In my previous post I mentioned a real estate investor who was suing Damac in DIFC court. I think he has no shot because there is a good argument to be made that he has no standing in the DIFC. I’ll tell you what though, there is a group of people who sure as hell do have standing to sue in DIFC court: the Damas Shareholders.
There has been quite a lot of news out about Damas and the Abdullah Brothers. It seems that Damas is close to negotiating a standstill agreement with its creditors. An informal agreement has been in place for some time and the company and its creditors are working to formalize it. Damas needs to do this because its balance sheet was obliterated by a series of “unauthorized transactions” executed by its majority owners. These transactions consisted of the 51% owners withdrawing funds from the company and purchasing assets with them in their own name. This constitutes an outright theft from the shareholders.
There are three Abdullah Brothers. One of them was the CEO and on his resignation one of the other Abdullah brothers became the MD. Then the former CEO negotiated a repayment plan with the current MD, that is to say that the Abdullah brothers agreed with themselves how they would repay the money. What they came up with is this: the Abdullah brothers will pay the company back the missing $165 million over the next 18 months otherwise the brothers will hand over 35% of the company (worth around $70 million) back to the company. Of course this is not really possible because so many other Emiratis have (wisely) sold out of their Damas shares that the company would then be effectively owned by non-Emiratis in contravention of the UAE companies law. The plan was never put to a vote of shareholders, the Abdullah Brothers agreed it with themselves. Then there are articles about how they have now sold a hotel and that this is a good sign that the company is moving past all this unpleasantness.
There is an lengthy and quite good article in the National about how the Abdullah Brothers stand to lose control of the company founded by their grandfather as a single storefront long before Dubai became what it is today. There is much discussion of what a tragedy this is for the Brothers Abdullah and how difficult this must be for them, and I’m sure it is. They’re a close family living in a compound in Jumeriah and go on traditional fishing trips on the weekends. This has come as quite a blow to the family. Apparently the brothers have put one of their three yachts up for sale. This is a noble gesture to be sure but they have three, why not sell them all? Why are they even deciding which yachts to sell? Why is there not a receiver or liquidator hitting bids all over Dubai with the personal property of the Abdullah Brothers in order to pay back the shareholders who have been defrauded and lost nearly $200 million between them? Where are all the shareholders yachts?
The investing public are cautioned against being prejudicial. Public ownership of family companies is new to the region and this requires a period of adjustment. “The Damas case, and a number of recent cases involving regional families and businessmen, highlight some of the challenges that regional business leaders face as they tap capital markets, which demand a higher degree of transparency and accountability,” said Nasser Saidi, an economist and the executive director of the Hawkamah Institute for Corporate Governance. (from the article in the National.) How quaint. “some of the challenges.” Like not appropriating the money the shareholders gave you in return for equity in the company to your own personal account? Is that a challenge? I beg to differ, I think they knew perfectly well what they were doing.
Let me posit a hypothetical. Let’s say that instead of selling a stake to international investors the Brothers Abdullah sold $270 million worth of equity in their company to Sheikh Mohammed the Ruler of Dubai. What are the chances that they would then withdraw Sheikh Mohammed’s money and deposit it in their own accounts and invest it in Turkish shopping malls and London hospitals in their own name? The chance of that would be zero because if they robbed Sheikh Mohammed blind they would be in prison or worse. No, they know all about what it means to do right by your shareholders if those shareholders have the power to put you in prison. But the poor suckers who bought shares in the Damas IPO don’t have the power of Sheikh Mohammed, they have the DFSA to look after their interests. And what do the Brothers Abdullah think of the DFSA? Well, they’re there’s no independent DFSA inquiry, no legal action, they get to decide which yachts they sell, and walk around Dubai as if they did not steal $200 million from unsuspecting foreigners. What does it look like to you?
