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Reading certainly maketh a full man! Let’s hear the stories of resilience and success that inspire us to follow the trails forged by those before us at the AmCham SL CxO Book Club. This month, Discussion Director Sarinda Unamboowe shares insights, life, and business lessons from UNBROKEN by Laura Hillenbrand.
By Sharon Arnolda
“Shareholder activism is not a privilege – it’s a right and a responsibility. When we invest in a company we are part of the company and we are partially responsible for that company progresses, if we feel that there is something going wrong with the company then we, as shareholders, must be active and vocal.”
— Mark Mobius
The eighth session of the SL Law Review web series hosted by American Chamber of Commerce in Sri Lanka (AMCHAM) was held recently, focusing on shareholders; their rights and obligations. The timely discussion was panelled by presidents Counsel Nihal Jayawardene who has been in the legal practise since 1983 also actively participated in the Company Law reforms process from May 1993 which resulted in the enactment of the Companies Act No. 7 of 2007; Senior Legal Counsel Hiran de Alwis practicing in Colombo over the last 25 years, specialising in Civil and Commercial Law, Financial and Securities Litigation and Commercial Arbitrations; Senior Attorney-at-Law Ayomi Aluwihare who is the Precedent Partner of the law firm F. J. & G. de Saram and is the Head of the Corporate Law/Commercial Division of the firm with over 20 years of experience; and was moderated by Attorney-at-Law Lalani Paranawithana who is attached to the AMCHAM and is the co-organiser of this series.
Who exactly are shareholders and how did their role evolve into what it is today?
In opening the discussion Jayawardene stated the following; To put it simply, shareholders are those that invest money in a company. The concept came into existence in the 19th century with the introduction of the concept of limited liability companies; which as a concept came into existence to divorce the entity that is a company from those who invest and manage it.
He further stated that the concept evolved from the decision in ‘Borland’s Trustee v Steel Brothers & Co. Ltd.  1 Chapter 279’ in which it was elaborated that a ‘share’ measures a shareholders interest in the company measured monetarily based on the investment that was made for the purpose of ascertaining a shareholders liabilities and entitlements. In other words, a share is not a sum of money but an interest measured by it, he added.
According to Section 49 of the Companies Act 0f 2007 (the Act) a share is defined as movable property which grants the holder rights in and against the company. In general, a share acquired will secure its holder a vote at a meeting or in passing a resolution, an equal share entitles its holder to equal distribution in the event of surplus following liquidation. He added that the rights, obligations, and interests of a shareholder are defined in the Act in addition to what is agreed in the shareholders agreement.
Articles lay down all the governing laws for the company and usually are what you rely on, the shareholders agreement isn’t mandatory but is used to bring in additional clauses to protect investors. One example of where it is used is when a foreigner invests 100 per cent of the money but can only show 49 per cent ownership on the books.
This would lay down the terms of repayment. The shareholders agreement can also lay down clauses that supersede the articles of association in terms of voting rights of shareholders but then, the shareholders agreement has to specify that in situations of ambiguity between the articles and the shareholders agreement that the shareholders agreement will supersede.
The classification of shareholders
Ordinary shareholders are those that make an investment in a company and therefore, are directly impacted by the profits and losses made by the company. In addition to this shareholders can be conferred rights and obligations based on what is agreed in the Agreement. Preference rights can be given to some shareholders in regard to payments of dividends or in the event of casting a vote. He further added that shareholding can be further classified into categories such as redeemable shares and nonredeemable shares.
What are the fundamental rights and duties of a shareholder?
A shareholder makes an initial investment in the capital and acquires rights and obligations based on the same; Prior to the existing Act a company could only perform according to the objectives laid out in the Memorandum of the Company, anything besides the defined actions would have been considered illegal. Which means that any party making an investment (a shareholder) was aware of the functioning of the company.
However, under the new Act a company can carry out business activities besides what is laid out in the objectives in the Article of Association, provided that it is legal (subject to certain conditions). However, through section 16 of the Act a contract is created between the company and the shareholder and shareholder can sue the company for the breach and enforce conditions of the same. However such action needs to be taken in a court of law before the company starts carrying out the activity that is in contravention with the objectives.
