Financial Times

Chaos and confusion at Commercial Bank AGM
By Duruthu Edirimuni
Major shareholders of Commercial Bank created palaver at last week’s Commercial Bank annual general meeting (AGM) and a subsequent extraordinary general meeting (EGM), with minority shareholders and the staff representatives denouncing their conduct, while some legal experts were raising questions about the legality of their actions.

Unlike last year’s historical EGM, which concluded within 20 minutes, last week’s meeting created history taking five hours with majority shareholder, Harry Jayawardena-controlled DFCC setting the mood for drama and confusion by seeking to abstain from attending the EGM, while representatives of Distilleries Company Sri Lanka (DSCL), Sri Lanka Insurance Corporation (SLIC) and Lanka Milk Foods (LMF), all Jayawardena-controlled firms, called for an ‘unnecessary poll’ (as some called it) to vote to select Ernst & Young as auditors.

Before the mayhem
The AGM proceeded smoothly in the first two hours with various shareholders taking to the podium and the Chairman, Mahendra Amarasuriya presiding over it. The directors were reasonably calm.

K. Vignarajah, a shareholder who has been advocating good governance in the bank, spoke first, rapping the regulators about the controlling stake matters to get to the courts. “Central Bank (CBSL) and the Monetary Board (MBSL) of Sri Lanka have yet again failed in their duties, and greatly disappointed the stakeholders – the civil society had to seek redress at great cost of litigation. Thankfully, the civil society and stakeholders have intervened, and the Appellate Courts have held with them in matters of great public interest and the importance to the investing public when they restrained DCSL and SLIC together with related parties (including DFCC), limiting their exercise of voting rights to 10 percent in total,” he said.

He said that the character of DFCC has drastically changed from that of a government controlled Development Corporation at its inception, to the now privately controlled, intensely competing bank, with interests directly conflicting with those of Commercial Bank.

Amarasuriya replied saying he too felt there was a conflict of interest but the board didn’t think so. “There is a conflict of interest in my view, but the board does not feel this,” he said.

“The DFCC nominee Directors should have taken cognisance of the above, and resigned. They should not continue to act in contempt of all decent principles by remaining on the board,” Vignarajah said, adding that their continuance on the board should be seriously scrutinised. “A committee of independent investors and minority shareholders should go into this subject as soon as possible,” he said.

The meeting was smoothly conducted by the chairman and the house was split over some shareholder comments and Amarasuriya’s witty answers.

Start
The accounts were passed and when the appointment of auditors, which was the last item in the AGM’s agenda was announced, MLF, DCSL and SLIC representatives requested a poll. Since they represented 10 percent shareholding, it was decided to have a poll. The house decided to adjourn the AGM and have the EGM after the polling.

However, it was questioned by the chairman whether any shareholders disagree replacing Ford Rhodes with Ernst & Young as auditors, because none had objected to it earlier. But D.S. Lakmanarachchi (DCSL), Avanka Herath (SLIC) and R. Attygalle (LMF) insisted on a poll. The other shareholders were agitated and demanded on what grounds they wanted a poll. “There is no rationality in this. We want know why they want a poll,” M.R. Shah, Secretary of the Employees’ Union.

Amarasuriya said there is no law saying that a shareholder should give reasons, but after much coaxing by the rest of the house asked whether they wanted to give any reasons, which they promptly declined. “They are not prepared to indicate the reasons,” Amarasuriya informed the house.
It was decided that the appointment of auditors, subsequent to the poll should be held after the EGM, but DFCC director, Nihal Fonseka informed the Company Secretary and the Chairman that DFCC will not participate at the EGM.

Why EGM?
The regulator had stipulated to appoint a trustee to the employee share ownership plan (ESOP) the bank has, subsequent to the amendments to the Banking Act. This has been directed by the Director Bank Supervision through a letter to the Commercial Bank, which Amarasuriya showed the house.
“The Central Bank said that Commercial Bank needs a ‘trust’ to have a ‘trustee’. Therefore it was decided by the board to appoint J.C. Trust Services as the trustee at an EGM. All matters other than the matters of an AGM should be considered at an EGM. The appointment of a trustee for the ESOP is one such instance,” R. Senathirajah, Partner, Julius & Creasy told The Sunday Times FT.

“We held the EGM to appoint the trustee for the ESOP and to pass a resolution for the board to increase the limit to a realistic amount when selling a certain category of properties without shareholder approval. At present it is at Rs.5 million, which is not a very large amount when considering today's context,” an employee explained to The Sunday Times FT.

DFCC and EGM
“Based on the advice that we have received, we did not want to participate at an EGM where articles are amended,” Nihal Fonseka, CEO. DFCC told The Sunday Times FT when asked when DFCC didn’t want the EGM.
Senathirajah said that the effect of DFCC withdrawing from the EGM was that the stipulated quorum, which is 30 percent of minimum shareholding, was affected. “The EGM and the AGM had a 38 percent shareholding and when DFCC withdrew, it reduced the quorum to 28 percent and the EGM could not be held,” he said.

When it was announced by Amarasuriya that DFCC will not be participating at the EGM, the house erupted with many shareholders speaking simultaneously.
“Mr. Nihal Fonseka, being a director and having agreed at the board to go ahead with the resolution to amend the articles is opposing now. He is not acting in the interest of the bank, but to a hidden agenda. Also he is going against the Central Bank and what right has he to do this? We denounce the actions of the DFCC,” Shah later told The Sunday Times FT.

Fonseka said that the DFCC was advised legally that according to the Banking Act the loans can be given either to an employee or to a trust. “Because of this the employees can continue to have the same scheme as earlier,” he said. However, the members of staff and the union members were confused as to why he had agreed to the resolution at the previous board meeting of the bank. “If that is the case, why did he agree at the previous board meeting,” Shah asked. “The other shareholders demand the immediate resignation of Mr. Nihal Fonseka from the board,” he said.

“The DFCC ‘version’ contradicts with the Director Bank Supervision's ruling. She is a public official and it is amazing that DFCC goes against the regulators,” an employee said. “They have added to the problems by disrupting the meeting and contravening the Banking Act,” Shah asked.
It was discovered by the Company’s Secretary that DFCC, DCSL, SLIC and LMF had not marked their attendance. “Since they have not registered for the EGM, there is no quorum and we cannot have the EGM,” Amarasuriya announced. Pandemonium prevailed once again.

The end
“Did they sign in for the AGM,” a shareholder demanded. “Yes,” the Company Secretary answered. “They will definitely sign the attendance for the AGM, because they want the dividends,” a shareholder said. Meanwhile the polling took place and a lot of time was consumed in counting the votes. By this time, the two directors representing DFCC and the three representatives of LMF, DCSL and SLIC had left the premises. The AGM reconvened and the proposal to appoint Ernst & Young as auditors. The Secretary announced that out of 49 million votes, 47 million had voted in favour of appointing the new auditors.
“The confusing part is that the parties who had wanted the poll, implying their discontent in the new appointment had not voted against the resolution,” an employee said, adding that this is a clear act of disruption.

“They have added to the problems by disrupting the meeting,” Shah said. He requested Amarasuriya to record the fact that he is moving a no confidence motion on the DFCC directors, because of the violation of the regulator’s directive, but the chairman declined saying that it cannot be done. However Shah was persistent.

When Amarasuriya requested Senathirajah’s opinion, he said that a statement to this effect can be recorded, but a motion cannot be recorded, saying the AGM has been terminated and there is ‘no other business’ in the agenda.
“This is not what I feel, but what I have to do as an impartial chairman,” he said, adding that Shah’s statement will be recorded.

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