Melstacorp seeks CA to quash SEC determination

By S.S. Selvanayagam

Melstacorp Ltd. – formerly known as Beruwala Distillery (Pvt) Ltd. – in its petition before the Court of Appeal is seeking a Writ of Certiorari, quashing a determination of the Securities and Exchange Commission (SEC).

The SEC has determined that the Petitioner Melstacorp must pay the balance to the shareholders of Lanka Mild Foods who have disposed of any Lanka Milk Foods shares during the period 13 September 2011 to 15 February 2012 at prices below that of Rs. 105 per share, irrespective of the parties the shares have been sold to. Petitioner Melstacorp, a 100% owned subsidiary of Distillery Company of Sri Lanka (DCSL), is engaged in the principal business of inter alia investments related activities and functions as the holding company for the investments of the DCSL Group.

It cited the SEC, the Chairman of the SEC Thilak Karunathne and the Members of the SEC as Respondents.

The Petitioner states that Milford Exports (Ceylon) Limited and DCSL being parties acting in concert, held 13,426,540 shares (33.57%) and 763,733 shares (1.91%) as at 7 September 2011 each respectively, constituting approximately 35.48% of the total number of shares in issue in Lanka Milk Foods (CWE) PLC.



By the acquisition by the Petitioner on 8 and 9 September, 2012, of 316,400 Shares (0.791%) in Lanka Milk Foods, the Petitioner together with Milford Exports (Ceylon) Limited and Distilleries Company of Sri Lanka PLC being parties acting in concert, held 316,400 shares (0.791%) 13,426,540 shares (33.57%) and 763,733 shares (1.91%) as at 12 September 2011, each respectively, constituting approximately 36.27% of the total number of shares in issue in Lanka Milk Foods (CWE) PLC.



On 13 September 2011, the Petitioner purchased a further 2,000,000 shares at a price of Rs. 105 per share, constituting approximately 5% of the shares in Lanka Milk Foods.

It required the petitioner to make a Mandatory Offer to purchase the balance 23,491,327 shares, which constituted approximately 58.73% of the issued shares of Lanka Milk Foods at a price of Rs. 105 per share, being the highest price paid by the Petitioner and the parties acting in concert during the period of one year prior 13 September 2011.

It is in terms of Rule 31(1)(b) of the Company Takeovers & Mergers Code 1995 (as amended in 2003) (Code) published under the Rules made by the Securities and Exchange Commission of Sri Lanka under Section 53 of the said Act.



The Petitioner maintains that however, inadvertently and/or due to an oversight and/or genuine mistake, the Petitioner bona fide did not make a Mandatory Offer to purchase all the remaining shares of Lanka Milk Foods at the time it exceeded the threshold limits. However the said Lanka Milk Foods was under the management and/ or control of the said Milford Exports (Ceylon) Limited /DCSL group even as at 13 September 2011.

The Petitioner thereafter on 15 February 2012 purchased 3,542,100 Ordinary Shares constituting a further 8.856% of the shares in Lanka Milk Foods.

On 15 February 2012, the Petitioner by the purchase of 3,542,100 shares at prices between Rs. 95.80 to Rs. 99 per share constituting approximately 8.856% of the shares in issue in Lanka Milk Foods incurred an obligation under Rule 31(1)(b) of the Code which states as follows:

“Where any person together with persons acting in concert with such person, holds not less than thirty per centum and not exceeding fifty per centum of the voting rights of a company and such person or any persons acting with him acquires in any period of twelve months, additional shares carrying more than two per centum of the voting rights, such person shall extend within thirty-five days, an offer in accordance with this rule to the holders of any class of equity shares which carry voting rights and in which such person or persons acting in concert with him hold shares.”

When the Petitioner sought to determine the highest price paid, during the 12 months preceding 15 February 2012, the attention of the Petitioner was drawn to the fact that the Petitioner had already on 13 September 2011, incurred an obligation as aforesaid which the Petitioner as stated above bona fide and inadvertently overlooked.



Petitioner states that no sooner it became aware of this in February 2012 it notified the SEC. At the Meeting between the Representatives of the Petitioner and the Officials of the SEC, the Officials of the SEC were of the view that the Petitioner should have made a mandatory offer on 13 September 2011. The Petitioner was also advised to seek a determination from the 1st Respondent SEC as regards the parties to whom the mandatory offer should be made and the offer price.



Petitioner laments that thereafter the 1st Respondent SEC by letter dated 05-03-2012 communicated to it the following purported determinations:

The Petitioner should extend a mandatory offer to all the shareholders of Lanka Milk Foods at an offer price of Rs. 105 per share;

To all the shareholders of Lanka Milk Foods (other than the parties acting in concert with the Petitioner) as at 13 September 2011; and

To all the current shareholders of Lanka Milk Foods (other than the parties acting in concert with the Petitioner).

If any shareholders belonging to category (I) above have disposed of any Lanka Milk Foods shares during the period 13 September 2011 to 15th February 2012 at prices below that of Rs. 105 per share, the Petitioner must pay the balance to such shareholders, irrespective of the parties the shares have been sold to.



It furthers states that the 1st Respondent SEC further determined that if the Petitioner was unable to implement any one or more of the aforesaid conditions then steps should be initiated to divest such shareholding immediately with due notice to the 1st Respondent SEC and to the market in accordance with the Code so that the Petitioner will no longer be liable under the Code.

The Petitioner subsequently by letter dated 13 March 2012 responded to the aforesaid determinations and whilst notifying the 1st Respondent SEC that the Petitioner was in the process of finalising the mandatory offer documentation and will be extending it to all shareholders of Lanka Milk Foods at an offer price of Rs. 105 per share, requested the 1st Respondent SEC to review its said determination with regard to the period for which this payment should be made.



The Petitioner submitted that such payment should be limited to the period of 60 days from 13 September 2011 which is the maximum possible duration of an offer if made, rather than the five-month period from 13 September 2011 to 15 February 2012 proposed by the 1st Respondent SEC.

Petitioner reiterated its position that the two issues – i.e. mandatory offer and period for which the payment should be made could be delinked; and the former proceeded with whilst the latter was being negotiated, and further reiterated that the Petitioner intended to make the mandatory offer but was not in agreement with the said five month period.