The act provides for Minority buy out rights; in which a minority shareholder can demand the company to buy them out in certain instances. In addition to the rights conferred through the Act, shareholders can agree on their rights and obligations towards a company based on the agreement between them. The Act gives further flexibility through Section 31 which states that the parties can even agree to terms that negatively affect the parties, and the parties can choose the application of the rights and obligations laid out in the Act.
Shareholder rights are attached to groups. As a minority they can vote on aspects such as changing of directors and auditors. However, situations requiring the passing of special resolutions such as changing the articles of the company and amalgamations require a special majority vote (75 per cent of the shareholders present at the meeting), 10 per cent can call requisition a meeting. Further, if a shareholder acquires more than 90 per cent of the shareholding of a company such person has the right to ‘force out’ or ‘buy out’ the minority shareholders. In addition to which every shareholder has the right to request and receive details of the company such as annual reports and financial statements.
Liabilities and powers of a shareholder
Tackling the question Aluwihare stated that the fundamental understanding is that through the principle of the company being a ‘separate legal entity’, the liabilities imposed on a company does not directly affect the shareholders of the same. A shareholders liability is to contribute to the initial funding of the company after that there is no direct liability, she added.
However, there are certain instances that the courts will look into the actions of the shareholders in the event of fraudulent activities such as tax evasion; where the court pierces/lifts the ‘corporate veil’ to look into the direct actions of the shareholders and find them directly liable.
How is a shareholder protected?
“The law provides a sword and a shield.”
— Hiran de Alwis
The primary right given to shareholders is the right to transfer their shareholding, in addition to which they are registered in the Company’s Register which gives them statutory, contractual, and equitable recognition. The existing sophisticated laws and the ability to alter their rights and obligations based on their agreement with the company gives shareholders the opportunity of protecting their rights and further expanding on them.
There is a lack in the enforcement of these rights, de Alwis added. Prior to going to courts a shareholder is given the options of calling for a meeting or resolution, an audit or appealing for a seat on the Board in addition to the right of compensation in certain instances. The Act through section 224 onwards provides for the oppression and mismanagement of minority shareholders.
Even though the Act provides for actions such as derivative actions the general understanding is that the Court does not tend to interfere in business policy. However, if there is mismanagement or a material change brought to its attention the court can in its discretion intertwine and make demands of the company. The main understanding between the company and its shareholders lies in the contract entered into by them through the articles of association. However, in the event of a material dispute or fraud the Act will generally take precedence over the agreement.
De Alwis also went on to emphasise the importance of entering into a comprehensive agreement with the company and ensuring that such agreement is handled professionally. Subject to the terms of the agreement a shareholder can – based on such documents – sue the company for damages, demand for specific performance through the intervention of the court or turn to the court for injunctions and other remedies.
Can a shareholder be a director?
In answering Jayawardene stated that while in the initial stages a person had to be a shareholder to be a director such a requirement is not a necessity under the current regulations. In her closing remarks Aluwihare mentioned that the current Act which in addition to its English roots is also based on the Companies Act of New Zealand, which is based on the act of similar nature in North America. This has resulted in the current Companies Act providing for a lot of flexibility for companies to operate, especially from an investment point of view.
Let’s hear the stories of resilience and success that inspire us to follow the trails forged by these trailblazers! Meet the men & women who got it done!
By Sharon Arnolda
“How a company is governed influences rights and relationships among organisations and its stakeholders, and ultimately how it’s managed – whether it succeeds or fails. Companies do not fail, Boards do.”
— Richard Le Blanc
The seventh webinar series of the SL Law Review series hosted by American Chamber of Commerce in Sri Lanka (AMCHAM) focused on corporate governance and directors’ duties, the enlightening discussion was panelled by President’s Counsel Dr. K. Kanag-Isvaran, Legal Counsel Nilshantha Sirimanne, Legal Counsel Ameer Maharoof, and was moderated by Attorney-at-Law Shalinie Kulatunga.
What exactly is corporate governance?
In a nutshell it’s the policies, regulations and rules that control a business’ behaviour, it’s affected by the legal, regulatory and ethical environment that surrounds a company; good corporate governance results in a well performing, sustainable business with a culture of integrity; at the centre of all of this lies the Board of Directors. In initiating the discussion, Sirimanne’s presentation focused on the role of a director, the historical underpinnings of the now well-established role and its influence in good corporate governance.
