High Court upholds share consolidation

Sarath Malalasekera

SHARE CONSOLIDATION: The decision of the Board of Directors of the first respondent company to consolidate the shares has in fact helped to obtain a better price for the shares and also has found a better market for them, observed Colombo High Court Judge K. T. Chitrasiri exercising civil jurisdiction in the High Court of the Western Province in a case filed under Sections- 210 and 211 of the Companies Act No. 17 of 1982.

The Judgement also stated that furthermore, there is no material to decide that there had been any bad faith on the part of the Directors in deciding to consolidate the shares by changing its par-value.

"As I have already stated herein before this decision to consolidate the share is purely a business strategy and this Court does not and should not interfere with those decisions of the managers of a Company who are presumed to be competent to do so, the judgement stated.

The Ceylon Guardian Investment Trust Limited of Janadhipathi Mawatha, Colombo 1 cited Hunter and Company Limited of Front Street, Colombo 11 and six others as Respondents.

This is an application made under Sections -210 and 211 of the Companies Act No. 17 of 1982 in order to obtain declarations to the effect that- the affairs of the first respondent company are being conducted in a manner oppressive to the petitioner, the affairs of the company are being conducted in a manner prejudicial to the interests of the company, the resolution passed by the Board of Directors of the first respondent company for re-denomination of shares is null and void and to prevent the first to six respondents from taking any steps in accordance with the resolution to re-denominate the share capital of the company.

The judgement also stated that the main complaint of the petitioner was that the resolution passed by the Board of Directors of the first respondent company to re-denominate the par value of the share was made without having the proper authority to do so by the Board.

It further alleged that the manner in which the resolutions were passed was not in conformity with rules referred to in the Companies Act as well as the Articles of Association of the first respondent company.

The petitioner also complained that the consolidation of shares would draw down the marketability of the companies' shares and would result in the reduction of the market values of the shares.

The petitioner also has stated that the Board of Directors has not acted bona fide in changing the par value of the shares of the company.

The first to six respondents stood by the acts of the Board of Directors of the first respondent company and took up the position that the consolidation of shares was made in the best interest of the company.

They further said that the market price of shares have in fact has been increased by the said consolidation and also have stated that the procedure adopted in the consolidation of shares has been made according to law, the judgement added.

Those reasons revealed by the respondents cannot be disregarded in this instance. Unless the Board of Directors who is responsible in managing a company is given the necessary freedom and authority to manage a company, it is difficult to run a business viably. Even if a decision of the Board would affect business activities badly for a short period of time, it may cause better prospects and benefits in the long run.

High Court Judge Chitrasiri observed: therefore it is my considered view that this Court should not interfere with the management of a company unless the decisions of the managers cause serious detrimental effects to the company and to the minority shareholders.

'Moreover, it is settled law that the managers must act in the best interest of the company although their decisions may not help to generate much dividends or to give more benefits to the shareholders.

Shareholders cannot ask for increased dividends as of right. Basically, they have the right to vote at a general meeting and to make a claim for the balance assets of a company, if available, after it was wound up.'

President's Counsel K. Kanag-Isvaran, Dr. Harsha Cabral PC, Nigel Hatch PC with Miss Dilrukshi Boteju appeared for the respondents, Hunter and Company. President's Counsel Romesh de Silva with Hiran de Alwis appeared for the Colombo Stock Exchange.

Arivinda Rodrigo instructed by F.J.and G. de Saram appeared for the Petitioner.