Engage the Chain Case Study #3: United Cacao – Aggressive Expansion Leads to Regulatory Violations and Insolvency

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United Cacao: Aggressive Expansion Leads to Regulatory Violations and Insolvency 

The Engage the Chain case studies are produced by Ceres and Climate Advisers and written by Julie Nash, PhD, Ceres, and Gabriel Thoumi, CFA, FRM, and Anthony Mansell, Climate Advisers.

Executive Summary

United Cacao (CHOC) was a cocoa producer that owned and operated large plantations and a smallholder program in Peru, until its insolvency in July 2017. The company’s downfall was a result of its aggressive growth strategy, which led it to violate Peruvian environmental regulations regarding deforestation, and to underestimate its operational, regulatory and market risks.

  • On December 2, 2014, United Cacao embarked on an ambitious expansion plan. It held an initial public offering on the London Stock Exchange Alternative Investment Market (AIM), securing an equity market valuation of $36 million. It also issued a secured convertible bond for $6.08 million. CHOC used this capital to fund its plantation land bank expansion. The plan relied upon a smooth process of planting cocoa to begin generating revenue.
  • The company’s expansion plans conflicted directly with government regulations against deforestation – a risk the company itself identified in the prospectus of its bond issuance. CHOC stated to investors that it held all relevant permits. The Government of Peru disagreed telling CHOC to cease operations in December 2014.
  • Failure to address these regulatory risks proved costly. In May 2016, investors and advocacy groups complained to the London Stock Exchange about CHOC’s illegal activities. On January 4, 2017, CHOC’s nominated adviser resigned its role. This led to its suspension from its equity trading on the AIM and its debt trading the NEX Exchange. February 6, 2017, CHOC was permanently delisted from the AIM.
  • Its July 2017 winding up petition resulted from CHOC’s regulatory and legal challenges arising from illegal deforestation in Peru’s Loreto Region. But this deforestation was a key driver of CHOC’s expansion strategy. Equity and debt investors lost $42 million because CHOC mismanaged its operational, regulatory and market risks.

Figure 1: United Cacao Share Price from IPO to Delisting


Cocoa is a tropical fruit tree cultivated and harvested for its beans, the raw material for cocoa liquor and butter. It is the main ingredient for chocolate.

Cocoa is the essential ingredient for the chocolate industry, worth over $100 billion per year. Cocoa production is a driver of deforestation in West Africa, South America and Asia, responsible for an estimated 2 to 3 million ha of forest loss between 1988 and 2008. Almost 90 percent of cocoa production takes place through smallholders. CHOC used a different business model by operating the largest cocoa plantation in Latin America and planning aggressive expansion of up to 12,000 hectares (ha) in Loreto.

The supply chain for cocoa is global, encompassing multiple steps. Cocoa beans are purchased from smallholder farmers or large plantations by traders or grinders, who conduct initial processing of cocoa beans for export into cocoa liquor.


Figure 2: United Cacao and Cocoa Supply Chain

Cocoa production is regionally concentrated in West Africa, Latin America and Indonesia. Table 1 shows forecasted production by major producing countries for 2015/16.

Table 1: Cocoa Production 2015/16 Forecast

Country Production (Metric Tons)
Côte d’Ivoire 1,570,000
Ghana 820,000
Indonesia 330,000
Cameroon 250,000
Ecuador 230,000
Nigeria 190,000
Brazil 135,000
Other Countries 464,000
Total 3,989,000

Chocolate producers source cocoa from these firms and either process cocoa liquor into cocoa powder and butter, or create mixes and fillings from already processed cocoa.

Finally, manufacturers turn the product into goods that are retailed to consumers. Europe is the major cocoa producer through hubs such as Rotterdam, Netherlands. 60 percent of cocoa consumption occurs in Europe and North America.

The production of cocoa beans remains a dispersed industry, with 90 percent of production coming from smallholder farms at an average size of two to three ha. Conversely, the rest of the supply chain is highly concentrated. Eight traders and grinders enjoy a market share of 60 to 80 percent. Six manufacturers have 40 percent of the global market.

