Re: Legal Opinion on preference shares of Company 1.
We refer to your letter no. COMPANY 2/LKP/DBH/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 January 15, 2004 with Company 1 (“COMPANY 1”) for a Class A preference share facility of BDT 20.00 million. The facility was disbursed in two tranches of BDT 8 Million (“Tranche 1”) and BDT 12 Million (“Tranche 2”) on January 15, 2004 and April 5, 2004 respectively. The Dividend and Redemption payment dates for Tranche 1 and Tranche 2 are January 15 and April 5 respectively each year.
COMPANY 2 has not received the dividend payments of the preference shares for the years 2006 and 2007 from COMPANY 1. And no redemption of shares has been made as per the Subscription Agreement.
In the revised scenario, the dividend payments due but not paid for Tranche 1 are as follows:
|Particulars||Amount in BDT|
|Dividend Due on 15 January, 2006||1,016,800|
|Cumulative Dividend Due on 15 January, 2007||129,235|
|Dividend Due on 15 January 2007||1,016,800|
|Total Payable Dividend on 15 January, 2007||2,162,835|
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. This tax change has decreased COMPANY 2’s net dividend income.
In these circumstances, you have sought our legal opinion on the following matters:
1. Whether COMPANY 2 can revise the dividend rate upwards to 12.71% effective from July 1, 2005.
2. Whether COMPANY 2 can claim financial compensation at the rate of 16% p.a. from COMPANY 1 for delayed Dividend payment of January 15, 2007 to compensate for COMPANY 2’s forgone income covering the period from January 15, 2007 to the actual date of payment.
3. Whether COMPANY 2 will be able to make an amendment to the Subscription Agreement by adding a clause regarding claiming of financial compensation on dividend payments made after the dividend due dates.
Whether COMPANY 2 can revise the dividend rate upwards to 12.71% effective from July 1, 2005.
According to Clause 6.4.2 of the Subscription Agreement in the event that any Tax Change or change in the interpretation of tax law results in a decrease in the Net Dividend Received on a Dividend Payment Date, the amount of Dividends paid by COMPANY 1 to COMPANY 2 on the Class A Preference Shares shall be adjusted upward to compensate for the decrease in the Net Dividend Received, 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 the Dividends paid by COMPANY 1 to COMPANY 2, COMPANY 2 shall exercise its Early Redemption option.
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 and the immediately succeeding Dividend Payment Date for Tranche 1 was January 15, 2006 and for Tranche 2 was April 5, 2006.
As adjustment under Clause 6.4.2 will be effective immediately succeeding the effective date of the relevant Tax Change, COMPANY 2 may propose to COMPANY 1 to revise the dividend rate upwards to 12.71% effective from January 15, 2006 for Tranche 1 and from April 5, 2006 for Tranche 2. However, any such upward adjustment has to be mutually agreed upon between the parties.
Whether COMPANY 2 can claim financial compensation at the rate of 16% p.a. from COMPANY 1 for delayed Dividend payment of January 15, 2007 to compensate for COMPANY 2’s forgone income covering the period from January 15, 2007 to the actual date of payment.
According to Clause 8.1 each party shall indemnify the other Party, and hold the other Party harmless from and against any and all losses, liabilities, damages, claims, penalties, actions, judgments, suits, costs, expenses and disbursements, which may be incurred by the Other Party as a result of, or directly or indirectly arising out of the indemnifying Party’s breach of any of its representations and warranties, covenants, agreements or obligations contained in the Agreement.
Although, COMPANY 2 has not received the dividend payments of the preference shares for the years 2006 and 2007 from COMPANY 1 and no redemption of shares has been made by COMPANY 1 as per the Subscription Agreement; these are not breaches by COMPANY 1 of the terms of Subscription Agreement. This is because according to Schedule I, Article 7A (iii), the dividend payments of the preference shares are cumulative and according to Schedule I, Article 7A (v) if on a Redemption Date the Preference Shares cannot be redeemed then the Preference Shares scheduled to be redeemed on that Redemption Date shall be redeemed in the next Redemption Date. The obligation of the part of COMPANY 1 is to pay all the accumulated dividends on the 5th Dividend Payment Date and to redeem all the preference shares on the 5th Redemption Date. Before the 5th Dividend payment date and the 5th Redemption Date, COMPANY 1 is entitled to defer payment of the Dividend and defer redeeming the preference shares.
Therefore, it is our opinion that, as there has been no breach of the terms of the Subscription Agreement by COMPANY 1, COMPANY 2 may not rely on Clause 8.1 to claim any financial compensation from COMPANY 1.
Whether COMPANY 2 will be able to make an amendment to the Subscription Agreement by adding a clause regarding claiming of financial compensation on dividend payments made after the dividend due dates.
According to Clause 9.6, the Subscription Agreement may be amended only by a written instrument executed by the Parties to the Agreement. As such COMPANY 2 alone cannot arbitrarily amend the Subscription Agreement. Any amendment has to be mutually agreed upon by both the parties and has to be executed by a written instrument.
As COMPANY 1 had failed to make dividend payments for the year 2006 and 2007 and also has failed to redeem any of the Class A Preference Shares, COMPANY 2 may, if they want, exercise their right under the Put Option Agreement dated 15 January 2004 and require the Sponsors to buy the Preference Shares from COMPANY 2 at the Put Option Price.
If you have any further query, please do not hesitate to contact the undersigned.
For: “The Lawyers & Jurists”