In initiating he explained the concept of a company being a separate legal entity in the eyes of the law, which in turn enables an organization to own assets and carry out transactions in its name; these tasks are carried out by the Board of Directors, he added. He explained that historically the director played a fiduciary role in the company; similar to that of a trustee, carrying out activities for and on behalf of the company and acting solely in its beneficial interest. However, he went on to explain how the role has diversified from its initial fiduciary standpoint.
In some instances directors are considered as agents in entering agreements with third parties. According to section 529 of the Companies Act, the term is given a broad definition and includes all individuals who perform the key functions of a director even though they may not necessarily have the job title of one. In further elaborating on the nature of its definition Sirimanne explained that it also covers concepts such as ‘Shadow Directors’, in which influential majority shareholders are not directly a part of the Board of Directors but silently instruct and influence the decisions of the Board.
He went on to state that even though such directors are not disclosed under Form 20 ( A form filed annually with the registrar of companies declaring all the directors of a company), since they fall within the gambit of the definition given in the act they too are bound by the duties and obligations laid out in the Act. He added that directors can therefore be broadly categorized into executive, non-executive, shadow, nominee, and may even be employed on a contract basis by the company and are responsible for running, maintaining, and supervising the organization and its activities.
Riveting to the discussion on the historical underpinning of the role, Sirimanne shared the brief evolution of the role, from its inception in English legal principles, he went on to add that in the 19th and 20th century the fiduciary nature of the directors obligations were so laxed in its interpretation that the standard of duty and care owed by a director to a company was very low. The preceding Companies Act therefore reflected similar legal principles. However, with the introduction of the Act in 2007, the role of the director and the duties and obligations have been clearly laid out, he added.
In a nutshell, he went on to elaborate that the Act lays the obligations for a director to act for, “Proper purposes,” and in accordance with the articles of the company. He further elaborated on the duty of ‘minimum care’ imposed by the Act, the section which he referred to as a, “Clever section,” lays out both an objective and subjective standard of care. He went on to state that according to the subjective approach a director’s duty of care will be subject to a higher standard, taking a director’s educational qualifications and so on into consideration as opposed to other directors who are not as qualified or experienced.
In other words, a director’s responsibility to the company can and will be individually assessed based on their individual qualifications resulting in more liability for their actions accordingly. In addition sections 187 – 200, and sections 219 and 220 impose duties during insolvency, in addition to which other laws such as the EPF and ETF Act also impose obligations and regulatory measures on the role of the director, he added.
He went on to state that while a director can delegate his duties to another party, the director is bound to supervise the appointed delegatee, a director has to be, “Hands on,” in the running of the company, he added. Even though there is a common misconception that the primary duty of a director is to the shareholders the general rule is that a director’s primary duty is to the company, however under special circumstances a duty can be owed to other stakeholders of an organization
— Nilshantha Sirimanne
How did the concept of corporate governance come into existence?
In drawing an example from the lack of corporate governance practises in the recent past, Sirimanne elaborated on the issue of ‘Golden Key’, a situation which left many people in dire situations and required the Government to step in to settle the payments that were due. He went on to state that such occurrences that adversely affect investor and stakeholder trust resulted in the development of the concept of corporate governance in the UK and the USA in the 1980’s. Corporate governance therefore, aims to reduce the adverse impact caused by the negligent management of companies.
Therefore, in its widest definition it deals with the relationship between the company and who owns and controls its functions, and in its broader definition deals with the relationships between a company and all of its stakeholders. In closing Sirimanne shared three reforms that have been brought about by corporate governance.
1. The separation of the role of Chairman, Managing Director and Chief executive officer: He added that prior to this change that there was too much power vested in one person who in turn has too much dominance over the Board.
2. Reforms to the role of nonexecutive directors: This brought in checks and balances on the actions of directors and promoted independence and the representation of stakeholders on the Board.
3. Subcommittees of the Board: Subcommittees mainly deal with four aspects of the running of a company, namely; Audit, Risk and Strategy, Remuneration, and Talent. The committees that mainly consist of non-executive directors and in turn ensures that there is representation and the daily functions of the company are not monopolised purely by the Board.
Has the pandemic had an impact on the duties and obligations of the directors?
