Legal Opinion regarding preference shares of Company 1

Mr. Z

Address….

Dear  Sir,

Re: Legal Opinion regarding preference shares of Company 1.

We refer to your letter no. COMPANY 2/LKP/COMPANY 1/2007/213 dated February 26, 2007 on the above subject.

From perusal of your letter and the provided documents, it appears that Company 2 (“COMPANY 2”) entered into a Subscription Agreement dated December 31, 200 with Company 1 (“COMPANY 1”) for a redeemable preference share facility of BDT 100.00 million. The facility was disbursed on December 31, 2000 with an annual dividend rate of 12% p.a. and redemption on June 30, 2005. Later on, through a letter no. COMPANY 1/2004 – 203 dated May 22, 2004, COMPANY 1 requested COMPANY 2 to extend the facility to a further period of 10 years and to reduce the dividend rate to 8.0% p.a. to complement COMPANY 1’s increased cost of fund. Accordingly, COMPANY 2 honored the request of COMPANY 1 and extended the facility upto July 01, 2014 through the execution of an Amendment to Subscription Agreement dated December 23, 2004.

The tax on dividend was increased through a change in the tax structure in the Budget of 2005-2006 which was effective from July 1, 2005. In this regard COMPANY 2 has provided us with a draft letter to be sent to COMPANY 1.

In these circumstances, you have sought our legal opinion on the following matters:

1.       Whether COMPANY 2’s request to COMPANY 1 for payment of the unpaid dividend amount of BDT 1,141,000 is justified.

2.       Whether COMPANY 2 can charge interest of 16% on the late payment of the unpaid dividend amount from October 24, 2005 (the date COMPANY 2 notified COMPANY 1 of the change in dividend rate from 8.0% to 9.41%) to cover COMPANY 2’s cost of funds.

3.       Whether COMPANY 2 can ask for an upward revision of the dividend rate from 9.41% to 11% p.a. since the current rate is not reflective of COMPANY 2’s cost of funds. In the past COMPANY 2 reduced the rate from 12% to 8% p.a. at the request of COMPANY 1.

4.       If COMPANY 2 cannot ask for a revision of the dividend rate, then whether it is possible for COMPANY 2 to go for an early redemption and if so, then what are the measures that can be undertaken for an early redemption.

5.       Whether the queries raised in the said draft letter are within the scope of the subscription agreement and its amendments.

OPINION:

Query 1:

Whether COMPANY 2’s request to COMPANY 1 for payment of the unpaid dividend amount of BDT 1,141,000 is justified.

According to Clause 6.4.2 of the Subscription Agreement in the event that any tax change results in a material decrease in the Net Dividend Received on a Dividend Payment Date or if the dividend received by COMPANY 2 is made subject to further taxes which decreases COMPANY 2’s net income, the amount of Dividends paid by COMPANY 1 to COMPANY 2 on the Preference Shares shall be adjusted upward to compensate for the decrease in the Net Dividend Received and/or the decrease in the net income of COMPANY 2, provided that any such upward adjustment shall not become effective until the Dividend Payment Date immediately succeeding the effective date of the relevant Tax Change.

In our opinion, in event of a Tax Change, being a change in the rate or basis of the taxation of dividends resulting in an increase or a decrease in the Net Dividend Received by COMPANY 2, COMPANY 2 is entitled to exercise the provision of Clause 6.4.2 of the Subscription Agreement. Since the computation (formula) has not been incorporated in the Agreement there may be dispute with regard to the computation but COMPANY 2 is entitled to exercise its right under the relevant clause.

The Tax Change became effective on 1st July 2005, the 5th Dividend Payment Date also occurred on 1st July 2005.

Adjustment under Clause 6.4.2 will be effective immediately succeeding the effective date of the relevant Tax Change. The Tax Change being effective on 1st July 2005, under the strict interpretation of Clause 6.4.2, it may be argued that COMPANY 2 can only exercise its right for the next Dividend Payment Date (the 6th Dividend Payment Date) after the date of the Tax Change.

