Summit Power Ltd. Vs. SummitNarayangonj Power Ltd 2016 (2) LNJ 227

Case No: Company Matter No. 68 of 2016

Judge: Syed Refaat Ahmed,

Court: High Court Division,,

Advocate: Mr. A.M. Masum,Mr. Probir Neogi,Mr. Suvra Chakravarty,Ms. Karishma Jahan,Ms. Narita Navin Khan,Ms. Sumaiya Sadia Huda,Ms. Anita Ghazi Rahman,Mr. Manzur-Al- Matin,,

Citation: 2016 (2) LNJ 227

Case Year: 2016

Appellant: Summit Power Ltd

Respondent: SummitNarayangonj Power Ltd

Subject: Company Matter,

Delivery Date: 2016-07-14

Summit Power Ltd. Vs. SummitNarayangonj Power Ltd 2016 (2) LNJ 227
HIGH COURT DIVISION
(STATUARY ORIGINAL JURISDICTION)
Syed Refaat Ahmed, J
Judgment on
14.7.2016
Summit Power Limited, of Summit Centre, 18, Kawran Bazar, Dhaka-1215.
. . . Petitioner
-Versus-
Summit Narayanganj Power Limited of Summit Centre, 18, Kawran Bazar, Dhaka-1215 and others.
. . . Respondents

Companies Act (XVII of 1994)
Sections 228 and 229
By an application under sections 228 and 229 of the Companies Act, the petitioner prayed for an approval of a Scheme of Amalgamation concerning the respondent No. 1, Summit Narayangonj Power Limited (SNPL), the respondent No. 2, Summit Uttaranchol Power Company Limited (SUPCL) and the Respondent No. 3, Summit Purbanchal Power Company Limited (SPPCL), collectively the “Transferor Companies” and the Petitioner Summit Power Limited (SPL) as the “Transferee Company”.  It is submitted that all four entities, being of intent on running their affairs more efficiently and effectively by reduction of costs and expenses, have decided upon a process of reconstruction and amalgamation reflected in the Scheme under which the Transferor Companies are to be merged into SPL with their respective assets and liabilities. The Scheme envisages SPL to be the remaining and existing Company, with the Transferor Companies ceasing to exist. Resultantly, the assets and liabilities of the Transferor Companies shall belong to SPL which shall take over and carry on with the business of each of the Transferor Companies.
The parties are to note that the report of the independent expert shall be final and remain binding on all concerned, inclusive of the parties to the Scheme and the BSEC. The methodology of calculation for the purpose of valuation of shares shall be based on the accepted methods variously submitted on by the parties to the Scheme as well as the BSEC. The methodology of valuation of shares and the accounting component of the exercise shall necessarily be in accordance with the Bangladesh Financial Reporting Standard (BFRS) including Bangladesh Accounting Standard (BAS) set out by the Institute of Chartered Accountants of Bangladesh.  The Parties to the Scheme are further reminded that any extension of BPDB’s 23.6.2010 contract with SNPL will necessitate the due incorporation of the present Article 17 provision on sanction and custom duties. This Court further directs the parties to the Scheme to revisit Section 8(b) of Part II of the Scheme to ensure an expeditious transfer of all employee-related funds, inclusive of existing provident and gratuity funds, created by the Transferor Companies to the relevant funds of the Transferee Company, SPL. Accordingly, this Court, hereby, sanctions the Scheme of amalgamation subject to the findings, observations and directions above and declares that the same shall be binding on all concerned upon a due and proper execution of the Scheme of Amalgamation inclusive of duly formulated provision on the basis of the directives above by and on behalf of all four entities at any date prior to the Effective Date as defined in the Scheme.  Furthermore, it is ordered that the merger of the Transferee and Transferor Companies shall be deemed to be effective on the date that a certified copy of this Judgment and Order, and as decided by the BODs of all four Companies, is delivered to the Respondent No. 4, Registrar, Joint Stock Companies and Firms for registration, such filing necessarily, however, taking place within 8 (eight) weeks of receipt of a certified copy of this Judgment and Order with the independent valuation exercise being undertaken and completed within that time frame. Moreover, the costs, charges and expenses, including any taxes, duties etc. arising in connection with the Scheme and incidental to the completion of the amalga-mation as envisaged therein, including those related to this Application, and the independent valuation exercise shall be borne and paid for by the Petitioner Transferee Company, SPL.  In the result, the Application is allowed, subject to the above observations and directions.               . . .  (1, 7, 32 to 37)

Miheer H. Mafatlal vs. Mafatlal Industries Ltd. reported in AIR 1997 SC 506 and Hind Lever Chemicals Limited and Another, (2004) 137 PLR 261, 2005 58 SCL 211 Punj Har ref.
Company Matter No. 68 of 2016


Ms. Karishma Jahan, Advocate with
Ms. Narita Navin Khan, Advocate
                 ..... For the Petitioner
Ms. Sumaiya Sadia Huda, Advocate
. . .For the Respondent Nos. 1, 2 and 3
Mr. Probir Neogi, Senior Advocate with
Ms. Anita Ghazi Rahman, 
Mr. Suvra Chakraborty,
Mr. Manzur-Al- Matin, Advocates
… For the Respondent No. 5.
Mr. A.M. Masum, Advocate
… For the Respondent No. 6.
 
