25 October 2017

Nigeria: Oando Claims Court Order Halting Suspension On Shares, Forensic Audit

Following the technical suspension placed on its shares and the decision to undertake a forensic audit into its affairs, Oando Plc has claimed it has obtained an interim injunction from a Federal High Court restraining the Nigerian Stock Exchange (NSE) and any other parties working on its behalf from giving effect to the directive of the Securities and Exchange Commission (SEC) to implement the suspension, pending the hearing and determination of the motion for injunction.

The court, Oando further claimed, has also issued an order restraining SEC and any other parties claiming to or working on behalf of the commission from conducting any forensic audit into the affairs of Oando, pending the hearing and determination of the motion for injunction.

Oando, in a statement Tuesday, said it obtained the interim injunction and restraining order from a Federal High Court, but failed to indicate the jurisdiction of the court.

Given the absence of the court's interim injunction and restraining order to support Oando's claims, THISDAY was unable to independently verify the decision of the court.

SEC last week had placed the company's shares on full suspension for two days, then a technical suspension thereafter, pending the forensic audit into the affairs of the company.

The decision followed its investigation into two petitions sent to the commission by Mr. Dahiru Mangal and Ansbury Incorporated respectively, a shareholder and an indirect shareholder of the energy firm.

SEC's probe threw up several regulatory infractions committed by Oando, which has dual listings on the Nigerian and Johannesburg Stock Exchanges (JSE), and the commission's instruction to the firm that it must bear the N160 million cost of the forensic audit to be handled by a team of independent experts to be led by the audit firm, Akintola Williams Deloitte.

But in a statement Tuesday on SEC's findings, Oando's Chief Compliance Officer and Company Secretary, Ayotola Jagun, provided clarifications to all the points raised in the commission's findings as outlined in their correspondence to Oando's Group Chief Executive (GCE) Mr. Wale Tinubu, on October 17, 2017.

Oando also noted that SEC had announced that a forensic audit into the affairs of the company will be conducted by a team of independent professional firms.

But Oando described SEC's directives as illegal, invalid and calculated to prejudice its business.

To safeguard the interests of the company and its shareholders, Oando said it took the step to file an action against SEC and NSE.

"The NSE and SEC were served with the enrolled court order today Tuesday, October 24, 2017 after the technical suspension was carried out by the NSE on Monday, October 23, 2017.

"In our view both the NSE and the SEC are legally obliged to comply with the interim order, pending the substantive determination of the suit," the company added.

Oando said it resorted to the court action because having declared to the public that SEC had ordered the suspension of its shares as a result of its "weighty" findings in the course of its investigations, SEC further concluded that a forensic audit was necessary in order to investigate whether its findings were true.

Oando described SEC's position on the matter as a clear contradiction.

"How did SEC arrive at its findings if it cannot be sure of the veracity or otherwise of those findings and how did it ascribe the appropriate level of weight to be given to those findings, enough to warrant an immediate suspension, followed by a technical suspension of the shares of the company, if those findings are still mere allegations at this point?" Oando wondered.

Oando said it had fully co-operated with SEC since the commencement of this investigation in May 2017 and had provided all the information requested.

According to the company, it was evident that the submissions made to SEC had not been duly considered due to the conclusions reached and actions taken, as all of the matters raised had been responded to in great detail with all supporting documents requested by SEC.

Oando alleged that its chairman had requested audience with SEC to enable it present its case before the commission but to date, no invitation has been extended to the company.

"Each of the alleged infractions has a penalty as prescribed by the respective provisions of the ISA, SEC Code, SEC Rules and Regulations, NSE Listing Rules and CAMA; none of them whether singularly or together warrant the suspension of free trading in the securities of the company or the institution of a forensic audit.

"The latest actions taken by the SEC are prejudicial to the business of the company as it would hinder the ability of the company to enter into new business transactions and affect the confidence that existing stakeholders (lenders, JV partners, vendors, etc.) have in transacting business with the company.

"The company has received numerous queries from critical stakeholders, including its lenders as a result of SEC's actions and an indefinite technical suspension of its shares, as well as an open-ended forensic audit that will negatively impact the ability of the company to conduct its day-to-day business and meet the expectations of all its stakeholders," Oando stated.

Oando added that by issuing the two letters dated August 24 and August 28, its chairman had petitioned the Director General of SEC alleging bias and lack of due process in the way and manner in which SEC has conducted this investigation.

According to the company, the current action by SEC, despite its internal findings, confirmed that SEC appeared to be working to its own conclusion rather than looking at the facts before it and acting in the best interest of the company and the minority shareholders whom it claimed it sought to protect.

Oando further alleged that in its most recent communication to the Group Chief Executive (GCE) dated October 17, SEC unilaterally qualified one of the petitioners, Ansbury Inc. as a whistleblower despite the fact that Ansbury brought its petition to SEC as an indirect "shareholder" of the company.

