Legal Battles Trip up Stanbic-CFC Merger
Tuesday, 10 June 2008
On Tuesday, 13 May 2008, Kenyan courts declined to lift the order halting the Stanbic-CFC merger, and this temporary order is to stay in place for another fortnight. Two pending court cases now represent a serious threat to the future of what has been described as the largest merger and acquisition deal since the 2002 takeover of Kencell by Celtel. On Tuesday, 13 May 2008, Kenyan courts declined to lift the order halting the Stanbic-CFC merger, and this temporary order is to stay in place for another fortnight. For the past two years, since 2006, Stanbic Bank has worked hard to make CFC Financial Group part of its stable. If concluded, this union worth KES16bn, billed by both parties as a merger, was going to be the second biggest merger and acquisition deal in Kenya since the 2002 KES20bn takeover of Kencell by Celtel. For the state owned Industrial and Commercial Bank of China (ICBC), which acquired a 20% stake in Stanbic’s parent bank, Standard Bank of South Africa, in October 2007, the Stanbic-CFC merger would expand their footprint in sub-Saharan Africa to East and Central Africa’s financial hub, Kenya. ICBC’s acquisition, at ZAR36.7bn (US$5.5bn), was the largest foreign acquisition by a Chinese commercial bank yet.

While the CFC seemingly had no major case against it that had the potential to drastically derail the merger, Stanbic Bank had two formidable cases in the Kenyan courts. One of them may have become the Achilles heel in the bank’s intended merger  but the other is a potential threat that could sink the whole deal.

Already, a case filed by 15 former employees of Stanbic Bank in 2005, before the merger talks had commenced, has turned out to be a bigger challenge than the bank ever expected. What started as a claim for KES532.2m as claims for pension after their retirement has now ballooned to a claim worth KES1.16bn due to interest and an order from the High Court where lady justice Roselyn Nambuye temporarily stopped the merger on 8 May 2008. Stanbic Bank must now be regretting their statements of 2005 claiming that “the entire suit is misconceived, bad in law and an abuse of the court process and shall at the earliest opportunity apply to have the suit struck out.”

The other case is even more formidable where Industrial Plant (EA), a company in receivership, is demanding over KES25bn from Stanbic Bank, for what it claims to be losses incurred and assets sold at throw away prices after the bank withdrew a funding lifeline that it had promised the firm.

While this suit seemed to have hit a dead end after Stanbic Bank asked for a huge security deposit in court worth KES525m, Industrial Plant got a major boost when Justice Luka Kimaru of the Milimani Commercial Court rejected Stanbic’s claim and instead set the security at KES10m. That was the window of opportunity the lawyers for Industrial Plant were waiting for: KES10m was affordable, and in a day, they had placed the security in court and started preparing for injunction proceedings for the merger to be stopped until the case was heard and determined.

What will irk shareholders of CFC and the top management of Stanbic Bank is that in both cases, the parties suing Stanbic were open for negotiation and out of court settlements, but the bank’s lawyers advised otherwise. “Based on consultation with external legal counsel, it is considered that the suit is frivolous, vexatious, out of time and lacks merit,” Stanbic Bank said in its financial report for 2007.

But nothing could have been further from the truth. On 5 May 2008; a certificate of urgency was lodged at the Milimani Commercial Court by Industrial Plant’s lawyers for an injunction order seeking to also stop the merger. Before this, Industrial Plant had grown cold feet due to the high cost of security of KES500m that Stanbic Bank wanted deposited in court. “The truth is that Industrial Plant would not have been able to raise KES500million easily and could therefore not risk to try and stop the merger as they did not have the financial muscle, but when the court held that KES10m was sufficient, it was all systems go,” says a lawyer versed with the issue who declined to be named.