JUDGMENT

Syed Refaat Ahmed, J:
This is an Application under Section 228 read with Section 229 of the Companies Act, 1994 (“the Act”) praying for an approval of a Scheme of Amalgamation (hereinafter referred to as the “Scheme” as necessary) concerning the Respondent No. 1, Summit Narayanganj Power Limited (“SNPL”), the Respondent No. 2, Summit Uttaranchol Power Company Limited (“SUPCL”) and the Respondent No. 3, Summit Purbanchol Power Company Limited (“SPPCL”), collectively the “Transferor Companies”, and the Petitioner, Summit Power Limited (“SPL”) as the “Transferee Company”.
  1. SPL is a publicly listed company limited by shares incorporated under the Act with its shares being traded both in the Dhaka and Chittagong Stock Exchanges. It is engaged in the business of, among others, designing, financing, building, owning, operating and maintaining power plants for generation of electricity, and to sell such electricity to relevant government authorities. SPL’s authorized share capital is Tk. 1500,00,00,000/-  divided into 120,00,00,000 ordinary shares of Tk. 10/- each, amounting to Tk. 1200,00,00,000/-  and Tk. 3,00,00,000/- fully convertible preference shares of Tk. 100/-  each amounting to Tk. 300,00,00,000/-. Presently, the issued and paid up share capital of SPL is Tk. 826,41,57,750/- divided into 82,64,15,775 shares.
  2. The Transferor Companies, SNPL, SUPCL and SPPCL are all presently public limited companies and engaged similarly in generation of power, building, developing, installing, setting-up power plants and selling the generated power commercially to any person or legal entity in Bangladesh.  
  3. SNPL’s authorized share capital is Tk. 300,00,00,000/-  divided into 30,00,00,000 ordinary shares of Tk. 10/- each. Presently, the issued and paid up share capital of SNPL is Tk. 214,98,75,000/-  divided into 21,49,87,500 shares.
  4. SUPCL’s authorized share capital is Tk. 315,00,00,000/-  divided into 15,00,00,000 ordinary shares of Tk. 10/- each, amounting to Tk. 150,00,00,000/- and 1,65,00,000  preference shares of Tk. 100/- each amounting to Tk. 165,00,00,000/-. Presently, the issued and paid up share capital of SUPCL is Tk. 67,97,84,830/- divided into 6,79,78,483 shares.
  5. SPPCL’s authorized share capital is Tk. 500,00,00,000/-  divided into 25,00,00,000 ordinary shares of Tk. 10/- each, amounting to Tk. 250,00,00,000/- and 2,50,00,000  preference shares of Tk. 100/- each amounting to Tk. 250,00,00,000/-. Presently, the issued and paid up share capital of SPPCL is Tk. 151,98,07,030/- divided into 1,519,80,703 shares. SPPCL’s shares are being traded both in the Dhaka and Chittagong Stock Exchanges (“DSE” and “CSE” as necessary).
  6. It is submitted that all four entities, being of intent on running their affairs more efficiently and effectively by reduction of costs and expenses, have decided upon a process of reconstruction and amalgamation reflected in the Scheme under which the Transferor Companies are to be merged into SPL with their respective assets and liabilities. The Scheme envisages SPL to be the remaining and existing Company, with the Transferor Companies ceasing to exist. Resultantly, the assets and liabilities of the Transferor Companies shall belong to SPL which shall take over and carry on with the business of each of the Transferor Companies.
  7. A perusal of the Scheme reveals that it bears all the necessary and requisite hallmarks of a transfer of assets, rights and liabilities as envisaged generally under Section 229 of the Act, which are found reflected generally in the Part II “Transfer and Vesting” provisions of the Scheme. Also satisfactory are the Scheme’s provisions concerning security of employment of all employees of the Transferor Companies allowing, thereby, for them to become employees of SPL upon coming into effect of the Scheme without any break and interruption in service and on such terms and conditions that were agreed between the employees and each of the Transferor Companies. Found further is the consequential provision for existing provident, gratuity and other employee related funds created by each of the Transferor Companies to be transferred at an appropriate stage to the relevant fund of SPL and until which time these shall be maintained separately. It is noted that SPL has also agreed to continue to abide by the provisions of any Trust Deed of any such funds.
  8. On the issue of ordinary shares held by SPL in the Transferor Companies on the Record Date, the Scheme provides for the cancellation of the same without any further act or deed, negating the possibility of any shares in SPL to be issued in lieu thereof. Similarly, any ordinary shares in SPL held by the Transferor Companies on the Record Date shall stand similarly canceled without any further act or deed and shall not require any shares of the Transferor Companies to be issued in lieu thereof. The Scheme also provides for preference shares of SUPCL and SPPCL to be carried over as liability to SPL, allowing for this to be reflected in the audited accounts of the SPL as such.     
  9. Noted further is that under the Scheme no certificate shall be issued in respect of fractional entitlements, if any, by SPL, to which the members may be entitled on issue and allotment of shares of SPL, as stated above. The Board of Directors (“BOD”) of SPL shall instead consolidate all such fractional entitlements and thereupon issue and allot shares in lieu thereof to the Company Secretary or such other person as the SPL BOD shall appoint in this behalf, who shall hold the shares in trust on behalf of the members entitled to fractional entitlements with the express understanding that such Company Secretary or other person shall sell the same in the market at such times at such price or prices and at such exchange or exchanges as he may deem fit, and pay SPL the net proceeds thereof, whereupon SPL shall distribute such net sale proceeds to the members in proportion to their respective fractional entitlements. 
  10. The learned Advocate for SPL, Ms. Karishma Jahan, has impressed upon this Court at the very outset that the Scheme is first and foremost a device at increasing profitability through better management. The Scheme achieves that apparently through certain synergies brought about ultimately. Resultantly, separate managements and inventories of the Transferor and Transferee Companies will be done away with and dividends will be declared  on the basis of the consolidated account of the Transferor Companies and Transferee Company as opposed to the standalone accounts of individual Transferor and Transferee Companies that were used for declaration of dividends prior to amalgamation. This is turn will ensure greater earnings for members.
