Minority shareholders of Uganda Baati Ltd — a manufacturer of roofing and hardware products — have sued the company’s majority owners over what they say is dubious transfer pricing and poor corporate governance.

The November 9 petition, filed by BNB Advocates and fronted by Andrew Muhimbise, Margaret Kiwana, Anna Mwewulize and Jesse Ibanda against Uganda Baati Ltd, Safal Investments (Mauritius) Ltd and the registered trustees of the Chandaria Foundation.

The Chandaria Foundation controls Safal Investments Ltd, a holding company for Uganda Baati Ltd, and other sister businesses located in East and Central Africa, including Mabati Rolling Mills Ltd of Kenya, Safintra Ltd of Rwanda, Bouchard International Services Ltd, Comcraft Kenya Ltd, Bahari Forwarders Ltd, Aluminium Africa Ltd, Safal Steel (PTY) Ltd and Insteel Ltd.

The Foundation was created by Mannilal Premchand Chandaria, who also chairs the board of Uganda Baati Ltd.

The registered trustees of the Chandaria Foundation and Safal Investments (Mauritius) Ltd held 49,085 and 982,620 ordinary shares respectively in Uganda Baati Ltd at the end of August.

The stake for the minority shareholders stands at 17,570 shares for Andrew Muhimbise, 2,881 shares for Margaret Kiwana, while Anna Mwewulize and Jesse Ibanda held 5,000 and 500 ordinary shares respectively.

The minority shareholders have taken issue with transfer pricing schemes — an arrangement in which companies and their subsidiaries sell goods and services to each other below average market prices.

They have also raised issues with questionable insider lending transactions, which they said have depleted Uganda Baati’s revenues significantly since 2011, leading to considerable gains for the majority shareholders and denying minority shareholders dividends over the past four years.

The company’s last dividend payment dates back to 2011 and amounted to Ush20,000 ($5.5) per share, court documents show.

“…That the affairs of the 1st respondent company have, for a long period of time now, been conducted by the 2nd and 3rd respondents in a manner prejudicial to the interests of the rest of the minority shareholders in so far as the 2nd and 3rd respondents have devised various transfer pricing mechanisms to gain substantial commercial benefit out of the company to the exclusion and detriment of the rest of the shareholders…” the petition reads.

The petition cites an interest free loan of Ush5,380,027,000 ($1.5 million) that was provided by Uganda Baati Ltd to Lugogo Developments Ltd, a subsidiary of the Safal Group over the past five years without clear justification. 

Another $905,200 interest-free loan was given to Tororo Steel Works Ltd, a subsidiary of Safal Investments (Mauritius) Ltd and the Chandaria Foundation, under similar circumstances during that period.

The petition also cites high value transportation contracts maintained by Bahari Forwarders Ltd and Uganda Baati Ltd. While the former secured transportation contracts worth Ush12.2 billion ($3.3 million) in 2011 for carrying raw materials from Mabati Rolling Mills to Uganda Baati’s factory premises in Uganda, all payments made to the transporter are apparently excluded from the company’s financial statements.

The petitioners have questioned management fee contracts signed by Comcraft Kenya Ltd, Bouchard International Ltd and Uganda Baati Ltd. Whereas the above companies have been paid a combined sum of Ush3 billion ($820,149) in management fees over the past five years, the petition claims no management services of any kind are actually provided to Uganda Baati Ltd by the firms in question.

Furthermore, management fees paid to the two rose from Ush535,548,000 ($146,410) in 2013 to Ush569,387,000 ($155,661) in 2014 despite continued losses suffered by Uganda Baati Ltd.

The minority shareholders are equally upset about the surge in costs of raw materials procured from Mabati Rolling Mills Ltd in the past.

“The monies paid to another subsidiary of the 2nd and 3rd respondents, Mabati Rolling Mills Ltd, for purchase of raw materials in 2011 increased dramatically from Ush31,376,572,000 ($8.6 million) in 2010 to Ush88,738,506,000 ($24.3 million)...” added the petition.

Governance standards

The petition also alleged weaknesses in Uganda Baati Ltd’s corporate governance standards, reflected by the refusal to appoint a chief executive officer between 2013 and 2014.

This together with the lack of independent directors on the board and refusal to appoint board oversight committees to brief shareholders about company performance patterns, led to the loss of Ush3.8 billion ($1 million) during the period, says the petition.

The minority shareholders want the court to compel the majority owners to acquire their shares at a fair market value and also issue an order for a forensic audit to be done on previous insider dealings and related party transactions.

“We are still receiving instructions from our clients on this matter and that is why we are yet to file our defence. But I believe this matter could have been resolved internally without being taken to Court. Right now, we are held back by the fact that most of the company directors are based overseas and it may take long to compile numerous relevant documents filed many years ago,” said Chris Bwanika, one of Uganda Baati Ltd’s external lawyers.