Last month, Egyptian B2B e-commerce platform Capiter made headlines after founders Mahmoud Nouh and Ahmed Nouh were ousted by its board as CEO and COO. The reasons were unclear, as both parties didn’t publicly comment on the situation; however, from various local news outlets, they ranged from mismanagement of funds to failure to report to the board and work out a potential merger, as well as internal disagreements over management methods.
In a statement issued to ZebethMedia last month, Capiter’s board said claims of theft of the company’s assets by the founders are untrue and it didn’t move to remove the founders due to suspicion of theft or fraud. “Rather, this course of action was undertaken after the founders abdicated their responsibilities, failed to enact Board-approved corporate actions, and began to actively subvert the abilities of the company to stabilize its financial and operational affairs. After that juncture, it became necessary to appoint an interim CEO (the company’s chief financial officer Majid El Ghazouli) to manage the operational and financial affairs of the company.”
When the news broke, the axed CEO Mahmoud Nouh denied the allegations when ZebethMedia reached out and said he and his brother Ahmed didn’t receive official notice of their dismissal. But in an unexpected twist, the founders, in a statement to ZebethMedia, are accusing the board of spreading “false and untrue allegations” that question their reputation. Last week, Nouh took to LinkedIn to describe his account of the whole drama.
Meanwhile, the statements received from Capiter’s board and founders involve a lot of finger-pointing, leaving Capiter’s employees more confused than they currently are about their current situation. Many of these employees, clueless about the company’s direction, are yet to receive their August salaries and severance packages. Some have expressed their displeasure on LinkedIn (you can find other posts here and here).
While about 50% of August salaries have been paid, a few employees who spoke with ZebethMedia on the condition of anonymity said the board has yet to communicate any timeline or dates for outstanding salaries, leaving them stranded. “The Board told us they are following legal procedures to finalize whatever is going on before they pay us. Also, suppliers and creditors are calling some of us asking for their money, which should be the company’s responsibility, not ours,” one said, adding that many of them haven’t moved on to new opportunities, as they are yet to be officially released from their duties at Capiter.
Founders versus investors
Last September, Capiter raised $33 million in Series A funding to compete in the country’s growing B2B e-commerce and retail space. It was one of the largest of that stage, and things seemed to be going well with the company until it laid off multiple employees between June and July, citing global macroeconomic trends. But various sources say the company’s issues were more inward than outward, as they described Capiter as a workplace with poor management, no structure and a business with a high burn rate.
The company had planned to raise a follow-on round to address its struggles but met a challenging fundraising environment. What ensued after this led to the current spat between founders and investors.
According to sources, Capiter’s investors wanted to sell the company to Retailio, a similar player based in Saudi Arabia, but the founders refused; they wanted existing investors to inject more capital into Capiter. A source close to the company confirmed this to ZebethMedia. “It is true that in the last nine months, the company has received inbound interest from multiple players in Egypt and neighboring countries because of the incredible business that Capiter built,” the person said. “During that same period, investors infused millions of dollars of capital in two tranches (over and above the Series A that was raised last year) based on the progress of these conversations and the traction of the business. Though the events of the last couple of weeks have disrupted these efforts, there are still active M&A discussions underway currently.”
The board claims that Capiter founders departed Egypt during these discussions around September 1. By doing so, they ceased to resolve the company’s operational and financial situation. They also argued that the founders blocked email access for key employees and restricted the viewing and transacting ability for important bank accounts. “These actions undermined efforts to stabilize the company, most notably its ability to negotiate with creditors, pay employees and realize a potential consolidation,” the board expressed in its statement.
The board said it funded Capiter with sufficient capital to pay August salaries and directed the founders to effect these payments. They claimed that the founders unilaterally and without approval redirected most of this capital to lower-priority creditors and the now blocked bank accounts. According to the board, any liabilities for outstanding salaries and employment benefits rest with the Nouh brothers and Capiter Egypt, where the board is composed solely of the two founders.
Yes, you read that right: The major investors which include Quona Capital and MSA Capital, say they hold board seats at Capiter Technologies Holding Ltd., the holding company initially based in Mauritius and now in Abu Dhabi. In contrast, Capiter Egypt has only two board members: the Nouh brothers. Thus, all of the liabilities currently under investigation sit entirely at Capiter Egypt, where Capiter Technologies Holding Ltd. doesn’t hold any managerial rights or signatory powers.
Now, here’s where it gets interesting. On September 5, Capiter’s board appointed new management, with El Ghazouli as interim CEO. The Nouh brothers, in their statement, said the board did not commence any official procedures or formality to dismiss them and strike their names off the official records of Capiter “to the best of their knowledge.” In response, the board claims that because the two founders are sole managers, signatories and legal representatives of Capiter Egypt, any efforts to effect a change of control must follow due process and could take up to 60 days, per the guidance of Egyptian legal counsel. The board said that the above-outlined legal procedural challenges have slowed the legalities of formally completing this process.
As Capiter’s management hangs in the balance, neither the company’s board nor its founders bear full responsibility for the salaries owed to employees and the money owed to creditors, which according to people familiar with the matter, ranges between $3 million and $5 million. Though the board’s jurisdiction argument seems sensible, it conveniently absolves them from liabilities. So it’s unclear whether that holds. In addition, it doesn’t help that the Nouh brothers claim that they cannot perform managerial duties, including paying employee salaries and settling creditors’ payments, because they were removed from their positions by the board.
The Capiter founders also noted that in the month preceding these events, they asked the board to agree to the company’s liquidation immediately as the proper legal way to protect the company’s employees and creditors — and also commit in writing to pay the company’s liabilities to its employees and creditors in the event of future liquidation should the shareholders wish to continue the company’s business in hopes for a prospective M&A deal.
“Instead of acting responsibly, they procrastinated and did not agree on our solutions, disregarding the company’s employees’ and creditors’ rights, and leaving them unpaid in the current crisis,” the founders said. “The new management did not disburse the remaining salaries nor negotiate the restructuring of creditors’ liabilities payments.”
The Nouh brothers argue that the proper closure of Capiter was a fundamental right the board didn’t afford them and that their unlawful dismissal was a means the board used to cover up their responsibilities of attending to the debts owed to creditors and employees. As a result, Nouh, in his LinkedIn post, has threatened to involve the limited partners of Capiter’s shareholders in the matter.
We call upon the shareholders’ LPs support to open an internal investigation to enable the founders to share their evidence with the LPs, and to help influence the shareholders to cover the company’s liabilities payments and debts (on which the shareholders signed their approval on) to creditors and employees, in order to promote responsible behavior toward the ecosystem. The founders believe that the boards’ actions are aimed to cover up the core issue, which is that the company remains indebted to its creditors. This situation has been very damaging to the company, its founders, its creditors and to the entire ecosystem.
Meanwhile, after stating that any liabilities for outstanding salaries and employment benefits rest with the Nouh brothers and Capiter Egypt, the board said that though its shareholders are under no financial or legal obligation to ensure the August salaries are paid, they’ll put “some effort” toward the endeavor.
“The board is working to find a legally and operationally viable avenue to pay the balance of August salaries, as expeditiously as possible, that does not undermine the financial and legal restructuring process nor subvert Egyptian law,” said the board in a statement. “Employees will be updated on the timing and methodology for this disbursement as soon as confirmed. As we understand the financial burden of this situation, the board is also exerting all the efforts to support employees in finding new roles and job opportunities and will spare no effort in realizing this.”
This is a developing story…