  11. This Court also remains satisfied with the Scheme’s objectives overall of increasing the net worth of the Amalgamated Company and consequently increasing its capacity to give back more to the individual shareholders. And all this is to be achieved understandably so with a bigger entity with a far greater operational base wielding greater influence in the power generation sector.
  12. The power generation sector has notably evolved in this jurisdiction by reference primarily to the Private Sector Power Generation Policy of 1996 (“1996 Policy”) and the ¢hc¤Év J SÅ¡m¡e£ Ⲥa plhl¡q hª¢Ü ¢h­no ¢hd¡e BCe, 2010 (“2010 Act”). The 1996 Policy marks the genesis of the Electricity Power Generation Industry in this country and is replete with fiscal incentives for potential international, as well as local, power players to engage effectively and profitably in this sector.
  13. Upon a decade and half into the imple-mentation of the 1996 Policy, the power generation sector and policy makers were alerted of the inability of the sector to keep pace with the demands in generation of electricity brought on by a steady and healthy growth of the economy. A policy shift, therefore, took place leading to the enactment of the 2010 Act that endorses a fast track mechanism of entertaining and establishing Independent Power Plants (IPPs), as well as power generation companies operating on a rental basis, by necessarily bypassing the requirement to comply with the procurement process under the Public Procurement Act, 2006. IPPs and rental arrangements imple-mented under the 2010 Act came to be benefited not only by being freed from the shackles of the 2006 Act but also by the statutory promise of the Government’s liberal policy stance implementing various power generation projects without, significantly, the spectre of legal challenges being mounted against the same (Section 9 of the 2010 Act).
  14. It is in that legislative and policy atmosphere that IPPs such as SPL, SPPCL and SUPCL have flourished over the years to a great extent, being governed by relevant SROs setting out income tax, VAT and customs duty exemptions, which were in turn reflected in the commercial contracts in the form of the Implementation Agreements (IAs) read with the Power Purchase Agreements (PPAs). As these Agreements were entered into with the Government, such exemptions came to be enjoyed by the IPPs as entrenched statutory and contractual rights. The IAs notably record undertakings by the President of the Republic to compensate an IPP if inter alia an off-taker fails to pay. Of the parties before this Court, SNPL is the sole entity operating on a rental basis enjoying a contractual arrangement with the off-taker (in this case, the Respondent No. 6, Bangladesh Power Development Board(BPDB)), in respect of payment of tax, the burden of payment of which lies with the off-taker. In the present facts, in addition to SNPL’s Madanganj Power Plant, BPDB also has an offtake arrangement with one other Transferor Company, the Respondent No. 3 SPPCL with regard to the latter’s Jangalia Power Plant.  As impressed upon by Ms. Karishma Jahan, at the end of the day, in the case of either an IPP or a rental entity, the project companies are freed from the burden of paying taxes.                      
  15. BPDB’s 23.6.2010 contract with SNPL pertaining to the Madanganj Power Plant for supplying electricity on a rental basis for five years significantly allows for the diversion of the tax liability from the project company on to BPDB under Article 17 dealing with taxation and customs duty as reads thus:
“Article 17- Taxation and Customs Duties
BPDB shall be responsible for payment of income taxes, other taxes, VAT, duties, levies, all other charges imposed or incurred inside Bangladesh on any payments made by BPDB to Rental Power Company and for the importation (on a re exportable basis) of any plant/ equipment (excluding consumables) and/or spare parts before Commercial Operation Date and/or replacement equipment and spare parts of operation throughout the contract period. In this regard the Rental Power Company shall submit to BPDB copy of pro forma Invoice, Bill of Lading, Letter of Credit (L/C), Packing List, Original Invoice etc. attested by the L/C opening Bank. The Rental Power Company shall submit an undertaking provided in Schedule 9 and Schedule 10 for importation of materials.
The Rental Power Company will be liable to deduct tax from any payment to sub-contractor, suppliers, professional or technical service provider in accordance with the provisions of Income Tax Ordinance, 1984.”
The BPDB is presently concerned about a necessary distinction under the Scheme of the nature of electricity generation undertaken by SNPL as compared to the other transferring entities and indeed the Transferee Company, SPL. BPDB apprehends that falling under the purview of separate statutory policy, regulatory and contractual régimes, the amalgamation of SPL and SNPL shall complicate payments of taxes, VAT and duties, thereby, impairing seriously proper implementation of the 23.6.2010 agreement. Apprehended by BPDB further is that the amalgamation will result in the PPAs and contracts for rental power being nullified resulting in a vacuum without indication as to how SPL shall run the business of a rental entity with BPDB. BPDB also perceives a lack of good faith in the implementation of the Scheme in that SPL shall have transmitted to the Transferor Companies all privileges of tax, VAT and duty exemptions otherwise the sole contractual entitlement of SPL. The learned Advocate for BPDB Mr. A.M. Masum, by reference to BPDB’s Affidavit-in-Opposition, submits that the amalgamation of SPL and SNPL will result necessarily in SNPL being the ultimate beneficiary of tax exemption and other liabilities enjoyed by SPL for a period of fifteen years that, according to him, goes against the very concept of establishing a power producer on a rental basis. Highlighting further BPDB’s contractual relationship with Jangalia Power Plant, it is also asserted that the separate PPAs with BPDB imposing significantly separate tax imposition dates as well as rates of power purchase will create complications in enforcing the Madanganj and Jangalia contracts within the Scheme’s tenor and purport. It is feared that as the only customer of SNPL’s Madanganj Power Plant operating on a rental basis, and being one of the off-takers of a power plant of SPPCL, BPDB will be faced with unwelcome administrative, operational and financial dislocation. That leads BPDB to seriously question the feasibility of the Scheme. Mr. Masum further highlights that BPDB’s contracts with SNPL and with SPPCL shall in effect stand to be negated by reason that benefits solely intended for SNPL and SPPCL shall potentially accrue to a third party, i.e SPL, as the transferee entity, with whom BPDB has no privity.
