TAKEOVER OFFERS AND THEIR RAMIFICATIONS*

By

Saleem Marsoof*

Introduction

Corporate phenomena such as the take-over offer made by Hatton National Bank for the control of the Commercial Bank of Ceylon and the tussle between Vanik Incorporated Ltd and Asia Capital Ltd for the control of Forbes Ceylon Ltd – to mention two recent examples – have brought into focus the Company Take-overs and Mergers Code of Sri Lanka, which is a regulation introduced by the Securities and Exchange Commission of Sri Lanka. Before looking specifically at take-over offers, which constitute the major activity sought to be regulated by the Code, it will be useful to spend some time on the regulatory and legal framework within which the Take-overs and Mergers Code of Sri Lanka operates.

The objectives of take-over regulation

The Company Take-overs and Mergers Code of Sri Lanka1 was promulgated in June 1995 by the Securities and Exchange Commission of Sri Lanka as a rule having the force of law.2 The Sri Lankan Code was to a very great extent based on, and inspired by, the London City Code on Take-overs and Mergers3. Both Codes seek to achieve the same objectives, albeit through somewhat different means. They seek to protect the shareholders of companies that may become the target of a take-over bid or merger operation. This aim is accomplished in four principal ways. Firstly, the codes strive for, and guarantee, fair and equal treatment to all shareholders of target companies. Secondly, the codes seek to provide such shareholders with adequate, accurate and timely information to enable them to arrive at a reasoned decision whether to accept or reject a take-over offer. Thirdly, the codes strive to establish and maintain a fair and orderly securities market free from ‘turbulence’. Finally, the codes attempt to control or restrict harmful defensive action that may be taken by the management of target companies with a view of frustrating the take-over bid.4 The need for specially protecting shareholders of target companies is highlighted by certain deficiencies in the protective mechanisms of traditional company law.5

The flexibility of the London City Code

The London City Code was formulated in 1969 by the London City Panel on Take-overs and Mergers, which was established only the previous year. The City Panel consists of a few members (including the Chairman) appointed by the Governor of the Bank of England and representatives of

* LL.B.(Ceylon) LL.M.,(Colombo) LL.M.,(San Diego) – Additional Solicitor General * The author acknowledges with gratitude the fellowship awarded by the Nuffield Foundation, London and the assistance received from the Institute of Advanced Legal Studies of the University of London, the London City Panel on Takeovers and Mergers and the Securities and Exchange Commission of Sri Lanka. The Company Take-overs and Mergers Code, 1995 published in the Gazetle Extraordinary of the Democratic Socialist Republic of Sri Lanka, Part 1

important professional bodies involved in take-overs such as the London Stock Exchange and the Securities and Futures Authority.6 The executive branch of the Panel is headed by its Director General. The Administration of the London City Code is the function of the London City Panel. The London City Code is a classic example of self-regulation, and consists of those principles and rules voluntarily set up by the Panel to regulate the conduct of take-overs and mergers in the London Stock Market. The Code has been aptly described as “the collective opinion of those professionally involved in the field of take-overs”.7

The take-over world regularly produces situations which could not reasonably be envisaged by the authors of any rule-book. The Panel feels able to respond to such situations by the application of a flexible set of rules to achieve the result that it believes most fairly reflects the underlying principles of the Code in particular circumstances. The Code contains ten general principles8 which are essentially “statements of good standards of commercial behaviour”9 as to how fairness to shareholders can be achieved.10 These principles are expressed in broad general terms, and the Code does not purport to define the precise extent of, or the limitations on, their application. The Code also contains thirty-eight rules11 which illustrate the application of the general principles embodied in the Code. They are applied by the London City Panel in accordance with their spirit to achieve their underlying purpose, and the Panel is free to modify or relax the effect of their precise wording accordingly. The day to day procedures of the London City Panel are designed to combine speed with consistency and fairness, which are conditions essential for the survival of any securities market.

The SEC and the CSE

By contrast, the administration of the Company Take-overs and Mergers Code of Sri Lanka is the function of the Securities and Exchange Commission of Sri Lanka (SEC). The Commission consists of ten members, one of whom is a Deputy Governor of the Central Bank of Sri Lanka nominated by the Governor of that Bank. Three members hold office ex officio, namely the Deputy Secretary to the Treasury, the Registrar of Companies and the President of the Institute of Charted Accountants.12 The remaining six members are appointed by the relevant Minister, who according to the present allocation of subjects, is the President of Sri Lanka also holding the portfolio of Minister of Finance. The relevant Minister also nominates the Chairman of the Commission from the ranks of its members, and also has the power to remove any member without assigning any reasons13. The executive of the -Commission is headed by its Director General and seven Divisional Managers. The main objectives of the Commission are the creation and maintenance of a market in which securities can be issued and traded in an orderly and fair manner, the protection of the interests of investors, the operation of a Fund to compensate investors against financial loss arising from breaches of contract committed by incensed stock brokers or dealers and the regulation of the securities market with a view of maintaining professional standards in that market.14

The Sri Lankan Commission requires wide powers to give effect to its objectives. Accordingly, its statute of incorporation empowers the Commission to license and control stock exchanges, stock

