Big guys happy, small guys angry

The new Companies Act has created more confusion and uncertainty particularly on issues pertaining to minority shareholders despite a plethora of events and awareness programmes on its provisions.

Most of the seminars however have dealt with issues relating to company issues and the role of directors while there appears to have been little focus specifically on the rights of minority shareholders.

However lawyers specializing in company law said the new Act was comprehensive and that the public (small shareholders) was not interested in the beginning and now wanted to be part of it.

Management consultant and senior visiting lecturer M. Mohamed Mohideen told The Sunday Times FT that the new provisions of the Act was brought in with the idea that it can benefit the minority shareholders but in what way it will help is not very clear. Mohideen said there has been some talk that the Act should come into effect in May 2007 but nobody seems to know because of all the confusion, particularly regarding the bonus issues. The Act which was intended to come into effect on 1 April 2007 is yet to be gazetted.

Interpretation
"Different opinions are being put across that future bonuses might not come in as before. I believe due to this, in the past weeks, there have been lots of bonus issues before this Act comes into effect," Mohideen said.

"No one seems to know how to interpret it properly." Even at Annual General Meetings, the Board of Directors appear to be clueless. "Someone should take it upon themselves and make this position clear and explain what the provisions are. What sort of advantages will accrue to the shareholders and how will it affect them? Moreover, it should be explained in comparison to the provisions of the old Act."

Under the old Act, Mohideen explained that the bonus issue was given on 'par value'. "Suppose we are given five bonus shares for every one share, we get five shares at the par value and it goes against the reserves available.

Now, I think it will not be on the par value." Mohideen urged the Colombo Stock Exchange (CSE) or the Securities and Exchange Commission (SEC) to concisely explain these issues and resolve the confusion. "Why are the CSE and SEC keeping silent? This is a very big omission on their part. It's their duty to advise and keep the public informed."

Mohideen said most shareholders are aware of the new laws coming into effect but they have not been informed of the details. "I feel it is lacking in duty on the part of the CSE and SEC. They have the wrong attitude and they are not alert to what is taking place."

Bonus issues
Senior partner at Julius & Creasy, R. Senathi Rajah said he has no doubt that in due course, the SEC and CSE will publish explanatory documents on the provisions of the Act. "The new Act has been passed by Parliament and only awaits endorsement by the speaker but it is still not available," he said.

He also feels the changes have made the Act better because the many provisions are of a progressive and innovative nature which allows companies greater authority to resolve problems instead of resorting to Courts. "The responsibility is on the Board of Directors to get it right. In that respect, it is most welcome."

Senathi Rajah explained that there is a bonus issue for all shareholders and minority shareholders will also be entitled to the bonus shares they make. "Under the old Act, you could have provisions in the article which allows you to capitalize reserves and issue bonus shares.

They would have gone to shareholders free of tax." This is not a dividend but a distribution of capital.

"Now, we don't have anything called issued share capital, only stated capital. This allows you to increase stated capital when there is an infusion of cash, transfer or property or against a promissory note." He said the bonus issue does not seem possible but if a company is inclined to give bonus shares, they can always declare the dividend and satisfy it by the allotment of bonus shares. Companies are also obligated to pay a 10% withholding tax if a dividend is declared.

Partner at Nithya Partners, Naomal Goonewardena told The Sunday Time FT that the crux of the Act is that the directors obligations are specified.

Directors have been given increased power and have greater responsibility and accountability for their actions.
"What they can and cannot do is much more specific," Goonewardena said, adding that shareholders are more aware and informed on the role of directors. To this extent, he believes the Act is beneficial to all.

Goonewardena said the provisions of the new Act are positive for minority shareholders because certain thresholds which previously existed have been removed. Bonus issue results in some additional share being issued which may increase the number of shares numerically.

He said the Act does not seem to contemplate the issue of bonus shares because it is not adding value to the shareholders. "This bonus issue at the moment is not a really big problem for shareholders but the problem is that people have gotten used to this bonus issue so they think they are getting something of value out of it."

Last minute complaints
When asked why this confusion has surfaced now, Goonewardena said that the public, up until now has not taken interest in the matter. "They only react and wait until the end to discuss such matters." He said that there has been talk that the Act might be coming into effect in the first week of May 2007 but that there has been no confirmation to that effect. At a seminar on the provisions of the new Companies Act held earlier this year, Goonewardena said 'there is no nominal or par value on the share.'

The significance of the par value was that a share could only be issued at a discount with court permission. The dividends are normally expressed as a percentage of the par value. Goonewardena also explained that on a bonus issue, it was the par value which got transferred from a reserve account to the share capital account.

Goonewardena also said that the consideration on the issue of shares has to be reasonable to the company and to all existing shareholders. The consideration for which a share is issued may take any form including cash, promissory notes, future services, roperty of any kind or other securities of the company.

Hayleys Group Director Richard Ebel said the new Act seems to have greater flexibility and seems to cast a stronger burden on the people running the company, particularly on dividend distributions. They also have to act responsibly where the solvency of the company is threatened. "It is a lot of adjustment because we are moving to a completely new set of rules at this point and not too many people are conversant with these changes," Ebel said. Seminars have been held to educate people on the forthcoming changes but a lack of clarity still exists.

Ebel explained that there has been a firmly held view that the existing law was completely outdated and that the world has moved on quite a bit. He believes the new Act will be beneficial to minority shareholders because of a provision in which they can insist on being bought out if there is some dissent which does not exist under current law. "There aren't many provisions for minorities under the old Act," he said, adding that minority shareholders could pursue legal options in the courts but due to the slow pace of the legal system, the option is not appealing.

SEC role
According to Ebel's understanding of the new Act, a bonus issue is still possible but only using a share split, allowing companies, for example, to convert four existing shares into five new shares. "I'm not sure if there are many differences from the older provisions." He added that he does not see why this should have a negative impact on shareholders.

Director General of the SEC Channa De Silva said they do not have the authority to engage in disseminating information and answering queries because the purview falls with the Registrar of Companies. "There are lots of questions and concerns but we are not in a position and don't have the expertise to give answers," he said.

"The new legislature is only known by the people who drafted it and we were not involved in the drafting of the Act." De Silva said a possible platform for educating the public is through the proposed Financial Services Academy which he described as a good mechanism and something the SEC will seriously look into.

Former chairman of the Ceylon National Chamber of Industries KC Vignarajah feels it is the duty of the SEC and the CSE to bring out publications and critiques in order to educate investors and minority shareholders of the intended provisions and to organize interactive seminars with reasonably priced tickets to get opinion prior to the assent to the new Act. Seminars and meetings among privileged groups of people and directors with high priced tickets, excluding a majority of the public is insufficient.
"Directors have advisors and legal experts paid for by the company but the public does not," he said.