Query 2:

Whether COMPANY 2 can charge interest of 16% on the late payment of the unpaid dividend amount from October 24, 2005 (the date COMPANY 2 notified COMPANY 1 of the change in dividend rate from 8.0% to 9.41%) to cover COMPANY 2’s cost of funds.

Whether COMPANY 2 can charge interest of 16% on the late payment of the unpaid dividend amount from October 24, 2005 to cover COMPANY 2’s cost of funds hinges upon whether there has been an agreement with regard to the revised dividend payable between COMPANY 2 and COMPANY 1.

Clause 6.4.2, provides a scope for COMPANY 1 to refuse the revised dividend proposed by COMPANY 2. It also provides COMPANY 2 to end the contractual relationship between COMPANY 1 and itself by exercising an early redemption if DHB refuses to accept the proposed revised dividend.

If COMPANY 1 refuses to accept COMPANY 2’s request and COMPANY 2 fails to exercise its right of redemption within 45 fays from the date of notification, it is arguable that COMPANY 2 will have waived its right of early redemption.

If COMPANY 1 is not in breach, then indemnification under Clause 9.1 will not be applicable.

Query 3:

Whether COMPANY 2 can ask for an upward revision of the dividend rate from 9.41% to 11% p.a. since the current rate is not reflective of COMPANY 2’s cost of funds. In the past COMPANY 2 reduced the rate from 12% to 8% p.a. at the request of COMPANY 1.

If COMPANY 2’s cost of fund in not reflective of the current dividend rate of 9.41% p.a. because of a Tax Change, then according to Clause 6.4.2 of the Agreement then COMPANY 2 may ask COMPANY 1 for an upward revision of the dividend rate. However, the procedure is which COMPANY 2 should exercise its right under Clause 6.4.2 should be strictly complied with for the same to be effective.

However, if the reason why COMPANY 2’s cost of fund is not reflective of the current dividend rate is NOT because of a Tax Change but for some other reason then any upward revision of the dividend rate will have to be mutually agreed upon by both the parties regardless of COMPANY 2 having agreed to reduced its rate in favour of COMPANY 1 in the past.

Query 4:

If COMPANY 2 cannot ask for a revision of the dividend rate, then whether it is possible for COMPANY 2 to go for an early redemption and if so, then what are the measures that can be undertaken for an early redemption

As stated above, COMPANY 2 can ask COMPANY 1 for an upward revision of the dividend rate according to Clause 6.4.2 of the Agreement ONLY IF such upward revision is because of a Tax Change. In the event that the parties cannot mutually agree upon such an upward adjustment in the amount of Dividends paid by COMPANY 1 to COMPANY 2 within 45 (forty five) days of notification of the Tax Change, COMPANY 2 shall exercise its early redemption option specified in Clause 7 of the Agreement.

According to Clause 7.1.2(iii) (b) (I), in the event that any Tax Change results in a decrease in the net Dividend Received COMPANY 2 shall in respect of each Preference share be entitled to give 30 days written notice to COMPANY 1 requiring COMPANY 1 to redeem each Preference Share, provided that such notice is given within 90 days of the notification of such Tax Change in the Official Gazette. COMPANY 1 shall on or before the 30th day following the receipt of such notice redeem the Preference Share.

With regard to the 5th payment of dividend, COMPANY 2 was required to give notice of early redemption within 90 days the notification of such Tax Change in the Official Gazette. However, since the Tax Change in the Budget of 2005-2006 was published in the Official Gazette on 30 June 2005 the time limit for giving a notice of early redemption appears to be over.

Query 5:

Whether the queries raised in the said draft letter are within the scope of the subscription agreement and its amendments.

The draft letter to be sent to DHB has been revised and vetted by us. Please find enclosed herewith the revised version of the draft letter. However, the enforceability of COMPANY 2’s claim is subject to our legal opinion granted hereinbefore.

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

Thanking you.

Yours faithfully,

………………….

