Legal Opinion of the Draft Term Sheet for Private Placement of Equity sent by Company

Dated: September 05, 2007

Mr, A

Chief Financial Officer

Company 1

House no. 8/A, Road no. 143

Gulshan – 1

Dhaka – 1212

Dear Sir,

Re:      Legal Opinion of the Draft Term Sheet for Private Placement of Equity sent by Company 2.

We refer to your letter dated August 27, 2007 and your electronic mail dated 5 September 2007 on the above subject.

We have perused the Draft Term Sheet (“Term Sheet”) for private placement of equity sent by Company 2, managed by “X” South Asia Managers Limited (““X””) to be accepted by STS Holdings Ltd. (“STS”). Our comments on the Term Sheet are given below:

Clauses/

Paragraph

 Comments.

Clause 1.3 In the table contained in Clause 1.3 it is stated that, the issue of 41,160,000 shares worth US$ 15 Million @ Taka 25/- per share (with par value of TK 10/- each) shall raise the Paid-up Capital of STS by TK. 1,029,000,000. This is incorrect, as according to the relevant laws of Bangladesh, the premium value of shares has to be transferred to an account called the “share premium account” and does not form part of the paid up capital of a company, it only forms part of the equity of the Company. The par value of shares form part of the paid up capital of a company. Therefore, the issue of 41,160,000 shares shall raise the Paid-up Capital of STS by TK. 411,600,000, and the rest of the amount shall form part of STS’s equity. Therefore, we suggest you to delete “1,029,000,000” in row 3, column 3 of the table and replace it with “411,600,000”. “2,128,500,000” in row 4, column 3 of the table should also be deleted and replaced with “1,511,100,000”.
Clause 1.4 and Appendix 1 According to this clause, the ordinary shares which are going to be issued to “X” shall be subject to the special terms and conditions set out in Appendix 1.

According to paragraph 1 of Appendix 1, in case of liquidation of STS, holders of New Shares will receive in preference to all other shareholders per share value shown in the table therein. Such preferential treatment in connection with the holders of New Shares is not possible, because the shares that are going to be issued are ordinary shares and preference at the time of winding up/liquidation can only be provided to preference shareholders by law.

Therefore, paragraph 1 of Appendix 1 cannot be implemented by law.

According to paragraph 2 of Appendix 1, sale of all or substantially all of the assets of the Company or a sale of shares involving a change in control, prior to a listing will be treated in the same way as liquidation and proceeds of the sale will be distributed as set out in paragraph 1.

It is not clear from this paragraph, in case of a substantial sale of assets of STS or change in control of STS, is “X” requiring STS to voluntarily wind up or are they claiming for damages in the manner set forth in Paragraph 1.

Even if there is no voluntary winding up, and “X” wants to claim the amount stated in Paragraph 1, to give effect to the same, the Company will be required to buy back their own shares which in this case requires approval from the High Court and a valid case will have to be made out for obtaining the approval. Please note that the mechanism for the shares to be redeemed is one which is adopted for the redemption of preference shares but the shares to be issued to “X” are ordinary shares.
Clause 1.5 According to Section 57(1) of the Companies Act 1994, where a company issues shares at a premium, whether for cash or otherwise, a sum equal to the aggregate amount or value of the premiums on those shares, shall be transferred to an account, to be called “the share premium account”.

According to Section 57(2) of the Companies Act 1994, the share premium account may be applied by the company—

(a) in paying up unissued shares of the company to be issued to member of the company as fully paid bonus shares;

(b) in writing of the preliminary expenses of the company,

(c) in writing off the expenses of, or the commission paid or discount allowed, on any issue of shares or debentures of the company; or

(d) in providing for the premium payable on the redemption of any redeemable preference shares or of any debentures of the company.

Therefore, according to Companies Act, STS may apply the share premium account in the manner stated in the Act or apply it in any other way decided by the Board. STS should ensure whether they want to apply the share premium account to repay debt and for working capital purposes only as envisaged in Clause 1.5 of the Agreement.
Clause 2.1 According to Clause 2.1, the terms of the offer are subject to STS adopting the “X” “Business Principles and Environmental and Social Management System”. We have not been provided with a copy of the same. Please check the contents of principles and ensure that it contains no terms adverse to the interest of STS.
Clause 2.3 According to this Clause, STS is under a duty to take necessary steps to obtain a listing in Dhaka Stock Exchange. Please check whether STS wants to convert into a listed company as stipulated by this Clause.
Clause 2.4 According to this Clause, STS is under a duty to pay a minimum dividend payout of 50% of profit after tax attributable for equity holders after payment of preference shareholders. Dividends can only be paid out of the profit the company and it is not possible to predict the profits of a company in advance. Therefore we are of the opinion that STS should not covenant to pay 50% dividend.
Clause 2.6 According to this clause, in the event of any other investor being offered better rights or privileges than “X”, then “X” shall automatically be entitled to such rights and privileges.

Section 71 of the Companies Act 1994 protects the rights of holders of different classes of shares by requiring that to change their rights there should be a provision to that extent in the memorandum or articles of association and that these should be sanctioned by a specified majority of shareholders of that class. Any number of dissenting members holding at least ten percent of the issued Shares of that class may within fourteen days of the resolution apply to the Court for cancellation of the resolution and such resolution shall not be effective until it is then confirmed by the Court.

Therefore, the rights and obligations of “X” cannot be automatically changed.
Clause 2.7 and 2.8 According to these clauses STS shall stop Placement after a period of 30 days from the disbursement of investment by “X”. Any attempts by STS to raise new investment by issuing shares after the said 30 days has to comply with two conditions contained therein. It is a commercial decision as to whether STS should accept these two clauses or not.

With regard to the requirement that the shares are to be sold at a value above Tk.25.00:

  • This may subject to approval from the SEC hence it will be to the extend permissible by law;
  • The value of the Company is not at a standstill and hence how long does “X” intends to place this restriction?

With regard to issue of shares at no cost to “X” in case shares are sold at a price lower than Tk.25.00:

This is a public company and “X” shall be shareholders holding ordinary shares having the same rights, benefits and privileges as other ordinary shareholders. A company does not have right to issue shares as fully paid-up shares at no cost except bonus shares. If bonus shares are to be issued to “X”, the same shall have to be issued to other shareholders under the same terms and conditions.
Clause 3.3 According to Clause 3.3, certain key decisions of STS shall require the consent of “X” or their Nominee Director who will have the casting vote.

Generally shareholders having 9.1% do not make major management decisions unless they have special skills or know how for business. However it is a commercial decision.
Clause 3.4 Comments are same as above.
Clause 3.6 According to Clause 3.6, “X” and other shareholders will have the right to acquire and sell shares in the manner outlined in Appendix 4. In order to implement such rights, changes shall have to be made in the Articles of Association of STS by Special Resolution.
Clause 6 This Clause states that the Articles of Association shall be reviewed and amendments recommended by the “X”’s lawyers. Please Check whether STS agrees to allow “X” to make such amendments to its Artilces of Association. Moreover, such amendments have to be by Special Resolution passed in a General meeting of STS.

Apart from the above observations, the terms and conditions of the Term Sheet are otherwise in order.

If you have any further query, please do not hesitate to contact the undersigned.

Thanking you.

Yours faithfully,

________________

Barister


The Lawyers & Jurists

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Bijoy Nagar, Dhaka-1000.

www.lawyersnjurists.com

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