Nyabiage

Alois Chami is one of the few known local investors and he is a common figure in Annual General Meetings (AGM).

Chami is a minority shareholder in all the listed companies at the Nairobi Securities Exchange. And even in his sunset years, the greying bald old man who walks with a stoop, will be seen clinching onto a briefcase of sorts as he makes his way to numerous AGMs over the year.

And he will never walk away without asking a question in such AGMs — and hardly does he get the answers he seeks.

At a recent AGM called by logistics firm Express Kenya, he asked the managing director why his wife was a member of the board of directors and if that was a conflict of interest. He did not receive a reply.

“Later I was informed that the matter was being reviewed. I am yet to know the conclusion,” he told the writer of this article over the phone.

At another AGM, he asked the board of directors of Williamson Tea why they had decided to stock huge piles of real estate across the country while off-loading such property would boost the company’s bottom lines. That time, he received a scorn.

The chairman of Williamson Tea is reported to have even stated that if any shareholder had an issue with the property ownership by the company, that the matter should be subjected to a vote.

Then there is the case of Kakuzi, which apparently forced the sale of a crucial factory and the hapless feeling of minority shareholders at a case of a director of Orchids who has up to 11 unlisted companies.

“Majority shareholders use us (minority shareholders) to stamp whatever they decide in the boardrooms,” said Chami.

Call AGM

Daniel Kimotho is a minority shareholder of CMC Motors. He and others recently moved to court to have the company compelled to hold an AGM. After several appeals to the Capital Markets Authority to compel the board of directors to call for an AGM or have the company’s shares listed with no recourse, the courts were the only way out.

 “According to the company laws, all listed companies should call for an AGM not more than 15 months from the last AGM. For the case of CMC that should have been by June 2, 2012, ” said Kimotho.

“With the suspension from the NSE, we are loosing out on trading opportunities and the capital gains that we could have gotten were we trading. All these come as a result of the mistakes of majority shareholders.”

In 2009, when Safaricom called shareholders to ratify a dividend of ten cent, it was fireworks for the better part of the morning. A group of minority shareholders — mostly holding less than 100,000 shares — protested the move and asked for an increase to 50 cents saying that even on M-Pesa, the dividends would be swallowed up by sending charges.

“Give us 50 cents and we shall vote everything that you want us to vote for,” said Musa Karanja, a minority shareholder attending the event.

In the end, minority shareholders failed and majority shareholders — in this case, the Treasury with a 60 per cent stake, Vodafone International with a 35 per cent stake, and a third stakeholder with a five per cent stake — carried the day.

Chami, Karanja and Kimotho are the embodiment of a caricature of the fate of minority shareholders in Kenya — a long-suffering lot, required to rubber stamp whatever the majority shareholders decide.

From a classic example of the BOC-Cabarcid wrangles to the issue of Safaricom dividends to KenolKobil hostile take-over bid to even most recent CMC Motors corporate governance concerns, minority shareholders seem to be bearing the weight of being on the wrong end of the stick

Swiss firm, Puma Energy has expressed interest to give KenolKobil’s minority shareholders a compulsory acquisition offer as it seeks to acquire the entire shares of the listed oil marketer. The offer will be made once the Switzerland-based oil firm signs a purchase agreement with KenolKobil’s majority shareholders.

Minority shareholders at the oil marketer, which is associated with former powerful Cabinet minister Nicholas Biwott, are estimated to have a combined stake of 31.5 per cent.

Puma is eager to delist KenolKobil from the Nairobi Securities Exchange (NSE) and minority shareholders will find it difficult to dispose of their shares, once the company converts into a private entity, should they reject the offer.

CMA Requirements

The Swiss firm will be banking on the Capital Markets Authority (CMA) regulations that require foreign listed firms to make available at least 25 per cent of their equity to local shareholders, hence the drive to de-list from the bourse.

This is expected to bring back memories of the botched takeover of Carbacid Investment by BOC Gases that saw the capital markets regulator veto the deal in 2006 after it failed to get the backing of minority shareholders with a combined stake of 29 per cent, who included businessman Kenneth Matiba.

The key condition in the takeover deal and subsequent delisting of Carbacid from the NSE was that at least 80 per cent of shareholders had to back the takeover transaction, but the promoters of the deal waived the condition without informing the regulator.

Prudent structures

Einstein Kihanda, the chief investment officer at ICEA-LION Asset Management, says the root cause of the problem is the absence of prudent corporate governance structures.

“Ultimately, the direction of a company is governed by ownership. This includes appointments to the board. Majority shareholders are assumed to have the best interest of the company at heart,” said Kihanda.

“The problem comes when in both private companies and public entities such appointments to the board are done without adherence to corporate governance requirements.”

After the end of the era of share price escalations that led to quick capital gains, shareholders have been left to look at dividends as the only gains of investing at the NSE.

The development, stock market analysts say, has unearthed the obvious inequities of AGMs in Kenya, tipped to favour majority shareholders.

The concern by minority shareholders also brings to the fore the inadequacies of proper corporate governance in many firms, especially when concerns mount over business practices and the validity of financial disclosures.

“There is a possibility that full disclosure of the actual profits is not made when majority shareholders collude,” said Chami

Minority shareholders also say that some of the appointments made contravene the spirit of having the good of the company at heart. According to a research by Business Weekly, a good number of directors seating in boards of such companies have several unlisted companies that, in some cases, are doing similar business.

Then there is the issue of the age and the expertise of some of the board members appointed by majority shareholders.

 “The idea of one share one vote needs to be re-looked at. Minority shareholders interest also need to be presented at the boards,” said Kimotho.

“We have to find a way of addressing this issue.”

According to Dr XN Iraki, an economics lecturer at the University of Nairobi School of Business, the fate of minority shareholders becomes more precarious when one considers the fact that most minority shareholders are disinterested with affairs of the firm beyond dividends.

Not protected

“I do not think they are protected enough and that is not unexpected if democracy. Rule by majority prevails in company’s governance,” said Dr Iraki

“The remedies open to minority shareholders such as taking a court action against directors are not an easy one. The situation is more complex when majority shareholders are “ a few people” with lots of power concentration.”

In the recent past, the plight of minority shareholders has been manifested in the form of court cases halting hostile take-overs — as in the case of KenolKobil — or calling for an AGM as in the case of CMC Motors whose director also attracted the wrath of the CMA.

Modifying laws

Experts say that going forward, the answers lies in modifying the laws governing minority shareholding rights and the need for the CMA to step in hard.

“Change company law to protect the minority shareholders. Ensure that information on the firm is easily accessible so that minority shareholders have a say in governance. Minority shareholders must also be made aware of the options open to them in case they are dissatisfied with the firm,” said Dr Iraki

“How about limiting the percentage of a firm individuals can own to reduce concentration and disperse power? Cross -listing of shares also increases protection of minority shareholders.”

According to Kihanda, CMA guidelines on corporate governance need be reviewed and straightened out with stiff penalties in case of breech.