SEC takes Harry and eight other Melstacorp Directors to court over LMF deal

The Colombo Fort Magistrate yesterday released on bail business tycoon Harry Jayawardena and several other directors of Melstacorp Limited for violating the Securities and Exchange Commission Act.

At a previous occasion, Magistrate Kanishka Wijeratne had directed the Court registrar to issue summons on nine Directors of Melstacorp Limited to appear in Court on charges of having violated Section 52 (1) (2) (3) of the SEC Act.

However, when the case came up before Court yesterday, Directors of Melstacorp Limited including Harry Jayawardena appeared in Court and they were ordered to be released on a personal bail Rs. 2 million each.

The Securities and Exchange Commission (SEC) had filed a case before Colombo Fort Magistrate against 10 defendants including the Melstacorp Limited over non-compliance in connection with the transfer of shares in Lanka Milk Foods to Melstacorp.

The SEC alleged the defendant company together with Milford Exports (Ceylon) Limited and Distilleries Company of Sri Lanka PLC failed to declare a mandatory offer after they had purchased 36.27 percent of voting rights of Lanka Milk Foods Company PLC (LMF) on or around September 13, 2011, violating the SEC Takeovers and Mergers Code.



The SEC further alleged that Melstacorp bought another parcel of voting shares of LMF, each share at Rs.99, without having made a mandatory offer at Rs.105 per share to the remaining shareholders of the LMF within 35 days of having triggered the Code in September, 2011.

Senior counsel S.L. Gunasekara appearing on behalf of the defendants informed Court that the defendant company would come for a settlement. Meanwhile, Senior State Counsel Damith Thotawatta appearing for the SEC informed Court that defendants had made an application for settlement to the SEC. Having considered the submissions, the Magistrate fixed the case for inquiry or settlement on 21 September.

In this case, Melstacorp Limited had been named as the first defendant. The other defendants are: Don Harold Stassen Jayawardena, Rajpal Kumar Obayasekara, Cedric R. Jansz, Krishantha Francis Fernando, Adriyan Naoyomal Balasuriya, Kolitha Jagath, Niranjan de Silva Deva Aditya, Wijeyanthimala Jayatilleke (Alternative Director), Lintotage Udaya Damien Fernando.

See Page 2 for SEC’s notice issued following the Court ruling.

The Securities and Exchange Commission of Sri Lanka (SEC) instituted proceedings on 13 June 2012 in the Colombo Fort Magistrate Court against Melstacorp Ltd., and its Board of Directors for their failure to make a mandatory offer at Rs. 105 per share to the shareholders of Lanka Milk Foods (CWE) Plc (LMF) when they allegedly triggered the Takeovers and Mergers Code on 13 September 2011 in terms of Rule 31(1)9b) of the Code. The Hon Magistrate on 19 June 2012 issued summons on the Defendants returnable on 4 July 2012.

In this case the Company, Melstacorp Ltd., without having made a mandatory offer at Rs. 105 per share to the remaining shareholders of LMF within 35 days of having triggered the Code on 13 September 2011, bought a further parcel of shares on 15 February 2012 at Rs. 99 per share.

When this matter was brought up to the notice of the SEC, the Commission acting in terms of the powers vested in the Commission in terms of the SEC Act No 36 of 1987 (as amended) having considered the nature of violation gave the following determinations to Melstacorp Ltd., to comply with by letter dated 5 March 2012 as a remedial measure.

“That Melstacorp Ltd., should extended a mandatory offer to the following shareholders of LMF at an offer price of Rs. 105 per share;

(a) To all shareholders of LMF (other than the parties acting in concert with Melstacorp Ltd) as at 13 September 2011 and

(b) To all the current shareholders of LMF (other than parties acting in concert with Melstacorp Ltd)

2) If any shareholders belonging to category (1) above, have disposed of any LMF shares during the period 13 September 2011 to 15 February 2012 at prices below that of Rs. 105 per share, Melstacorp Ltd must pay the balance to such shareholders irrespective of the parties the shares have been sold to.

If Melstacorp Ltd is unable to implement the above two specified conditions, in toto it should divest forthwith such quantity of shares of LMF as will result in the company avoiding liability under Rule 31 (1) (a) or (b) of the Takeovers and Mergers Code.”

Melstacorp Ltd whilst admitting their obligation to make a mandatory offer to the Commission refused to comply with the direction to pay the compensatory balance to the shareholders of LMF who had disposed of their shares between 13 September 2011 to 15 February 2012 at a price below Rs. 105 per share and wanted the Commission to restrict the computation of the period of 60 days in order to pay the compensatory balance as stipulated in (2) above. The Commission after having considered this request saw no valid reason to change its original decision and requested the Company to implement the determinations conveyed by SEC’s letter dated 5 March 2012 without further delay. For this purpose, the SEC even extended the time period within which for the Company to do so.

Melstacorp Ltd did not comply within the stipulated time period and filed a Court of Appeal application against the Commission and its members seeking inter alia writs of certiorari to quash the determination of the Commission.

However Melstacorp Ltd did not support this matter in the Court of Appeal on two consecutive occasions when the matter came up for support. As such as of the date of going to press no notice on the Commission has been issued by the Court of Appeal nor any interim relief been granted against the Commission by the Court of Appeal.

As Melstacorp Ltd failed to implement the determination of the Commission which was issued on 5 March 2012 in its totality the Commission filed action in Colombo Fort Magistrate Court against Melstacorp Ltd., and its Board of Directors for their failure to make a mandatory offer to the shareholders of LMF within 35 days of triggering the Code in terms of the provisions of the SEC Act No 36 of 1987 (as amended). The Hon Magistrate of Colombo Fort on 19 June 2012 issued summons on the Defendants returnable on 4 July 2012.

In the meantime Melstacorp Ltd., by its letter dated 28 June 2012, has made an application to the SEC seeking a settlement agreeing inter alia to unconditionally follow the determination of the SEC dated 5 March 2012 and to withdraw the Writ application filed by them in the Court of Appeal against the SEC if the SEC would consider withdrawing the action filed in the Magistrate Court against the Company and its Board of Directors.

When this case was taken up in Court this morning (4 July 2012), the Colombo Fort Magistrate Hon Kanishka Wijeratne fixed the said matter for inquiry or settlement on 21 September 2012 after Mr. Damith Thotawatte, Senior State Counsel, appearing for the SEC informed Court that the Defendants had made an application for settlement to the SEC and the said matter was under consideration by the SEC. The Defendants were released by the Hon. Magistrate on personal bail of Rs. 2 million each.

The SEC’s Secretariat has now been notified that the Members of the Commission has considered the request for settlement conveyed by the letter dated 28 June 2012 and the terms of settlement contained therein and has agreed to withdraw the case as a settlement subject to the prior fulfilment of the following conditions, by Melstacorp Ltd.

That Melstacorp Ltd., unconditionally withdraw the CA (Write) Application Number 127/2012 filed by the Company against the SEC and its members in the Court of Appeal with due notice to the SEC as to the date this matter will be supported for withdrawal in the Court of Appeal and

Unconditionally implement in toto the determinations of the SEC dated 5 March 2012.