Cocoa demand has grown consistently at 3 percent per year since 1999. Last year, Cocoa production in Peru grew at a faster pace – 13.7 percent from 2015 to 2016. Deforestation driven by cocoa production is concentrated in biodiversity hot spots such as the Upper Guinea Tropical Rainforest and the Amazon Basin in Peru.

Cocoa is vulnerable to the impacts from climate change. The effect of rising temperatures on cocoa production is site specific. However, decreased rainfall threatens cocoa in regions such as West Africa. In addition, cocoa will likely need to be planted at higher altitude. Periods of drought, increased instances of disease such as cocoa pod borer, and increased flooding can also devastate cocoa crops.

Environmental concerns from cocoa production has produced numerous sustainability certification standards. The largest standard is UTZ, with 15 percent of global production area. CHOC was a member of the World Cocoa Foundation, which promotes a sustainable cocoa industry.

United Cacao

United Cacao (LSE:CHOC) was a cocoa producer with plantations in the Loreto Region in the Peruvian Amazon. It had over 500 employees. Its business model involved operating both large plantations and a smallholder program called Programa Alianza Producción Estratégica Cacao (PAPEC). As of June 30 2016, CHOC’s 3,985 ha landbank included 1,837 ha planted with cocoa. This made it the largest pure-play cacao estate in Latin America. 1,643 ha was planted on its corporate estate. Another 194 ha was planted via PAPEC.

CHOC was based in the Cayman Islands. It operated through Peruvian based subsidiaries Cacao del Peru Norte SAC (CDPN) and Cooperativa de Cacao Peruano SAC.

Over a period of three years, CHOC raised capital through the equity and debt markets to finance an aggressive growth strategy, which was later revealed to be in violation of environmental regulation.


Image 1: Cacao Del Peru Norte Cocoa Plantation in Tamshiyacu. (Source: EIA)

On December 2, 2014, CHOC held its initial public offering (IPO) on the London Stock Exchange’s Alternative Investment Market (AIM). It was the only publicly-listed permanent crop estate company in Latin America, with a market capitalization of $36 million.

The company also issued a 7 percent coupon secured convertible bond, payable semiannually convertible at $3.40 a share on October 27, 2015, due June 30, 2019 traded on the NEX Exchange. The bond was issued for a committed $6.08 million with a call option for a further $2 million on the same terms. The bond was issued to unspecified third parties- $4,805,000-and company directors-$1,275,000.

Its bond issuance in 2015 outlined the future vision for the company. The investment opportunity in CHOC was based on aggressive expansion of its operations near Iquitos, in the Loreto Region of Peru. While Peru’s deforestation rate of 0.2 percent per year is relatively low, Loreto – the largest Amazon region in Peru – has been a deforestation hotspot. In the Peruvian Amazon, small-scale agriculture accounts for around 80 percent of forest loss, though larger-scale losses are a growing threat from increases in agro-industry (such as United Cacao).

CHOC’s strategy was based on several assumptions, including:

  • Improved operating practices, particularly not using child labor, compared to rival producers.
  • Achieving high yields (2.5 to 3.0 metric tons/ha), compared to West Africa (0.6 metric tons/ha).
  • A projected shortfall in supply relative to cocoa demand until at least 2020, and the unavailability of substitutes for cocoa beans.

CHOC used the proceeds of both the IPO and the bond issuance to fund this expansion in its operations. For example, in its bond issuance CHOC expected the majority of capital to go towards planting an additional 2,000 ha. The company cited planting as the main use of its proceeds from its placing and subscription to the LSE. By November 2016, the company had applied for an additional 12,000 ha of land under a privatization program by the Peruvian government as an option to scale up planting in the future.

In May 2016, however LSE had received complaints from Environment Investigation Agency and investors that CHOC subsidiaries and related companies, allegedly funded by its IPO, were illegally deforesting the Peruvian Amazon. Given LSEs commitment to the UN Sustainable Stock Exchanges Initiative, CHOCs actions presented a reputation risk to the exchange.

