On 20 August 2020, a ZCCM – IH Zambian shareholder, Dennis Mumba, through his lawyers L.J. Michaels Legal Practitioners, applied for leave of court in the commercial registry of Zambian High Court under cause 2020/HPC/ 0641for Dennis Mumba to take a derivative action on behalf of ZCCM – IH against the following intended Defendants:
The intended 1st Defendant is Zambia Copper Investments Limited (ZCI), Vedanta Resources Plc is the intended 2nd Defendant, KCM Directors in November 2004 are the intended 3rd Defendant, Mr. Milingo Lungu- Provisional Liquidator of KCM is the intended 4th Defendant and Konkola Copper Mines (KCM, In Liquidation) is the intended 5th Defendant.
Remedies for wrongful dealings with corporate property are supposed to be obtained through a suit by and in the name of the corporation. In this instance the wrongful dealings that Dennis Mumba has identified have existed since 5th November 2004 to date, but ZCCM – IH various boards of directors have failed during this entire long period of time to assert ZCCM –IH rights and claiming it’s losses arising from the Vedanta / KCM sham transaction, hence ZCCM – IH’s directors have acquiesced to the fraud and cannot therefore be reasonably be expected to bring action against the wrong doers that Mumba has identified in good faith. In order to prevent failure of justice, company law allows an action to be brought in the name of a company by a shareholder on behalf of themselves and other similarly situated against the wrongdoers. The purpose of the application of leave of court action therefore that Dennis Mumba made on 20th August 2020 has been taken not for him alone but it is also for other similarly situated, that is ZCCM – IH, ultimate beneficial owners of 77.7% GRZ shareholding, all the Zambian citizens and ZCCM – IH minority shareholders that have been purportedly defrauded through the Vedanta / KCM deal. If Mumba’s claims against the intended defendants are successful, all the recoveries and damages will go to ZCCM – IH.
Additional reasons advanced by Dennis Mumba on why ZCCM – IH directors cannot reasonably be expected to bring this action in good faith are as below:
ZCCM – IH intention to liquidate KCM is against public policy and law because it would cover up the fraud that has been perpetuated through the purported sale of KCM to Vedanta against the interests of ZCCM – IH, ultimate beneficial owners, the people of Zambia and minority shareholders and will obliterate, the tracing and recovery of funds siphoned from KCM through the Vedanta / KCM deal.
That since the Zambian government (GRZ) has 77.7 % direct shareholding of ZCCM –IH and 92,8% indirectly through NAPSA. GRZ in its capacity as a majority shareholder of ZCCM – IH is its controller and exert its will over ZCCM – IH in the board itself through its voting power and exercise control over the business affairs of ZCCM – IH. It is however the same GRZ that illegally purportedly raised a US$16.8 million credit note in favor of ZCCM – IH to clear debt by Vedanta due to ZCCM – IH on account of 235,336,715 KCM right issues that Vedanta illegally took over from ZCCM – IH without paying any consideration. Vedanta then purportedly became illegitimate shareholders and went on to appoint KCM board and corporate officers only by reason of its fraudulent conduct.
From above it is apparent that ZCCM –IH has been under an influence that sterilizes lawful objective discretion and could not be proper persons to conduct the litigation and cannot reasonably be expected to bring this action in good faith.
Given the above reasons Mumba has therefore asked the court to allow him to pursue the wrong doers on behalf of ZCCM –IH that has failed to do so since 5th November 2004 to date.
The reasons for the action can be classified as (1) Massive gross undervaluation of KCM at the time of the purported sale of the company to Vedanta (2) The Vedanta / KCM deal did not comply with the Zambian laws.
The above reasons (1) and (2) are detailed as below:
1. That there was massive gross undervaluation of KCM in 2004, when the company was purportedly sold to Vedanta. ZCI (then KCM majority shareholders) in its circular dated 11th October 2004 to its shareholders revealed details of Vedanta buy-in of KCM transaction. Mumba, a professional used his corporate finance and accounting expertise to work backwards using the details contained in ZCI 11th October 2004 circular to determine that the implied valuation of KCM in the Vedanta / KCM sale deal was US$62.451 million while at the same time the same ZCI circular indicated that KCM Net Book Value of assets as at 30th June 2004 was US$464.682 million and for a six months period up to 30th June 2004, KCM had profit after tax of 31.740 million. Further for Vedanta to pay US$25 million subscription price to KCM for it to acquire 51% company shareholding, there was a further discount of 61.538% on KCM price per share based on their implied valuation of US$62.451 million.
Since the figures contained in ZCI circular dated 11th October 2004, were not tying up or making sense as demonstrated above, Mumba used his professional corporate finance skills to evaluate the value of KCM using the average of Free Cash Flow to Equity (FCFE) and Real Options Valuation and determined that KCM value was US$2.795 billion and to buy 51% shareholding Vedanta should have paid US$2.909 billion and not US$25 million.
2. Mr. Mumba under the guidance of his lawyers proceeds to find that the purported Vedanta / KCM deal did not comply with the Zambian laws. In the court leave application he has listed Individual defendant’s violations of Zambian Laws and breaches of fiduciary duty that arise out of the purported fraudulent sale of the 51% majority stake and corporate control to the Vedanta through fraudulent issuance of 560, 325, 511 KCM shares.
Summary of these individual intended defendants noncompliance with the Zambian laws are as below:
ZCI as the KCM majority shareholder working with KCM and KCM Board of directors engineered the Vedanta buyout of KCM in such a way that Vedanta and KCM deal would benefit ZCI while hurting the financial interests of the ZCCM – IH as evidenced by:
i. US$593.644 million economic damage to the ZCCM – IH investment in the KCM coupled with a 21.42% reduction in its shareholding, voting and economic rights from 42% to 20.58% and a US$2.884 billion loss to the KCM.