The company argued that it had from the date of its earliest communication to SEC on this matter, challenged both the legal capacity of Ansbury to bring a petition against the company and SEC's jurisdiction to consider the petition.

"This is because Ansbury is not in fact a shareholder of the company and furthermore, there is an on-going arbitration in the United Kingdom in respect of its indirect investment in the company.

"Under SEC's Complaints Management Framework, it shall not consider any matter which is currently in arbitration. The unilateral and arbitrary re-classification by the SEC of the basis upon which Ansbury wrote its petition at this late stage is at odds with accepted principles of fairness and due process.

"It is also difficult to understand how Ansbury can be a whistleblower when the information and allegations contained in its petition were obtained from the publicly disclosed 2016 audited financial statements of Oando and based on Ansbury's own interpretation of those financial statements," Oando said.

The company further alleged that the two petitioners, Alhaji Mangal and Ansbury Inc., were copied in SEC's most recent communication to the company's GCE on October 17, stressing that it was unheard of and prejudicial to the company's case for petitioners to be copied on correspondence to the investigated party on findings yet to be concluded.

Oando also described as onerous and unnecessary, the cost implication of the forensic audit -- N160, 000,000.00 -- which it is to bear, saying "it is not the best use of shareholders' funds at this time".

Responding to SEC's findings, as outlined in its correspondence to the company's GCE on October 17, Oando stated that SEC accused it of breach of corporate governance code.

The commission had informed Oando that it found from the corporate governance return submitted by the company for the period ended December 31, 2016, that the remunerations of the GCEO and the Deputy GCEO were approved by the board, while the GCEO was responsible for fixing the remuneration of other executive directors, which was in violation of Part B, 14.3 of the SEC Code of Corporate Governance.

SEC also found out that the last board evaluation of Oando was done by KPMG in 2012, which was a violation of Part B, 15.1 of the SEC Code of Corporate Governance.

Responding to the two charges, Oando stated that it wrote to SEC on July 21, informing it that the remuneration of all executive directors of the company was last reviewed prior to May 2014 before the SEC Code of Corporate Governance was made mandatory.

Oando also admitted that its 2016 Corporate Governance Report filing dated January 31, 2017 contained an error which was evident when compared to its previous filings, including the H2 2015 report sent to SEC under cover dated August 31, 2016.

On the board evaluation, Oando stated that its understanding was that the SEC Code of Corporate Governance was made mandatory on May 12, 2014, adding that prior to that date, the recommendation for an annual board evaluation was not mandatory.

The company added that even if it had breached provisions of the SEC Code, the commission was under obligation under s.1.3 (d) of the said Code to notify the company "specifying the areas of non-compliance or non-observance and the specific action or actions needed to remedy the non-compliance or non-observance".

"The company only received such formal notification from SEC requiring compliance with the SEC Code on these matters on October 17, 2017, five months after the commencement of its investigation.

"The company has since put remedial actions in place to cure this breach," Oando added.

SEC in its finding further stated that Oando breached ISA 2007 on the disposal of Oando Exploration & Production Limited (OEPL), stressing that the disposal of OEPL to Green Park Management Limited was done without the prior approval of SEC.

SEC had also charged that following the structuring of the OEPL transaction in contravention of ISA 2007, Oando Plc recorded a profit of about N6 billion from the sale of OEPL that erased the operating loss of N4.68 billion, leading to a profit of N1.4 billion for the year 2013. The company subsequently declared dividends from the profit.

According to SEC, having admitted that the action was in breach of the ISA 2007, Oando Plc restarted its 2013 & 2014 audited financial statements, which contained material false and misleading information contrary to Section 60(2) of the ISA 2007.

But in its response to the disposal of OEPL and its treatment of the proceeds from the sale, Oando stated that this breach flowed from the allegations regarding the accounting treatment on the disposal of OEPL, adding that there was no misstatement of profits in the 2013 and 2014 audited financial statements as the accounting treatment for the transaction was in full compliance with the IFRS standards both in the 2013 financial statement when the sale occurred and was recorded in the 2015 financial statement when the reversal occurred.

SEC further informed the GCEO in the October 17 correspondence that the 2014 Rights Issue Circular of Oando contained information relating to the profit reported by Oando in 2013 arising from the sale of OEPL.

"Consequently, the said Rights Issue Circular contained material misleading information. This action amounts to a violation as contained in Section 85(1), 86(1) and 87(1) of the ISA 2007," SEC observed.

However, Oando stated that SEC did not confirm what portion of the ISA was breached, adding that it acted appropriately in the way it reported the OEPL transaction, stressing that there was no breach of the ISA in respect of providing misleading information in Oando's 2014 Rights Issue Circular.