  1. In addressing BPDB’s unwarranted concerns above this Court notes that it has consistently been this Court’s view that, a scheme as the present one, based on Section 229, shall necessarily ensure that the activities of each of the power generation undertakings, in the present case being a total of eleven in number, shall stand compartmentalized and these will be maintained separately by the amalgamated entity. This shall enable the allocation of different tax exemption benefits to respective income streams. There is nothing in the Scheme that is found by this Court to blur that distinction between the separate nature of the power generation activities enjoyed by each of the participating entities. This is indeed stipulated expressly in Section 3 of Part II to the Scheme which reads thus:
   “All the license, permits, quotas, approvals, permissions, incentives, loans, subsidies, concessions, grants, claims, leases, tenancies, exemptions from income tax or other taxes, benefits, rights and privileges and right to extension under the Contract for Supply of Electricity as per the terms of the Power Purchase Agreement executed with Bangladesh Power Development Board and Rural Electrocution Board vide IPP Contracts dated 11 October 2007 (for SPPCL) and with Rural Electrification Board IPP Contracts dated 11 October 2007 (SUPCL) and Rental Contract No. 09752 dated 23 June 2010 (SNPL) and any amendment thereof between the respective Transferor Company with the Bangladesh Power Development Board (BPDB) and/or Rural Electrocution Board (REB) as well as other benefits or privileges enjoyed or conferred upon or held or availed of by and all rights and benefits that have accrued, which may accrue to the Transferee Company shall, pursuant to the provisions of section 229(2) of the Act, without any further act, instrument or deed, be and stand transferred to and vested in and available to the Transferee Company so as to become as and from the acquisition date the licenses, permits, quotas, approvals, permissions, incentives, loans, subsidies, concessions, grants, claims, leases, tenancies and other benefits or privileges of the Transferee Company and shall remain valid, effective and enforceable on the same terms and conditions to the extent permissible under law. It is hereby clarified that all inter party transactions between any/or all of the Transferor companies and the Transferee Company shall be considered as intra party transactions for all purpose from the Appointed Date.”
It is evident from the above that any existing contractual arrangement between BPDB and any of the Transferor entities shall continue to be in force post-implementation of the Scheme by reference to the Appointed Date. The terms and conditions of such contracts shall remain valid and enforceable to the extent permissible under law. There is additionally found no reason to construct in the Scheme’s provisions allowing for all inter-company agreements and contracts between “involved parties”, i.e., the four entities participating in the Scheme, to be nullified, to extend in any manner to agreements entered into by each of these entities with third parties as the BPDB. In that regard, the transfer and vetting process envisaged in Section 3 above operates with regard to BPDB’s existing contracts remaining untouched and unqualified by the said provision on nullification of inter-party contracts. Ms. Karishma Jahan asserts that this is indeed the true construction to be accorded to Section 3 as does not impinge in any way BPDB’s existing contractual rights.
  1. It has been brought to this Court’s attention that as per a decision of February, 2016, BPDB’s 23.6.2010 contract with SNPL regarding its 102 Megawatt Power Plant Project located in Madanganj shall be extended for another five years subject to negotiation on tariff. Documents perused attest to BPDB’s satisfaction in that regard of satisfactory power generation by the Madanganj Project. Given further the imminent retirement of several other IPPs and rental entities, BPDB projects a deficit in electricity generation during the 2019-2020 period. Premised on this, and in keeping with the Government’s 2021 power production target, BPDB at its 1654th General Board Meeting has decided in principle to extend the contract for supply of electricity with SNPL for an additional five years.
  2. This Court finds that the extension so envisaged by BPDB shall allow for power generation activity under the contract to be initiated and continued for the entire contractual period of five years without hindering BPDB’s rights and interests thereunder. This will be so, even given that the implementation of the contract during the extended period will straddle the implemen-tation of the Scheme, with reference to the Appointed Date, and with SPL assuming control of all rights and liabilities of SNPL. Given the stipulation in Section 3 of Part II of the Scheme quoted earlier, the contract shall remain undisturbed for the entire duration of five years with the power generation activity thereunder on a rental basis being continued by the Madanganj Power Plant under the aegis of SPL. This Court is of the view that it will be imperative in that regard for BPDB’s renewed contractual arrangement with SPL, as a successor company, to contain all terms and conditions as would ensure the offtaking of power by BPDB on a rental basis without interruption, with the parties specifically endorsing the terms under Article 17 found in the existing contract dated 23.6.2010.
  3. Moving on, it is noted that an essential component of the Scheme has been the methodology to determine the valuation of shares of each ccompany as in turn has been the final determinant of the “Share Exchange Ratio” per share of SPL thus:
  Summit Power Limited Summit Uttaranchol Power Company Limited Summit Purbachol Power Company Limited Summit Narayanganj Power Company Limited
NAV per share as on 31-12-15
 