In tackling the question, Dr. Kanag-Isvaran stated that the pandemic has had no impact on the duties owed by directors and the role and duties of the same remains the same even in the light of the pandemic, even though the proposed COVID Bill might bringing laxatives when it comes to timings he added. Elaborating on his predecessor’s comments, Dr. Kanag-Isvarn took the opportunity to further elaborate on the liabilities imposed on directors, which can arise in three ways; Criminal liability, Civil liability, and Tortious Liability. He pointed out that the concept of ‘limited liability’ gives rise to a situation in which directors cannot be sued directly for the shortcomings of the company.
Who can ideally sue directors?
As explained earlier, a director’s duty lies to the company and therefore, the company can sue a director for the breach of such duty and the consequences of it. However since a company is also run by the Board which is given sole control of the functioning of a company through section 184 of the Act this doesn’t often happen, he added. The Act provides for mechanisms in which a director of a company may be held personally liable in respect of their actions. The Act provides for ‘derivative Actions’ in which a shareholder can sue a director.
Such actions require leave of the court and in the event, the directors decide to take up such matters internally and such an action will not proceed in court. The Act provides for instances in which a director may be liable to pay through assets of the company or personal funds. In the event of distribution of funds, a director cannot distribute funds unless the company is solvent or has declared insolvency. Failure to obey the rules can result in the director being personally liable or will be liable to compensate through the assets of the company.
A similar approach is taken in the event of unapproved personal loans and mishandling of remuneration. In the event of fraudulent trading is where ‘during the course of winding up’ it is brought to light that a company had intention to defraud another party. Tortious liability is where a liability arises under a contract. For example, directors can be held personally liable if misinformation is included in any prospectus prepared by the Board. In ending Dr. Kang-Isvaran added that relief from liability can be obtained if a director can prove that his actions are honest and reasonable. In sharing his thoughts on the matter Maharoof added that, the only change that may arise out of the pandemic is that a higher standard of diligence and care can be expected of directors in dealing with the current situation.
What additions are required to corporate governance to face the current situation?
In answering, Dr. KangIsvaran shared that companies should look into the quality of the Board making the decisions. The final decision on the internal management of a company lies with the Board. Further, English law recognises that the law would not interfere in the management of the company if the directors are acting within their power and that an obligation cannot be imposed based on a decision that proved to be wrong in hindsight.
In further elaborating on the concept of ‘due care and diligence’ that is required to be exercised by the Board in making a decision, he stated that a Board is required to make a decision in the best interest of the company based on the facts and figures at the time. In other words, a decision that seems wrong in hindsight cannot be held against the Board if the board was acting with reasonable care and made the correct decision at the given time.
Read the full article on Ceylontoday: https://ceylontoday.lk/news
The sixth webinar of the SL Law Review series hosted by the American Chamber of Commerce in Sri Lanka (AMCHAM) focused on insolvency, liquidation, and winding up procedures that need to be followed by companies and how such procedures have been affected due to the current situation. The discussion was enlightened by professionals namely; President’s Counsel Dr. Harsha Cabral, President’s Counsel Kushan D’Alwis, Legal Counsel and Attorney-at-Law Vasanthakumar Niles, and was moderated by Attorney-at-Law Gayathri Gunawardhana.
Read the full article on Ceylontoday: https://ceylontoday.lk/news
Join this session which will focus on and discuss the implications, risks, obligations, and safety measures related to Money Laundering and Corporates.
The session focus on and discuss the resilience, performance & impact of the Apparel Sector on the Sri Lankan economy, despite, and through, the challenges of the pandemic; the performance of the sector, and the strategies (or lessons learned) over the last 2 years, as well as the current and emerging opportunities for the sector through the shifts in the global supply chain and what impact they will have on the stability of the Sri Lankan economy.
Meet the men & women who GOT IT DONE! Trailblazers share their experience, insights, and advice on this exclusive new series!
The Sri Lanka Association for Software and Service Companies (SLASSCOM) recently took steps to introduce Sri Lankan companies to the US market by signing a Letter of Collaboration (LOC) with the American Chamber of Commerce in Sri Lanka (AMCHAM).
Signed by SLASSCOM Chairperson Sandra De Zoysa and AMCHAM President Presantha Jayamaha, at a virtual event, the LOC covers a range of deliverables around the main objective of linking the Sri Lankan and US IT/BPM markets and thereby facilitating companies and investors in both countries to collaborate and explore that would result in mutual outcomes for both countries.
Read the full article on Dailymirror: https://www.dailymirror.lk/other/SLASSCOM-signs-LOC-with-AMCHAM/117-218968