6 Supra note 3, page A2 paragraph 2 (a). The other bodies represented in the Panel are: The Association of British Insurers

brokers, stock dealers and operators of unit trusts

The Act also confers on the Commission wide investigative powers to determine whether any licensed stock exchange, stock broker, stock dealer and unit trusts are operating within the provisions of the applicable law16 and to cancel or suspend any such license where there has been a violation of the law.17

Delegated legislation necessary to give effect to the Securities and Exchange Commission Act of Sri Lanka have to be made by the relevant Minister or the Commission. The Minister is empowered to make Regulations which have to be placed before Parliament.18 In addition the Commission has the power to make rules.19 The Company Take-overs and Mergers Code is a set of rules made by the Commission under this provision. Contravention of the provisions of the Act or any regulation or rule made thereunder are deemed to be offences under the Act.20

It is interesting to note that the Sri Lankan Code recognises the monitoring role of the Colombo Stock Exchange (CSE) and has not attempted to take away the power of the Exchange to suspend market activity. However, as a licensed stock exchange, the Colombo Stock Exchange is subject to the direction and control of the Securities and Exchange Commission of Sri Lanka, which also enjoys a limited power to cancel or suspend listing or trading of specific securities or to suspend the trading of all listed securities21, and to take over and administer the Sock Exchange, if the public interest so requires.22

The nature and scope of the Sri Lankan Code

Some features of the Sri Lankan Code are noteworthy. Firstly, the Sri Lankan Code is applicable only to listed public companies23, irrespective of whether Sri Lanka is the place of incorporation or central management of the company, while the London City Code is restricted in its application to companies resident in the United Kingdom24 which could have multi-national membership and could sometimes even be private companies25. Secondly, the Sri Lankan set up is rigid and statute-based,

15 ibid.. Section 13. 16 ibid. Section 14. 17 ibid., Section 21. This provision does not provide for the cancellation or suspension of any licence issued to a stock exchange as such action can have serious repercussions on the securities market, but the Commission could deal with an errant exchange by taking over the administration of such exchange under Section 23A of the Act. 18 ibid.. Section 52. 19 ibid., Section 53. Rules may be made relating to listing of securities in a licensed stock exchange

while the London framework is voluntary and flexible. Thirdly, certain important legal principles applicable in London are conspicuous by their absence in Sri Lanka. For instance, there are no rules in Sri Lanka corresponding to the Substantive Acquisition Rules, nor does the Sri Lankan Code contain any rules analogous to Rule 5 and the several anti-frustration provisions of the London City Code. Fourthly, the Sri Lankan Code does not vest any discretion on the Securities and Exchange Commission of Sri Lanka in situations corresponding to which the London City Panel enjoys a certain degree of discretion, which makes the Sri Lankan Code extremely difficult to work. Fifthly, the Sri Lankan Code and the parent Act contain certain provisions, such as its elaborate anti-fraud and anti-insider dealing provisions, that can give rise to considerable difficulties. Finally, the regulatory regime in Sri Lanka is deficient in procedural rules. There is no provision in the Sri Lankan Code which sets out the procedure for approaching the Securities and Exchange Commission for consultation or approval, or for appealing against any decision of the Commission to an administrative body or court of law.

The main focus of the Sri Lankan Code is on take-over and merger transactions. Primarily the Code seeks to regulate voluntary offers that are made with a view of effecting a take-over or merger and the legal relationships that such an offer may bring into existence. In the Sri Lankan Code, ‘take-over’ means “a transaction or series of transactions whereby an individual or a company acquires control over the assets of a company either directly by becoming the owner of those assets or indirectly by obtaining control of the management of the company” 26 Similarly, the term ‘merger’ is defined as “a transaction whereby the assets of two companies become vested in or under the control of one company (which may or may not be one of the original two companies) which has as its shareholders all or substantially all the shareholders of the two companies”27.

The difference between a take-over and a merger is that in the case of a take-over the direct or indirect control over the assets of the acquired company pass to the acquirer

As there is no definition of the term “control” in the Sri Lankan Code, the Sri Lankan Commission, and perhaps the Courts, will be called upon to determine whether in a given case there is a sufficient acquisition of control to attract the provisions of the Code. While the London City Code does not seek to define terms such as ‘take-over’ and ‘merger’, it is clear from the Introduction to the Code29 that any transaction whereby control of a company is sought to be obtained or consolidated would come within its ambit. The Code defines ‘control’ as meaning “a holding, or aggregate holdings, of shares carrying 30% or more of the voting rights of a company, irrespective of whether the holding or holdings gives de facto control” 30 The phrase ‘voting rights’ is in turn defined as meaning “all the voting rights attributable to the share capital of a company which are currently execrable at a general meeting”31 Clearly, the City Code does not apply to offers for non-voting, non-equity capital unless they are