28.72 29.9 32.22 28.58
Average market price for six months to 31-12-15 (SPL/ SPPCL)
 
37.8 - 54.87 -
 
 
 
 
Average EPS based on last five years to 31-12-15 times average market P/E (SUPCL/SNPL) - 81.08 - 69.57
Weighted Average Value per share 33.26 55.48 43.54 49.07
Exchange Ratio of SPL share for each share (number) of Transferors) 1 1.668 1.309 1.475
 
The basis of determination of valuation of shares as reflected in the table above is to be found in the price sensitive information published by all four entities in the print media and online in compliance with Order No. SEC/CMRRCD/2009-193/179/por-64 dated 7.12.2015, issued pursuant to the Securities and Exchange Commission (Prohibition of Insider Trading) Regulation, 1995.  The valuation of the shares of the SPL and the Transferor Companies have been arrived at by calculating the average of the following two bases:
  1. Net Asset Value on Current cost basis as on 31.12.2015; and 
  2. Average market price for six months to 31.12.2015 for listed Companies (SPL and SPPCL) or, in the case of the non-listed Companies (SUPCL and SNPL), Average Earning Per Share (EPS) based on last five years ended on 31.12.2015 times average market Price Earnings (P/E) based on the three months to 31.12.2015.
Consequentially, ordinary shareholders of SNPL, SUPCL and SPPCL, whose names are recorded on the register of members on the Record Date, shall be entitled to be credited with 1.475, 1.668 and 1.309 shares respectively of Tk. 10/- each in SPL as fully paid up shares for every share of Tk. 10/- each held in SNPL, SUPCL and SPPCL respectively.
  1. The Bangladesh Securities and Exchange Commission (“BSEC”) , as Respondent No. 5, while neither opposing the Scheme per se nor questioning the accuracy of the calculation reflected in the table above, has raised issues through an Affidavit-in-Opposition concerning the general process through which the draft Scheme has been drawn up by the four entities and indeed the basis for determining the valuation of shares. The thrust of the BSEC’s concern regarding valuation is that there is contemplated the issuance of SPL’s shares at possibly far greater numbers under the existing listed Share Exchange Ratio than would otherwise have been the case should alternate mode(s) of valuation been pursued.
  2. Before addressing BSEC’s concerns so expressed, this Court deems it prudent to reflect generally on the perceived inadequacies of the mode of drawing up the draft Scheme itself. BSEC primarily remains concerned with the valuation exercise not being the outcome of an audit independently commissioned and conducted on all four entities. SPL’s response in this regard has been that the Scheme has been based on audited accounts of each company, and vetting of such internal audits in each instance has been undertaken by independent directors forming part of each of the Boards of Directors concerned after due scrutiny.            
  3. That, according to Ms. Karishma Jahan, satisfies an objective evaluation of the internal audit obviating the need for an independent external valuer being additionally appointed to vet the valuation of shares incorporated in the draft Scheme. It is also pointed out that the process of adoption of the draft Scheme and the particular methodology used for the valuation of shares come to be questioned by BSEC in a legislative vacuum, given that there are no objective standards statutorily endorsed against which the sufficiency of such a process of adoption or mode of calculation may be gauged. Ms. Jahan submits that indeed the first point of reference or statutory standard in the regard must be Section 229 of the Act. But even given that, Ms. Jahan argues there are limitations implicit in Section 228 and 229 that bear on this Court’s authority to delve extensively into and determine the sufficiency of processes of amalgamation and indeed valuation exercises. The bottom line here, Ms. Jahan impresses on this Court, is that in recognizing the commercial autonomy of the members of a corporate entity in adopting the Scheme, this Court in exercising its authority under Section 228 and 229 should stop short of acting in an appellate capacity. It is argued that common law pronouncements made in such a legislative vacuum and within the confines of Sections 228 and 229 have necessarily only to determine whether the valuation and the resulting exchange ratio has been fixed in accordance with the recognized method of valuation and can, therefore, be deemed to be fair.
  4. A catena of decisions have been placed before this Court to carefully delineate the limits of its jurisdiction in this regard. Upon a perusal of the same, this Court deduces that there is no requirement for it to arrive at a decision based on its own alternate calculation with any level of mathematical accuracy. This Court simply does not have the expertise to determine the best arithmetical test in this regard or to arrive at the most accurate solution demanded in the circumstances. Nor is it required to undertake the task of an appellate court to sift through alternative methods and arrive at a definite accurate finding. This Court’s jurisdiction instead is found in the circumstances to be distinctly peripheral and supervisory, as held in the Supreme Court of India in Miheer H. Mafatlal vs. Mafatlal Industries Ltd. reported in AIR 1997 SC 506. The Mafatlal ratio requires this Court generally to act in deference to commercial wisdom exercised by members of a company in adopting any scheme of amalgamation and, thereby, to abandon any temptation to arrive at an independent conclusion distinct from that arrived at by exercise of commercial democracy. It is predicated on this that the Supreme Court of India held that:
“the commercial wisdom of the parties to the scheme who have taken an informed decision about the usefulness and propriety of the scheme by supporting it by the requisite majority vote … has to be kept in view by the Court.”
The Supreme Court reminds a Court, as this, exercising jurisdiction under Sections 228 and 229 of the Act that the judicial role assigned is akin to
“an umpire in a game of cricket which has to see that both the teams play their game according to the rules and do not over step the limits. But subject to that how best the game is to be played is left to the players and not to the umpire”.
It is in this context that this Court detects a check list of steps to be taken in sanctioning a proposal of reconstruction and amalgamation as that under consideration. Accordingly, the Mafatlal Test, if one may so call it, comprises of the following steps:
  1. a determination that the provisions of the Act have been complied with;
  2.  that there has been fair representation of members at meetings adopting the draft Scheme and that the statutory majority have acted bona fide and are not in any way in a position to coerce the minority; and
  3. that the arrangement is such as an intelligent and honest man acting in respect of his interest might reasonably approve.
  4. In other words, the Scheme has to pass the fair and reasonable test without a blot found within it. The question, therefore, that this Court has to ask itself is whether the valuation of shares and the resulting Share Exchange Ratio is so manifestly unfair as would be rejected outright by an intelligent, honest and reasonable man seeking to secure his interest thereunder.