So what is the DFSA doing? According to the article and the DFSA website they are “closely monitoring the investigation at Damas to find ways to improve corporate governance, especially at family-owned companies that issue shares to the public.” They’re closely monitoring the investigation at Damas? The Damas investigation is trying to locate the missing funds and value the assets purchased with them, not determine whether the funds are missing. It is known and admitted that they are missing and that they were withdrawn by the Abdullah Brothers. So, the DFSA is looking to improve corporate governance especially at family owned companies that issue shares to the public. I have an idea. HOW ABOUT ENFORCING YOUR OWN LAWS AND BRINGING CHARGES AGAINST THE ABDULLAH BROTHERS!?!
Don’t get me wrong. I know the people at the DIFC and the DFSA. They’re not bad guys. I can even tell you why they appear to be doing nothing. The Abdullah Brothers are a powerful merchant family in Dubai. From the DIFC perspective the Abdullah brothers supported the DIFC by conducting their IPO in the center. Given the prominence of the Abdullah family in Dubai I am sure that the powers that be in the DIFC consider this a political issue. The DFSA has not a single Emirati in its senior ranks and therefore they view their decision as standing aloof from a “political” issue.
I cannot tell you how many times I have met with European technocrats in the Arab world who when you describe how some terrible thing is about to happen will say something along the lines of “well that’s a political issue” and then go on to say “I view my role here as providing technical expertise, I’m trying to stay above the politics.” In the Arab world whenever a person says “I try to stay above the politics” what he is really saying is “I intend to achieve nothing.” The Arab world is a world in which you cannot always rely on the law. As a result everything gets done on the basis of personal trust built up over time, on relationships, on triangulating interests, in short on politics. To say you are above the politics is to say you are not in the game at all. Dubai desperately needs the DFSA to be in the game. They created the DFSA for precisely this reason.
The best hope for Dubai now is some kind of standstill agreement from the banks that will allow it to conduct an orderly liquidation of its assets in order to repay the creditors and avoid a default. To do this the international investors need to have confidence that if push comes to shove their disputes will be adjudicated fairly in an environment in which foreigners will have equal protection with locals. To that end Sheikh Mohammed established a tribunal inside the DIFC to adjudicate any insolvency or other litigation between Dubai World and its creditors. The Damas scandal, by standing aside from a $200 million fraud is shaking the confidence of investors that they will get a fair shake for their $20 billion. Indeed, lenders are already giving up before the game even begins and seeking to offload their loans which will the be bought at a huge discount by vultures like the Nakheel Sukuk and drive a tougher bargain with Dubai which as with Nakheel can lead to disaster.
I have been inspired by Martin Luther King Day yesterday, enough cursing the darkness. Let’s light a candle. If you are an Emirati or you care about the success of Dubai in any way. If you want to see the country remain as a commercial hub and emerge more strongly from this crisis, If you have any interest in a positive outcome for Dubai I ask you to join me and tak action. There is no way for Dubai or the entire Arab world for that matter to move forward without confidence in the rule of law. I ask you to do more than read my blog and hope for the best.
Email the CEO of the DFSA, Paul Koster and ask him to not rely on the deal the Abdullah Brothers have made with themselves but to conduct an independent investigation and if the brothers Abdullah have in fact misappropriated corporate funds to bring charges against them in DIFC court. If not then at least someone other than the Abdullah Brothers will have looked into this whole thing. As readers of my blog there are only a few hundred of you but you are disproportionately influential. Let’s see if you can make a difference or at least get a response. According to the DFSA website you can reach Paul Koster at info@dfsa.ae END
Your post reemphasizes three very key points:
ReplyDelete(1) Those who invest in emerging markets and frontier markets can often earn outsize returns. The trade-off is an acceptance of greater risk.
(2) Due diligence is best conducted at the inception of a transaction. If done at the end, it is little more than a very expensive form of tuition.
(3) If one can't get a fair shake or in some cases a fair Shaykh in a market, business venture or investment, it's best to pass.
As to boundaries between shareholders' funds and management's, I believe that in 2008 there were some locals hauled before the courts in Dubai - relatively senior executives who had a regrettable momentary confusion between their money and the Shaykh's. One chap whose name I suppose I shouldn't mention used company funds to finance one of his own company real estate projects.