The art of walking away with P400m
Mbongeni Mguni | Friday April 13, 2018 13:28
A stroke of a pen was enough.
The months the Botswana Public Officers’ Pension Fund (BPOPF) has spent in boardrooms, at the High Court and elsewhere in a death fight with its former fund manager and partner, Capital Management Botswana, boil down to the stroke of a pen.
More accurately, it is the stroke of a pen on the last page of a hefty partnership agreement dated November 11, 2014, signed by BPOPF and CMB directors.
Today, legal experts on both sides of the dispute agree that the agreements’ provisions and its demands on the BPOPF are beyond belief to the extent that it is mind-boggling how a pension fund with an arsenal of lawyers could agree to the establishment of such a deal.
“That agreement was lopsided from the word go. BPOPF had no business signing a contract of this nature, which gave away so much of its rights to another party,” says a legal professional who has been closely following the case.
CMB itself, in private correspondence to the pension fund at the height of the dispute, also touches on this asymmetry.
“Clearly the BPOPF has an army of legal advisors on this matter. That being the case, since the Secretariat (BPOPF executive management) took the premeditated decision to deliberately default, why did it not ask its army of lawyers as to what the consequences would be,” CMB managing director, Rapula Okaile wrote to the BPOPF on December 19.
The BPOPF itself, late in the dispute, hinted that parts of the deal could have been structured better.
“This arrangement should never have been made as it flies in the face of the fiduciary duty owed by the general partner to the fund and its partners at common law,” BPOPF directors and executives wrote on December 5, commenting on a specific clause within the agreement.
In short, the stroke of a pen in November 2014 established a partnership between the BPOPF and CMB called Botswana Opportunities Partnership (BOP), which was mandated to invest in private equity. The deal took for the form of an en-commandite arrangement which is a special partnership where one party is a general partner, possibly with investing expertise, and the other furnishes capital and is the limited partner.
Under the deal, BPOPF as the limited partner, committed to invest initially P500 million in BOP, an amount increased in early 2016 to P880 million. CMB, as the general partner, was also appointed the fund manager for BOP.
The agreement envisaged BOP as a private equity fund in which other parties would later invest and which would be managed by CMB. However, by the time of the disputes, no other parties had invested and the pension fund held a 99% stake, while CMB held one percent.
According to the agreement, CMB would issue BPOPF with drawdown notices whenever it required capital for an investment opportunity it had identified. BPOPF would make the funds available within 15 days. Provisions were also made for fund expenses and organisational fees payable to CMB.
A lawyer who has studied both the progression of the dispute between BPOPF and CMB, the judgments in the High Court last year as well as the matter before Motumise, says clauses 24, 28 and 77 of the BOP partnership agreement are central to how P400 million walked out of BPOPF’s coffers. The lawyer has requested anonymity as the dispute is still before the court.
Read together, the three clauses allowed CMB to take P422 million invested by BPOPF and sell its stake in BOP to a third party, if the pension fund defaulted on settling a drawdown demand from the asset manager.
Whatever recourse within the agreement that BPOPF had, including an advisory board, was also negated by other clauses within the agreement.
Clause 28.4, for instance, states that if the BPOPF defaulted on a drawdown and was notified of being a default partner by CMB, it would not be entitled to vote on any matter affecting BOP, even though BPOPF had a majority of directors on both the BOP’s advisory and investment boards.
“For so long as it is in default, the limited partner will, for voting purposes, be deemed to have a capital commitment of zero percent.”
Clause 28.2 is even more stupefying, according to the lawyer.
“The general partner (CMB) shall be entitled and is hereby irrevocably authorised by the defaulting limited partner, to dispose of the defaulting limited partner’s interest in BOP to one of more third parties at such price and on such terms and conditions as the general partner, in its sole and absolute discretion, deems fit.” Meanwhile, clause 24 makes the BPOPF obliged to pay drawdown claims even in the event of a dispute with CMB.
“Neither party was compliant in this agreement the beginning. There was clearly a very close personal working relationship in the arrangement because in some cases requests for drawdowns were made and paid on the same day.
“In early 2016, CMB made a drawdown request for P12 million for fund expenses and others and BPOPF paid the funds on the same day, rather than the 15 days provided by the agreement,” the lawyer said.
Between 2014 and mid 2017, CMB had applied for and successfully secured P477 million in drawdowns from BPOPF, these being invested in various entities, some of whose performances, structure and even existence are being currently contested today in court.
During this period, matters that the BPOPF would later tell the court were “material, ongoing and possibly unrecoverable” breaches, occurred but both parties sailed on with little concern raised.
In early 2017, however, the “personal working relationship” appears to have soured, leading to the pension fund paying more scrutiny to its financial commitments to BOP. Matters came to a head in September when CMB approached the pension fund with a drawdown request for P77 million. The asset manager had clinched deals to invest in Lobatse Clay Works and Yarona Media Holdings. The BPOPF held its ground and its money. By March, the BPOPF was demanding valuation of BOP and later audited financials and in even more tense communication, the pension fund was accusing CMB of lying about appointing an auditor for the BOP.
The asset manager invoked Clauses 24 and 28, depositing P50 million BPOPF’s account and notifying the pension fund that those were the proceeds from the sale of the BPOPF’s interest in BOP.
The balance, P422 million was retained, most in various investment vehicles whose valuation, returns or ability to be converted to cash is unknown to the BPOPF.
“The contract gave CMB the right to dispose of BPOPF’s interests in BOP to a third party,” the lawyer says. “That is total negligence on the part of the BPOPF. That was lack of fiduciary responsibility.
“How do you sign such a contract with people’s money? The contract shows lack of fiduciary responsibility and the absence of a due diligence.”
The lawyer adds that had BPOPF conducted even a cursory due diligence, they would have discovered that their partner in BOP had previously been involved in high profile contractual disputes with other leading financial entities in the market.
Instead, at least P422 million had walked away and that stroke of the pen in 2011 would form the basis of a suit the BPOPF would file at the High Court and lose on the grounds of urgency.
The court found that the matter had been festering for too long to suddenly be deemed urgent and on December 27 ordered the two parties to either go for dispute arbitration or allow the case to return on normalcy.
The baton now passes to Motumise, who has before him more than 500 pages of affidavits, evidence, written arguments and other material, even though his case does not directly concern the events set off in November 2014.
The case before the judge involves the Non-Bank Financial Institutions Regulatory Authority (NBFIRA)’s attempts to place CMB under statutory management. The regulator’s bid is primarily inspired by BPOPF complaints against CMB’s management as well as a subsequent preliminary audit NBFIRA conducted on the asset manager.
Another citizen-owned insurer, Bona Life, which is majority owned by BOP and CMB, also complained to NBFIRA over P133 million in assets under management by the asset manager.
The complex, multi-layered case before Motumise has already seen marathon arguments in which at least 11 senior attorneys, one of them a part-time judge in South Africa, spent 16 hours over two separate days arguing intricacies unintelligible to the average pensioner.
On Tuesday, Motumise’s will set off one of two events: either a statutory management process that could lead to some recovery of the pension fund assets currently in the wind. Or by throwing out the statutory management, send CMB and BPOPF back to arbitration to work on those “close personal relationships”.