    1. An Affidavit-of-Compliance filed pursuant to holding of EGMs on 27.4.2016 by each of the four entities concerned in compliance with this Court’s Order of 22.3.2016 remain in evidence of a majority in number representing ¾ in value of members in each instance of those present and agreeing to the arrangement envisaged in the draft Scheme. It is to be borne in mind that ¾ majority envisaged under Section 228 of the Act has to be the value of the members present and voting and not the total value of the members (In: Re: Hind Lever Chemicals Limited and Another, (2004) 137 PLR 261, 2005 58 SCL 211 Punj Har). Given the realities of today’s corporate world, big public limited companies also listed in the stock exchange (like SPL and SPPCL) shall have necessarily a vast shareholding base with the number of individual shareholders running to several thousand shareholders or more. Ms. Jahan informs that in SPL alone there are 41,000 shareholders while in SPPCL there are 31,000 shareholders. In that scenario it becomes highly impracticable, if not impossible, to convene a meeting which can be attended by persons representing ¾ of the total value of shareholding. It is here that a literal interpretation of Section 228(2) allows for members controlling 75% of the value of the shares attending and voting at such meeting so fulfil the statutory requirement. In the case of SPL alone notably 82 crore shares are held by 44,145 shareholders with Summit Corporation Limited, as the parent company, holding a majority of 53.52% shares. Given such test of the value of the members present and voting determining the ¾ majority requirement, it is deduced from the reports of the EGMs of SPL and SPPCL that the statutory requirement for 75% of the value of the shares held by those attending the meeting has, therefore, been satisfied.
    2. The BSEC questions further that SPPCL’s BOD has recommended 25% cash dividend for the year ended on December 31, 2015 and that SPL’s BOD has declared 12% cash and 6% stock dividend for the year ended on December 31, 2015. The BSEC has been made aware of such disclosure in the Dhaka Stock Exchange website on 16.3.2016. Ms. Jahan, in response, clarifies that in both instances the dividend declarations took place on 15.3.2016 and ought not necessarily to figure in the calculations under the Scheme given that the Appointed Date of the Scheme is December 31, 2015. That in turn signifies the cut off date for determining Exchange Ratio obviating the need, thereby, to take into consideration the subsequent dividend declarations of March, 2016. This Court finds, accordingly, that it is fundamental to the Scheme by reference to the Appointed Date, therefore, that it becomes effective on the position current and prevalent on December 31, 2015. That finding endorses further the centrality accorded to the fixation of the Appointed Date under the Scheme.
    3. The BSEC also stresses that in signifying the valuation of shares arrived at and the Share Exchange Ratio determined therefrom, the Scheme does not benefit from a detailed recording of the calculation mentioning net assets, number of shares, price earnings ratio, five years earning for the non-listed companies, market price for listed companies etc. in support of such valuation outcome as would otherwise assist shareholders to better understanding the Companies’ fundamentals. Ms. Anita Ghazi Rahman appearing for BSEC acknowledges that such reservation has been taken on expert advice albeit in the absence of any statutory obligation on the part of any of the four entities to either make available such detailed information of calculation to shareholders or to incorporate such detailed process of calculation within the Scheme’s text. Here again, this Court must accept the majority and unanimous decision taken at EGM by members autonomously exercising their commercial wisdom, which resultantly prevents this Court from determining the accuracy of that process in any detail (Mphasis Limited [2008] 141 CompCas 558 (Kar)).
    4. It is against this backdrop of findings of sufficiency of the process of adoption of the draft Scheme that this Court has now to contend with BSEC’s reservation on the very mode of calculation, arriving at specific valuation of shares of each of the four entities, that had finally determined the Share Exchange Ratio per share of SPL. BSEC asserts that in the calculation of earnings based valuation of non-listed companies’ shares (i.e., SNPL and SUPCL) market Price-earnings ratios (hereinafter referred to as “P/E ratio”) was considered instead of sector P/E ratio. It is submitted that a sector P/E ratio would have yielded a conservative result with the price not being overstated. It is also argued that Average Market Price (simple average) was considered for the calculation of the share values of listed companies (i.e., SPPCL and SPL) instead of Weighted Average Market Price (considering trade volumes) which would have been more justified. BSEC’s concern here is that a more conservative approach to calculation and valuation following other alternate methods would produce a result under which the Share Exchange Ratio per share of SPL would notably come down, thereby, negating the prospects of a possible dilution of share prices of the public listed Transferee Company SPL, thereby, adversely affecting minority shareholders.
    5. This Court, not equipped with the expertise to determine the sufficiency of the methods of valuation declared in the Scheme or alternatively mooted by the BSEC in its Affidavit-in-Opposition, has at length been made aware of three other alternate, available and recognized methods of valuation of shares for listed and unlisted public limited companies. The difficulty further for this Court is that the sufficiency of any of the rival methodologies forwarded under the Scheme or by the BSEC cannot in this jurisdiction be objectively gauged against statutorily endorsed standards. Such legislation is simply not there as an essential point of reference for judicial consideration. The BSEC, on whom is reposed the authority to provide requisite guidelines by way of delegated legislation under Section 2CC of the Securities and Exchange Ordinance, 1969, has admittedly yet to take any initiative in that regard. On the other hand, SPL, in particular, in instructing its counsel Ms. Karishma Jahan has been at pains to explain not only the sufficiency of the valuation exercise reflected in the Scheme but to have this Court appreciate that alternate methods and bases for calculation and valuation would yield an exchange ratio of SPL shares for each share numbers of the Transferor Companies not vastly different, but nominally different, from that reflected in the Scheme. Ms. Jahan has placed the following table before the Court setting out the different methods of calculation that could be used for arriving at a share valuation:
  SPL SUPCL SPPCL SNPL
NAV per share as on 31-12-15 28.72 29.9 32.22 28.58
Average market price for six months to 31-12-15(SPL/SPPCL) 37.8 (simple)
37.91 (weighted average based on traded volume)
37.43 (weighted average based on price volume)
  54.87 (simple)
54.97 (weighted average based on traded volume)
54.51 (weighted average based on price volume)
 