That ZCI breached the duty of loyalty when it invoked the KCM corporate machinery for purposes of self-dealing while standing on both sides of the transaction when it dictated the terms of transaction with Vedanta causing the KCM to contract with the Vedanta on terms greatly favourable to Vedanta at the expense of KCM corporate interests that resulted in KCM as a corporation to lose US$2.884 billion and the ZCCM – IH the minority shareholder to lose US$593.664 million
That ZCI further went on to use the unfair Vedanta / KCM contract to accrue special benefits to itself alone as controlling stockholder which benefits the minority shareholder ZCCM – IH did not share in, as evidenced by:
ii. ZCI was paid US$23.2million in deferred instalment payment by Vedanta for the ZCI waiver of its 324 988 796 rights issues in favour of Vedanta. There was no corresponding payment from Vedanta to ZCCM –IH purported waiver of its 235,336,715 right issue shares in favour of Vedanta.
Vedanta Call option over 28.4 % (312,244,138) of ZCI remaining shares in the KCM that the Vedanta excised in April 2008 at a pre decided price in 2004 of $213.150 million. There was no such Vedanta call option over ZCCM – IH remaining shares in the Vedanta / KCM deal
Vedanta is accused of being a knowing recipient of 560,325,511 of KCM shares that gave it 51% shareholding control of KCM and that Vedanta had the required standard knowledge that it received KCM in breach of trust.
Vedanta is also accused of receiving KCM without being able to assert the protection of bona fide purchaser for value without knowledge of the company’s interests. Furthermore Vedanta is also accused of being a dishonest accessory who dishonestly assisted or procured the fiduciaries breach of duty as evidenced by it being a party to the illegal US$16.8 million credit note purportedly raised by the Zambia Government in favour of the ZCCM – IH to clear debt by Vedanta due to ZCCM – IH on account of 235,336,715 ZCCM – IH right issues that the Vedanta illegally took over from ZCCM – IH without paying any consideration.
Vedanta is further accused of having no rights to these 235,336,715 KCM rights issues on the grounds that issuance of these shares to Vedanta is void because the same were not paid for. Vedanta is also accused to purportedly having become illegitimate shareholders that went on to appoint KCM board and corporate officers only by reason of its fraudulent conduct.
KCM board of directors in 2004 are accused of breach of their fiduciary duty of care and loyalty relating to issuance of the new shares when they made the sale of 560,325,511 KCM shares to Vedanta at bargain price that was unfair to KCM, resulting in KCM losing 2.884 billion on the Vedanta / KCM deal, adversely affecting KCM abilities to pursue its goals
KCM as a company is accused of hiding its wrong doing when it did not comply with regulatory filings of important documents relating to the Vedanta / KCM deal with the Registrar of companies:
The purported Zambian Government credit note of US$ 16.8 million that was raised to clear a Vedanta debt to ZCCM – IH has been described as a non-adroit act of commercial generosity towards Vedanta and as being not only a manifestation of how unfair Vedanta / KCM deal was but it is also a clear manifestation of evidence of conspiracy to commit fraud by all the parties to this deal.
If Dennis Mumba’s application for leave of court is grated, then his lawyers L.J. Michaels Legal Practitioners will proceed to file Statement of claim and writ of summons, the contents therein will then be revealed at that time. The writ of summons will contain all the claims. However if the demand letter that was served on KCM liquidator is anything to go by, Mumba wants to stop the liquidation of KCM so that the legal proceedings against suspected embezzlement and its perpetrators can be pursued.
Like every Zambian citizen Dennis Mumba is an indirect shareholder of ZCCM – IH i.e. ultimate beneficial owner of 77.7% direct GRZ shareholding in ZCCM -IH. As a person he is also a direct shareholder in ZCCM- IH through the personal shares that he holds.
We have since established that this Dennis Mumba is the same person who was last Chief Executive of Zambia National Oil Company (ZNOC), that served the country during the Indeni Refinery oil fire crisis that lasted for about 18 months and managed the emergency Zambia oil imports from Dar es salaam and South Africa by rail and road that provided fuel supplies to the entire country and to all the mines during this critical period. He played a key role in the bringing back on stream of Zambian oil supply chain of Tazama, Indeni and ZNOC after the Indeni fire incident.
Mumba must have used his experience in the oil sector, in his research on KCM and must have had unique insight and opportunity to draw parallels between oil and copper business in Zambia. It is in the public domain that Dennis Mumba challenged the liquidation of ZNOC under extremely difficult conditions, and left the country thereafter. In the demand letter served on KCM liquidator Mumba has given credit to Mr. Andrew Sardanis book “A venture in Africa” in Chapter 32 Quo Vadit wherein Mr. Sardanis wrote about mining sector in Zambia and the Vedanta deal as the source of his motivation to look further into the purported sale of KCM to Vedanta.
Like all Zambians Dennis Mumba must have also been outraged that the assets of the Zambian people such as KCM was taken for a US$48.2 million pittance in a very suspicious manner while Anil Agarwal when speaking to The Jain International Trade Organization in Bangalore, India between March 22 – 23, 2014 boasted that KCM was giving him US$500 million every year in profit, plus an extra US$1 billion. Yet that same year, Vedanta continued to claim that they were making losses or a minimal profit at KCM, now the Zambian flag company is in liquidation.
Moreover, Vedanta owner Anil Agarwal’s mockery is very disheartening while many Zambians are in misery. He has mocked the Zambian government over a VIP welcome to the Zambian Parliament and the paltry amount of money he paid to buy the mine, rather than the US$400 million asking price. He ridiculed the then Zambian president Levy Mwanawasa for claiming that Vedanta would improve the lives of Zambians, especially those in Chingola and Chililabombwe.