This led to a series of events that culminated in

CHOC’s CEO and founder Dennis Melka resigning on January 4, 2017 . Two other members of the board, Anthony Kozuch and Graeme Iain Brown, resigned January 5, 2017.

A forensic audit and independent internal review of CHOC subsidiaries initiated on

25 January, 2017 revealed widespread issues, including misleading information by company directors on environmental and regulatory compliance.

In H1 2017, CHOC’s board provided regulators at the Financial Conduct Authority (FCA) and AIM a thorough and detailed private update on CHOC’s regulatory and legal risks.

On July 17, 2017 CHOC issued a winding-up petition in the Cayman Islands stating its insolvency and inability to pay back its debts. At that point, business operations ceased.


In its filings for debt issuance, CHOC outlined a number of risks that could impact the business and operations. For example, the company highlighted that a delay in land development would affect projected returns. It also discussed reputational risks posed by environmental groups. In addition, the company prominently highlighted regulatory and litigation risks in regards to land use. While these known risks were disclosed to investors, they were not realized until deforestation practices came to light.  Further, management overestimated the company’s ability to overcome these business risks.

Operational. A firm’s exposure to operational risk can be attributed to unexpected external factors, such as management’s failure to plan for more predictable factors, like resource scarcity. In the case of CHOC, its aggressive growth strategy necessitated rapid development of land for cocoa production. While management conveyed uncertainty over the ability to cultivate existing land, it also understood that failure to cultivate would decrease output. The company failed to effectively weigh the tradeoff between early land development and strict compliance procedures. This error in judgment resulted in cumulative net losses of $9.7 million between 2014 and H1 2016. In addition, the decision to continue operations amid permitting uncertainty evolved into realized regulatory risks.

Regulatory. Peru’s 2010 Forests and Wildlife law stated the requirement for private-owned plantations must have authorization certificates and management plans. Lack of legal clarity and poor enforcement means that illegal deforestation remains prevalent in the Loreto, Madre de Dios, and Ucayali Regions. The Government of Peru has responded, in some cases, by increasing enforcement and installing tougher sanctions for illegal deforestation.

CHOC stated it had secured all necessary approvals from Peruvian authorities, although this was being disputed in court at that time. Environmental groups also used satellite images (see Figure 1) to dispute CHOC’s claim that the Tamshiyacu plantation was used for agriculture by previous owners, rather than cleared from primary forest.

In December 2014, the Peruvian government ordered CHOC’s subsidiary CDPN to cease operations over illegal deforestation concerns. The dispute centered around whether CHOC required official authorization when it purchased the land from owners between 2012 to 2013, and whether the plantation cleared primary forest (see Image 1). CHOC also faced a criminal case against former employees related to land authorization.


Image 2: Landsat Satellite Images of United Cacao’s Tamshiyacu Cocoa Plantation, 2005-2013

Note: Red represents deforested area. Plantation is outlined

Market. A company’s level of market risk is determined by the potential that its access to buyers or access to financial markets will be adversely affected. In the case of CHOC, the loss of access to financial markets was an underestimated risk that became a reality when news over deforestation practices emerged.

On January 4, 2017, CHOC’s shares were suspended from trading on the AIM, which was formally triggered by the resignation of Strand Hanson Limited as the nominated adviser (a condition for listing a stock). CHOC’s shares were delisted February 6, 2017 when a successor adviser was not found. Overall, CHOCs shares decreased 72 percent from its IPO to its last day trading on the AIM. Trading of its bond on the NEX Exchange was also suspended.


CHOC’s underestimation of operational, regulatory and market risks ultimately undermined its corporate strategy.  At the time of publication, the outcome for equity and debtholders from the writing up order announced in July 2017 is unclear. The future of the company’s plantations, both their operation and ownership, will also need to be settled through legal proceedings.



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