Average EPS based on last five years to 31-12-15 times average market P/E (SUPCL/SNPL) - 81.08
60.1 (based on sector P/E of DSE)
62.47 (based on sector P/E of CSE)
 
  69.57
51.57 (based on sector P/E of DSE)
 
Discounted Cash Flow (DCF)   50.69   28.71
Weighted average value per share 33.26
33.315(trade volume)
33.075 (price volume)
55.48
45 (based on sector P/E of DSE)
46.18 (based on sector P/E of CSE)
53.89 (based on discounted cash flow)
 
43.54
43.595 (trade volume)
43.365 (price volume)
49.07
40.075 (based on sector P/E of DSE)
41.09 (based on sector P/E of CSE)
42.29 (based on discounted cash flow)
 
Exchange Ratio of SPL share for each share (number) of Transferors 1 1.668
1.351 (based on trade volume and sector PE of DSE)
1.360 (based on price volume and sector PE of DSE)
1.396 (based on price volume and sector PE of CSE
1.620 (based on simple average, market price, NAV, DCF)
1.617 (based on average of trade volume, NAV and DCF)
1.630 (based on average price volume, NAV and DCF)
1.309
1.308 (trade volume)
1.311(price volume)
1.475
1.202 (based on trade volume and sector P/E of DSE)
1.212 (based on price volume and sector P/E of DSE)
1.242 (based on price volume and sector P/E of CSE)
1.271 (based on simple average, market price, NAV, DCF)
1.269 (based on average of trade volume, NAV and DCF)
1.278 (based on average price volume, NAV and DCF)
Number of shares of SPL issued in favour of Transferors   5,50,15,894
4,45,59,385 (trade volume and sector P/E)
5,75,83,974
5,75,71,356 (trade volume)
7,92,76,641
6,46,58,029 (trade volume and sector P/E)
There is noted no discord between the BSEC and the parties to the Scheme regarding the Net Asset Value per share of all four entities as on 31.12.2015. The discord, however, arises with regard to determining the Average Market Price for six months to 31.12.2015 of SPL and SPPCL shares and the Average Earning Per Share (EPS) based on last five years to 31.12.2015 times average market P/E of SUPCL and SNPL being the unlisted public limited companies.
  1. With regard to the unlisted companies,  the Scheme adopts the market P/E method notably in preference to the sector P/E Method. The market P/E averages the performance of all companies listed in DSE and CSE whereas the sector P/E averages the performance of only section of those companies, being presently 19, as are engaged exclusively in the electricity/fuel and power sector. BSEC’s preference, in the interest of regulating the market favourably from the minority shareholders’ point of view, is for the sector P/E to be followed which, according to it, would ensure the issuance of lesser number of SPL shares to shareholders of the three Transferor Companies.
  2. Ms. Jahan while forcefully and extensively arguing on the sufficiency of the Scheme’s valuation and exchange ratio in the absence of legislative guidelines, has appealed to the ratio of a catena of judgments from various jurisdictions upholding majority decisions adopted unanimously under a fair and transparent process of calculation and valuation to be binding on the minority. It is here that the BSEC has raised the central point of whether this Court would consider ordering an independent valuation exercise given that the draft Scheme is yet to be vetted and certified by an independent firm of Chartered Accountants/ neutral expert. In this regard, BSEC’s Senior Counsel Mr. Probir Neogi, seeks guidance from Notification No. SEC/CMRRCD/2009-193/150/Admin dated 18.8.2013 under which the BSEC has set out general requirements for reevaluation of assets with regard, generally, to the issue of capital in Bangladesh and in the interest of investors and for the benefit of the capital market. Mr. Neogi has further referred to Section 2FF of the BSEC Ordinance that envisages issue of capital to be both for cash or otherwise and argues that the latter scenario covers the Exchange Ratio mechanism arising under the draft Scheme. Notably further, the BSEC under this Notification requires the decision to go for such valuation and the appointment of the independent valuer to be taken by the board of directors of the company concerned, with the board clearly identifying the purpose of such valuation and the asset classes to be revalued.  Significantly, further the BSEC requires absolute autonomy of action by the independent valuer in that it requires the valuer to be wholly independent from the company concerned, its directors, auditors and other stakeholders. Ms. Jahan, for her part, questions the relevance of the BSEC Notification of 18.8.2013 for reevaluation of assets in the present scenario, given that the assets envisaged in the Notification do not bear any reference to or permit of applicability to shares per se. Satisfied as this Court is of the adequacy of the Scheme in the terms as already discussed, BSEC’s intervention convinces this Court of the need to ensure as fair a valuation of shares as possible in the interest both of shareholders and the share market. Indeed, the Scheme is predicated on a fairly extensive mechanism of share valuation. That is not to say that it may not benefit from an independent expert vetting of the same. Even given the non-applicability of the 18.8.2013 Notification requirements in the present scenario, this Court sees no reason why standards specified therein may not be made adaptable to the circumstances. Staying within the four corners of the Mafatlal ratio, there is seen no reason why the test of fairness and reasonableness may not lead this Court to direct the management of each of the four entities parties to the Scheme to decide upon a probable independent vetting process of the valuation of shares and Share Exchange Ratio reflected in the draft text.
