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Uganda Baati set for legal battle with minority shareholders

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By BERNARD BUSUULWA
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Failed mediation efforts and the entry of new petitioners are likely to shape the outcome of a landmark transfer pricing case filed by minority shareholders against Uganda Baati Ltd, a manufacturer of roofing sheets and steel bars. Court hearings commence in April 2019.

The case was filed in Uganda’s High Court on November 9, 2016 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, according to court documents.

The petitioners asked the court to compel the majority shareholders of the company to buy out their shares at market value and also order a forensic audit into previous related transactions.

Under transfer pricing, companies and their subsidiaries sell goods and services to each other at prices higher than average market prices— a practice that is widely blamed for concealment of profits earned by multinationals in developing countries, and tax revenue losses suffered by poor economies.

According to court documents, Mr Muhimbise and Ms Kiwana owned 17,570 and 2,881 ordinary shares respectively in the company, while Ms Mwewulize and Mr Ibanda held 5,000 and 500 shares respectively.

Registered trustees of the Chandaria Foundation and Safal Investments owned 49,085 and 982,620 ordinary shares respectively.

Under current judicial rules, all civil cases filed in the High Court and Tax Appeals Tribunal are subject to mediation between the parties in question with a view to reaching an amicable, out-of-court settlement. Such a settlement must be endorsed by the relevant court before it takes effect.

Failure to reach an out-of-court settlement automatically moves a case to the trial stage usually conducted in a judge’s courtroom.

After more than a year of mediation, the petitioners and Uganda Baati Ltd failed to reach an-out-of-court settlement. While Andrew Muhimbise initially tabled an offer price of Ush200,000 ($53) per share and gradually slashed it to Ush60,000 ($15.9) the company’s majority owners insisted on a final price of Ush40,000 ($10.7) during the mediation process.

“We gave the company a final buyout offer of Ush60,000 ($15.9) per share but it rejected it. This case has put pressure on the company pushing up its offer price for minority shareholders interested in exiting the business privately. For example, the company previously offered Ush1,000 ($0.27) per share but this has been raised to Ush12,000 ($3.2) and Ush24,000 ($6.4) per share in some cases,” said Mr Muhimbise.

New petitioners expected to join in the case include former chief justice, Samuel Wambuzi who owns 1,026 shares, and former deputy prime minister Henry Kajura who has 964 shares.

A lawyer for Baati blames the failed talks on unreasonable demands.

“We believe the main petitioners can find a better deal for themselves by engaging a third party. Some minority shareholders outside the case have managed to sell their shares in the company to third parties on a willing seller-willing buyer arrangement,” said Chris Bwanika, one of the lawyers representing Uganda Baati Ltd.

Among the minority shareholders who recently sold their shares in the company are Ms Kiwana, who received Ush115 million ($30,631), Joseph Okwenje who received Ush80 million ($21,308) and Rebecca Nambi who received Ush3.7 million ($990.8).

“Transfer pricing is complicated. Most transactions are structured in a complex way and require lots of exposure for a tax officer to internalise their dynamics. Ugandan courts have little experience with transfer pricing and may need specialised lawyers to guide the bench,” said Denis Kakembo, managing partner at Cristal Advocates, a Kampala based law firm.

The company’s total turnover grew from Ush159.5 billion ($42.5 million) in 2016 to Ush173.4 billion ($46.2 million) in 2017.

It recorded a net loss of Ush10.6 billion ($2.8 million) in 2016 but posted a net profit of Ush868.9 million ($231,431) by the end of 2017.

Total assets held by Uganda Baati Ltd increased minimally from Ush89 billion ($23.7 million) to Ush90.5 billion($24 million) during the same period, according to company documents seen by The EastAfrican.



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