While the pensioners’ suit is direct and could easily be concluded if Stanbic Bank opted for an out of court settlement or had the order lifted next week, the Industrial Plants suit raises several issues that are sure to vex the two parties. By the time of going to press, lawyers for Stanbic Bank, Walker Kontos and Co Advocates had not yet responded to the chamber summons lodged by Industrial Plant intending to stop the merger, but Allen Gichuhi, the lawyer representing the Bank in court said that they will respond to the suit this week. The case will come up for hearing on 19 May 2008. “We will challenge the intended injunction,” he said, declining to comment further until he filed the banks replies in court.
Industrial Plant is entering into a legal sphere that will set precedent in the Kenyan courts if it succeeds especially after the incorporation of new amendments to the Banking Act in January this year. One of the main reasons Industrial Plant is claiming for stopping the merger is that the ultimate holding company of Stanbic Bank Kenya is not the Standard Bank of South Africa as is widely believed, but a private investment company, Standard Bank Investment Corporation that is not recognised as a bank by the South African Reserve Bank as is required by Kenyan laws. Similarly, according to Industrial Plant, there is a risk of international flight of cash or assets of the new bank being placed beyond the jurisdiction of Kenyan courts and thus it would be impossible for Industrial Plant to claim its KES25bn if its case succeeded.

“Stanbic Bank Kenya Ltd is directly owned by Stanbic Africa Holdings Limited which is only a private investment holding company incorporated or domiciled under the laws of England and Wales and which owns 96.3% of the bank, this is in violation of the Banking Act,” says Industrial Plants lawyer, Mathew Oseko of Oseko and Company Advocates, referring to the court documents he has filled in court. This, he argues is illegal, since Stanbic Africa Holdings Limited majority shareholders who own over 90.9% of the shares are registered and or domiciled in Douglas, Isle of Man, which is outside the jurisdiction of Kenyan courts.

“Stanbic Bank Kenya Ltd proposed merger with CFC Bank Ltd has been structured as a reverse merger to escape or flee pre-existing liabilities and obligations domestically and internationally, and the direct shareholding by Stanbic Africa Holdings Limited (SAHL) is structured to shield the ultimate owning company from any liabilities in Kenya with both schemes and structures specifically aimed at frustrating and or forestalling any execution that may be made against Stanbic Bank Kenya Ltd,” reads the court documents lodged by Industrial Plant at the Milimani Commercial Courts.

The Managing Director of Stanbic Bank, Du Tuoit, did not respond to the statements of Industrial Plant as he was out of the office, emails sent to him were also not responded to by the time of going to press. The annual report for 2007 for Stanbic Bank Kenya, states that the ultimate holding company is Standard Bank Investment Corporation, which is incorporated in South Africa.

While the matter of Industrial Plant is in the future and may yet come to nothing, for now, the main headache for Stanbic bank will be to overturn the order of Justice Roselyn Nambuye on 21 May 2008. The former employees who sought and obtained the injunction order from justice Nambuye, argued through their lawyer that the merger between Stanbic and CFC be put on hold and for Stanbic to deposit in court KES1.6bn to safeguard against default, or capital flight after the success of the merger as a new body would be formed that would be different from Stanbic bank. But more interesting was their plea to Justice Nambuye for Stanbic Bank to disclose to the court its business and assets in Kenya and the same to be conditionally attached until the determination of the suit. The judge did not deal with the issue, but had she also granted this particular plea, the repercussions would have been significant for Stanbic.

The coming two weeks are going to be trying ones for both Stanbic Bank and CFC, as the determination of the two legal cases will determine just how fast the merger will be completed. If Stanbic Bank fails to have the orders of justice Nambuye lifted on 21 May 2008, or if Industrial Plant manages to get similar injunction orders or an order requiring that Stanbic bank deposit KES26.5bn in court, then the merger will be as good as dead. At KES16bn, the money Industrial Plant wants Stanbic bank to deposit in court is over 60% of the total value of the merger. For now, the courts hold the keys to the success of Kenya’s second largest merger and acquisition deal.

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