  3. In light of the decisions cited above, this Court deems it prudent to refrain from itself appointing such an independent valuation expert. It is instead deemed appropriate to leave that decision making process to the entities concerned in the interest of ensuring a fair and transparent valuation exercise. Should positive steps be taken by the parties to the Scheme for so appointing an independent valuation expert, they shall be at liberty to draw upon the process and standards of appointment, terms of reference, the process of valuation etc. as spelt out in the BSEC Notification of 18.8.2013 to the extent that these permit of adoption and adaptation to the independent valuation of shares for the purpose of the Scheme. The parties are to note that the report of the independent expert shall be final and remain binding on all concerned, inclusive of the parties to the Scheme and the BSEC. The methodology of calculation for the purpose of valuation of shares shall be based on the accepted methods variously submitted on by the parties to the Scheme as well as the BSEC. The methodology of valuation of shares and the accounting component of the exercise shall necessarily be in accordance with the Bangladesh Financial Reporting Standard (BFRS) including Bangladesh Accounting Standard (BAS) set out by the Institute of Chartered Accountants of Bangladesh.
  4. The Parties to the Scheme are further reminded that any extension of BPDB’s 23.6.2010 contract with SNPL will necessitate the due incorporation of the present Article 17 provision on sanction and custom duties. This Court further directs the parties to the Scheme to revisit Section 8(b) of Part II of the Scheme to ensure an expeditious transfer of all employee-related funds, inclusive of existing provident and gratuity funds, created by the Transferor Companies to the relevant funds of the Transferee Company, SPL.
  5. Accordingly, this Court, hereby, sanctions the Scheme of amalgamation (Annexure-‘M4’ of the Affidavit-in-Compliance) subject to the findings, observations and directions above and declares that the same shall be binding on all concerned upon a due and proper execution of the Scheme of Amalgamation inclusive of duly formulated provision on the basis of the directives above by and on behalf of all four entities at any date prior to the Effective Date as defined in the Scheme.
  6. Furthermore, it is ordered that the merger of the Transferee and Transferor Companies shall be deemed to be effective on the date that a certified copy of this Judgment and Order, and as decided by the BODs of all four Companies, is delivered to the Respondent No. 4, Registrar, Joint Stock Companies and Firms for registration, such filing necessarily, however, taking place within 8 (eight) weeks of receipt of a certified copy of this Judgment and Order with the independent valuation exercise being undertaken and completed within that time frame.
  7. Moreover, the costs, charges and expenses, including any taxes, duties etc. arising in connection with the Scheme and incidental to the completion of the amalgamation as envisaged therein, including those related to this Application, and the independent valuation exercise shall be borne and paid for by the Petitioner Transferee Company, SPL.
  8. In the result, the Application is allowed, subject to the above observations and directions.
  9. All four entities concerned are further directed to proceed to give effect to the Scheme of Amalgamation pursuant to this Court’s sanction of the Scheme as above upon due notification of such judicial sanction communicated to the said Companies through a Lawyer’s Certificate of today’s date.
  10. The Petitioner No. 1 Transferee Company SPL is, hereby, now directed to donate a sum totalling Tk. 5,00,000/- (Taka Five Lac) only out of which two payments of Tk. 100,000/- (Taka One Lac) and Tk. 250,000/- (Taka Two Lac Fifty Thousand) will have to be made to (1) Mosque situated at Supreme Court Bhaban, (2) PBA Non-government Primary School, Village- New Pachakola, Post Office- Nakalia, Thana Bara, District- Pabna and individual payments of donations of Tk. 50,000/- (Taka Fifty Thousand) each will have to be made in favour of (1) Ramkrisnopur Uttarpara Baitul Aman Jame Masjid, Village- Ramkrisnopur, P.O. Mouha, Upazilla- Gouripur, District- Mymensingh, (2) Baitunnoor Jame Masjid, P.O. Kola, P.S. Sreenagar, District- Munshigonj, (3) Shilpa Aleaka Jame Masjid, Village- Charadpakhia, Thana- Muktagacha, District-Mymensingh within 1 (one) week from the date of the drawing up of this Order and to report the compliance thereof within 1(one) week thereafter.
Ed.