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.

OUR OPINION:

Query 1:

From perusal of the provided documents it appears that, 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. As a result of this tax change, COMPANY 2 paid additional tax on its dividend income in 2005 and therefore requested COMPANY 1 to increase the dividend rate from 8.0% to 9.41% p.a., effective from July 1, 2005. Clause 6.4.2 of the Subscription Agreement states as follows:

“6.4.2   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 the Subscriber is made subject to further taxes which decreases the Subscriber’s net income, the amount of Dividends paid by the Company to the Subscriber 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 the Subscriber, 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 the event that the parties cannot mutually agree upon such an upward adjustment in the amount of Dividends paid by the Company to the Subscriber within 45 (forty five) days of notification of the Tax Change, the Subscriber shall exercise its early redemption option specified in clause 7 of this Agreement.”

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

Thanking you.

Yours faithfully,

………………….

For: “The Lawyers & Jurists”

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