On SEC's observation that Oando in 2014, remitted dividends to the registrar in piecemeal in violation of Rule 44(1) of the SEC Rules and Regulations, which provide that "dividends declared shall be paid en-bloc by the issuance of a cheque or transfer of funds to the registrar not later than seven working days after the annual general meeting where the dividend was declared," Oando said this was the first time that SEC was making such an allegation.

The company added that it was not given an opportunity to respond to this allegation.

Oando noted that the penalties for breach of the provisions relating to payment of dividends are prescribed in Rule 44 (4) (a) and (b) of the SEC Rules, adding that these do not require a forensic audit.

On SEC's findings that Ernest & Young had raised concerns on the going concern status of the company, Oando said it was unclear how this issue on the going concern status was a SEC finding or how it amounted to a breach.

SEC had further observed that certain persons classified as insiders within the provisions of Section 315 of ISA 2007 and who were in possession of confidential price sensitive information not generally available to the public, had between January and October 2015 traded on Oando's shares prior to the release of the company's 2014 financial statement, where the company reported a loss of N183 billion.

On the allegation of insider dealing made by Oando against Mangal, the company stated that it has clear and robust insider trading policies which it had communicated to all known insiders of the company.

The company also noted that the penalties for insider dealing include the voiding of the affected transactions at the instance of the commission.

Oando also argued that there are further penalties contained in ISA -Section 115 - criminal liability for dealing in securities by insiders (Section 111).

"The company has clear and robust insider trading policies which it has communicated to all known insiders of the company. The company also operates a well-defined and articulated Closed Period/Blackout process relating to trading in the securities of the company by insiders, in line with corporate governance best practice.

"The question as to whether insider dealing occurred in the shares of the company is a matter for SEC to raise with any affected insider; it is also important to note that the company cannot be guilty of insider dealing since it only issues securities and is not involved in the trading of its own securities.

"Furthermore, as a public company with fully dematerialized shares, listed on both the Nigerian Stock Exchange and the Johannesburg Stock Exchanges all trading in the securities of the company takes place on the floor of both exchanges through the respective Depository, Clearing and Settlement Agencies.

"Any investigation into whether or not there has been a breach of insider trading rules is a question of fact which would be better addressed through an inspection of trading records of the exchange rather than through a forensic audit of the company.

"The company forwarded to the SEC, copies of the company's Insider Trading and Closed Period policies during the process of its investigation," Oando said.

It went further to highlight the prescribed sanctions for a person or corporate body discovered to have engaged in insider dealing as prescribed by ISA, which did not include suspension of trading in a company's shares or the requirement for a forensic audit.

SEC had also informed the company in the October 17 letter that it identified certain related party transactions and observed that they were not conducted at arm's length.

But Oando claimed that all related party transactions are disclosed by it in accordance with the SEC Code of Corporate Governance, the NSE Listing Rules as applicable, IAS 24 under the IFRS accounting standards, and the company itself has an extensive Related Party Policy which was made available to the SEC and is available on the company's website.

SEC also found that Oando declared dividends in 2013 and 2014 from unrealised profits.

In its response, Oando stated that it has repeatedly denied this claim and provided evidence to SEC in its defence.

"The interim dividend declared in September 2014 and paid by Oando PLC in November 2014 was paid from the H1 2014 profits of Oando PLC.

"At that point in time, the company had sufficient distributable reserves and it is acceptable under the law to pay out dividends if reserves exist at the point of declaration.

"The restatement of the OEPL sale was done in 2015 and would not have affected the 2014 declaration of the interim dividend, which was declared from H1 current period profit in 2014.

"Thus, the declaration of the interim dividend on the basis of reserves available at the point of declaration, complied fully with the provisions of Section 379 (2) of the Companies and Allied Matters Act.

"At all material times that dividends were declared, same were paid out of the available distributable reserves in the relevant period," Oando explained.

The company insisted that even if there was an infraction, the penalty is as laid down in Rule 44 (4) (a) and (b) of the SEC Rules.

On SEC's observation of discrepancies in the shareholding structure of Oando Plc, the commission had pointed out that while Alhaji Mangal's status as a shareholder in Oando Plc was not in contention or dispute, the exact units of shares held by him required reconciliation.

But Oando argued that Mangal has not contested the contents of the register of members maintained by the company's registrars -- First Registrars & Investors Services Limited -- or even made a request to the registrars to reconcile the register.

"We are therefore unclear as to what discrepancies SEC is referring to here. If Alhaji Mangal claims he holds more shares in the company than is stated in the Register of Members, then it is for him, directly, or through his brokers to seek a reconciliation of the register, providing evidence of the number of shares that he acquired in the company and when he acquired those shares.

"We do not see how this 'discrepancy' should therefore require a forensic audit to ascertain its veracity when the burden is on Alhaji Mangal to show that he acquired those shares," the company said.

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