The Board of Choppies Enterprise led by Former President Festus Mogae slept on the job while its suspended Chief Executive Officer Ottapathu violated Botswana Stock Exchange (BSE) and Johannesburg Stock Exchange (JSE) listing requirements and Companies Act, two confidential reports show.
The reports form part of the court papers that are before the High Court.
The first report by Rudi Binedell, partner at Price Water Coopers who is in charge of Choppies auditing relating to the 2018 Annual Financial Statement states that “from the foregoing it is apparent that various requirements of various legal agreements had not been complied with by a number of parties to the agreements (including Choppies Distribution Centre (CDC).”
The agreements are in relation to certain transactions involving the Fours Group of Companies and Payless Supermarket.
He also found that “The actual terms of legal agreements may not reflect the contracting parties’ intent, various laws and/or regulations (For example Companies Act, Competition Act and BSE listing requirements) may have been violated.”
According to Binedell’s report “ good cooperate governance requirements-including those related to disclosure of related parties disclosure and approval of strategic activities-may have been breached and historical annual financial statements may have been misstated through omissions in disclosure/application of inappropriate/incomplete accounting.”
But the second report by Desai Law Group was blunt in its findings as it accused the Board of sleeping on the job.
The report says further apparent irregularities, is in relation “to receipts of rebates by Choppies and settlement discounts by Payless/Fours Group when the Fours Cooperation requires the converse.”
The report observes that other irregularities relate to the” existence of a guarantee by Choppies of a loan procured by a company called Solace from BanABC in the sum of P50 million which was paid over to Choppies in reduction of Payless’s debt at the time of the guarantee (Solace being a company owned by Ottapathu and Mr Ismail; it being noted that this concern was identified and expressed by Desai Law Group and subsequently discussed with Price Water Coopers.”
Further irregularities include “the apparent co-financing (Choppies contributed) of the acquisition by one Mohamed Saleem Abdul Malique of 90 percent of the stated capital of payless from Willem Henning.”
Desai Law Group fell short accusing the Board of allowing Ottapathu to be powerful and not accountable to it.
“Mr Ottapathu who is known as the ‘face’ of Choppies has conducted virtually all of the business referred to in this Report almost single handedly. Whilst this may be both appropriate and acceptable in a private company, it is nowhere near the level of governance and the necessary ‘checks and balances’ required in a public listed company,” the report says.
It says “It goes without a saying that as a public company on the BSE and the JSE(Johannesburg Stock Exchange), Choppies is required to comply with the highest standards of cooperate governance and the Board is obligated to ensure compliance by the Company with these.”
According to the report, the past and current practice of ad hoc reporting to the Board by executive management is not reflective of best corporate governance practice and must be rectified.
Of course, the report notes, Board cannot be accountable, if it was kept in the dark by Ottapathu, but the Board cannot and should not wait to blame the executive management.
“It should not be the case that an auditor (whether Price Water Coopers or otherwise) should point out issues and concerns to the Board (as we have indicated above, the names Payless and Fours have clearly been mooted and discussed at a number of Board meetings.)”
The report added that “It should rather be for the Board to remain vigilant and make enquiry of and upon executive management immediately transaction is reported if not to the satisfaction, in anyway, to the Board.”
It says “This is not to say that the Board, in the matters to hand, should have known, for example, about Mr Ottapathu’s transfer of the Four Group shares into his own name (whether as additional security or otherwise if he did not inform the Board (as he did not but rather, to underscore the point that if at any time, the Board member considers that reporting on a given issue is incomplete or requires further debate or is confusing, he or should not hesitate to take executive management to further task on that issue.”
The report says Ottapathu should have not insisted on the transfer of the Four Group shares, whether as security or otherwise adding that this was a mistake on his part even if he thought he was acting in the best interests of Choppies.
“Mr Ottapathu should additionally have disclosed to the board that he had taken shares into his name. This was, as we have indicated above, material omission and quite possibly, a grave error of judgment, the report says.
The report says, however, the position is what it is what is necessary now for the Board is to take appropriate remedial action in relation to the holding of the Fours Group Shares by Choppies (in consequence of the signature by Mr Ottapathu of the Declaration of Trust.
“As for Mr Ottapathu’s failure to disclose to the Board the shareholding in Fours Group shares in his name, we are of the view that this should be the subject of censure of Mr Ottapathu by the Board,” the report says.
It recommended that such censure if the Board considers it appropriate, take the form of a disciplinary proceedings against Ottapathu in accordance with requirements applicable under Botswana employment law.
“As Mr Ottapathu has been suspended on precautionary basis, his capacity as CEO of the company by the Board , the mistake and failure to make disclosure to the Board can constitute a charge in the disciplinary change sheet that must precede any disciplinary hearing,” the report says.
The report states that Ottapathu did not appear to have received any payment or other personal benefit from Four Group shares in relation to his shareholding.
But Desai Law group advised the Board to be “concerned that, had it known at the time that Ottapathu had taken transfer of the Fours Group Shares, it may well have been compelled to seek legal advice which notwithstanding the assertion that the Four Group Shares were held by Ottapathu in trust for UDC , may have directed the Board to have approached the BSE for its guidance on the issue as to whether related party obligations were triggered.”
Ottapathu’s action in withholding the transfer from the Board means it simply did not have the opportunity to do so, the report says.
Additionally, the report found, it is not the norm to register a security interest by taking shares into ones name. John Little of Corporate Services denied having given advice to Ottapathu to transfer into his name when questioned by Desai Law Group saying the Four Group Shares were transferred into Ottapathu name on his direct instruction.
“Why then, was this done? What was the purpose of it as is it credible. The Board needs to deliberate upon these questions,” the report said.
It also adds that “If the Board take the view that, as a fact, the Four Group Shares were transferred into Mr Ottapathu name on behalf of Choppies for beneficial effect, it will need to consider whether; the BSE listings requirements as to acquisitions may have been breached; the P42 000 000 total consideration offered in terms of the Fours Offer represents the value for the Fours Group Shares.”
The report notes that even if the Board accepts Ottapathu’s contention, as supported by Fours Group in terms of the Four Offer that the Fours Group Share were transferred for purposes of additional security, it may nevertheless consider it necessary to engage BSE, after the fact, by way of disclosure and for the BSE’s guidance on the issues particularly since Price Water Coopers is likely to require disclosure of the transaction in the 2018 Annual Financial Statement.
“Whichever view prevails, it cannot be wrong for the Board to approach the BSE as a regulator. Note that, in addition to the above variables, it is possible to argue that mere fact that the Fours Group Shares were registered in Mr Ottapathu names means that the transaction had occurred and BSE consultation was required, regardless of any defences to it (not a related party transaction because the shares were being held in trust by Mr Ottapathu for Choppies and not a notifiable transaction because, purportedly, the shares were beneficially transferred, but simply for purposes of additional security),” the report says.
If so, the report says, the BSE should not to be bypassed.
The report also found that “There appears to have been no contract or agreement (verbal or written) in in relation to the transfer of the Four Group Shares and there was no engagement with BSE at the relevant time in relation to the transfer of the Fours Group Shares into Ottapathu’s name.”