For: “The Lawyers & Jurists”

Dear Sir,

SUB:   Adjustment of the Dividend Payment of 2004 – 2005 for preference share facility A/C Delta Brac Finance Corporation Limited.

We refer to the a Subscription Agreement dated December 31, 2000 (“the Agreement”) executed between COMPANY 2 (“COMPANY 2”) and COMPANY 1 (“COMPANY 1”) for a redeemable preference share facility of BDT 100.00 million. The facility was disbursed on December 31, 2000 with an annual dividend rate of 12% p.a. and redemption on June 30, 2005. Later on, through a letter no. COMPANY 1/2004 – 203 dated May 22, 2004, COMPANY 1 requested COMPANY 2 to extend the facility to a further period of 10 years and to reduce the dividend rate to 8.0% p.a. to complement COMPANY 1’s increased cost of fund. Accordingly, COMPANY 2 honoured the request of COMPANY 1 and extended the facility upto July 01, 2014 through the execution of an Amendment to Subscription Agreement dated December 23, 2004.

The Tax on dividend was increased through a change in the tax structure in the Budget of 2005 – 2006 which was published as the Finance Act 2005 in the Official Gazette on 30 June, 2005. As a result of this tax change, COMPANY 2 paid additional tax on its dividend income in 2005. And according to Clause 6.4.2 of the Agreement in the event that the dividend received by COMPANY 2 is made subject to further taxes which decreases COMPANY 2’s net income, the amount of Dividends paid by COMPANY 1 to COMPANY 2 on the Preference Shares shall be adjusted upward to compensate for the decrease. Therefore, according to Clause 6.4.2 of the Agreement from the Fifth Dividend Payment Date July 1, 2005, which is the Dividend Payment date immediately succeeding the effective date of the Tax Change, COMPANY 1 is legally bound to pay dividend at the rate of 9.41% p.a. (instead of 8.00% p.a.) to compensate of the Tax increase. And accordingly on the Fifth Dividend Payment Date July 1, 2005, COMPANY 1 were supposed to pay COMPANY 2 BDT 9,410,000.00 (taka nine million and four hundred ten thousand) only but the actual dividend paid by COMPANY 1 was BDT 8,000,000.00 (taka eight million) only at the dividend rate of 8.00% p.a.

COMPANY 2 requested COMPANY 1 to increase the dividend rate from 8.00% to 9.41% effective from July 1, 2005, though COMPANY 2’s letter no. COMPANY 2/COMPANY 1/2005/1391 dated October 24, 2005, in order to compensate COMPANY 2 for its additional tax payment against its preferential dividend income from COMPANY 1.

COMPANY 1 is liable to pay COMPANY 2 the unpaid dividend amount of BDT 1,410,000.00 (taka one million and four hundred ten thousand) only. Moreover, COMPANY 2 has incurred financial loss

because of the non – payment by COMPANY 1 of the increased dividend amount. COMPANY 1 is under a duty under Clause 9.1 of the Agreement to indemnify COMPANY 2 for the financial loss incurred by COMPANY 2 in this regard during the period from October 24, 2005 to __________. COMPANY 1 is liable to pay interest of 16% on the late payment of the unpaid dividend amount from October 24, 2005 to ___________ in order to indemnify COMPANY 2 for its cost of funds which is a total of BDT _____________ (______________________).

In this backdrop, we are requesting you to adjust the dividend payment of the Fifth Dividend Payment Date July 1, 2005 by paying the unpaid dividend amount of BDT 1,410,000.00 (taka one million and four hundred ten thousand) only and an interest of 16% on the said amount in order to indemnify COMPANY 2 for its cost of funds which is a total of BDT _____________ (______________________) only, within 15 (fifteen) days of receipt of this letter. If you fail to pay this amount within the said time limit, then you will be in breach of the Subscription Agreement and the Amendments thereto.

Thanking you and looking forward to your cooperation in these regards.

Sincerely Yours,

…………….

For: “The Lawyers & Jurists”

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