26 Supra note 1, Rule 37.It is necessary to note that Section 34(3) of the Securities and Exchange Commission of Sri Lanka Act supra note 2, defines the phrase “take-over offer for a company” as used in Part IV of that Act, but this definition is applicable in its special context and will not have general application. 27 ibid. 28 Rabinowicz (Ed), Weinberg and Blank on Takeovers and Mergers, Section 1-005, page 1002 See supra note 3, Introduction

offers required by Rule 15 of the Code.32 Conversely, the Code applies to acquisitions of voting rights or control over voting rights, as distinct from the shares themselves, as though they were acquisitions of shares.33

How to make a take-over offer

The manner in which company shares are distributed generally have a bearing on the method by which a take-over or merger is effected. Where the shares are not widely dispersed, the take-over or merger will be effected by means of an agreement or agreements with the shareholders. However, where the shares are widely distributed, there are three possible choices: (i) an agreement may be concluded with the controllers of the company implementing the changes

Generally, the take-over bid is launched by the latter in the form of a public announcement to all the relevant shareholders of the target company to the effect that if they tendered their shares with a Merchant Bank or other named depository within a specific period, they will receive a premium in excess of the then market price of the shares. The party making the bid is free to make a cash offer, an offer to exchange shares or a combination of the two. Equally, such party is free to offer to take all the shares of the target company or to make a partial offer to purchase only a specific number of shares. Unlike the take-over regulations in the United States and some other jurisdictions which are confined to the take-over or merger bid, the Sri Lankan Code applies to all transactions where control of a listed public company is to be obtained or consolidated, irrespective of whether the method of acquisition falls within category (I), (ii) or (iii) above.

As seen earlier, the main objective of the Sri Lankan Code is the protection of shareholders of target companies in the context of a take-over. Generally, the Code seeks to protect shareholders by defining or curtailing the circumstances in which the offeror can contract with shareholders and also by seeking to modify or rewrite contractual terms in certain circumstances. The freedom to enter into contracts is curtailed with various objectives in mind, such as the achievement of equality of opportunity,35 the elimination of coercion36 and the creation of market confidence.37 The primary objective of modifying contractual terms is the achievement of fair and equal treatment.38

■ It is convenient to consider the provisions of the Sri Lankan Code in the context of the type of take-over activity sought to be regulated by the Code, namely (i) the voluntary offer, (ii) the partial offer and (iii) the mandatory offer. The term ‘voluntary offer’ might sound curious as offers are by the nature of things expected to be voluntary, but the tag is useful to distinguish the ordinary type of take-over offer from a mandatory offer which a person is required by the Code to make in certain special circumstances outlined in Rule 31. An offer may be made with a view of acquiring full corporate control or may be confined to “less than one hundred per cent of the voting rights of an offeree company”, and the Sri Lankan Code contains some special provisions applicable to the latter type of offer, which is described in the Code as a ‘partial offer’.

32 Supra note 3, page A8. 33 Supra note 3, page F8. 34 Supra note 28, paragraph 1-003. See also, T.I.E.Ogowewo, Tender Offer Regulation: Thwarting the Market for Corporate Control through Opportunities for Defensive Litigation ( Ph.D. thesis submitted to Kings College, University of London) (1995) pages 23 and 24. 35 See for example supra note 1, Rule 3. See for example supra note 1, Rule 32. 37 See for example supra note 1, Rule 28(2). 38 See for example supra note 1, Rules 31 and 32. This concept is enshrined in several general principles contained in the London City Code such as General Principles 1,2,4,5,6,7,8,9and 10 enumerated in supra note 3, pages B1 to B2.

The voluntary offer

The Sri Lankan Code regulates voluntary offers by prohibiting any person making a take-over or merger offer from approaching any of the shareholders of the target company directly with any proposal. The Sri Lankan Code makes it imperative for such an offeror to forward his offer or proposed offer in the first instance to the Board of Directors of the offeree company.39 Every offeror is required by the Sri Lankan Code to disclose the identity of his principal in a situation where he is making the offer on behalf of some other person or entity.40 The offeror and offeree are bound to maintain absolute secrecy regarding the offer until an announcement is made.41

Under the Sri Lankan Code, an announcement is required to be made of an offer or possible offer where a purchaser is sought for more than thirty per centum of the voting rights of a company or the number of potential purchasers or offerors approached is more than a restricted number of persons.42 An announcement also becomes imperative where there is an untoward movement in the price of shares of the target company43 or the negotiations have reached a stage at which such Board of Directors of the target company is reasonably confident that an offer shall be made for its shares44 or are extended to persons other than the companies concerned and their immediate advisors.45 An announcement also becomes obligatory when a firm offer, namely an offer which is not subject to any pre-condition, is notified to the Board of Directors of the target company, irrespective of whether the Board views the offer favourably or not.46 However, before making such an announcement the Board is entitled to be satisfied that the offeror is or shall be in a position to implement the offer in full.47

* Whenever practicable, the announcement of a possible offer or offer should be contained in a joint statement to be issued to the Stock Exchange by the offeror and offeree to enable the Stock Exchange to make the same on the trading floor, but where a joint statement is not practicable, the offeror or offeree, as the case may be, is required to issue the statement to the Stock Exchange.48 Rules of the Stock Exchange provide that every announcement should either be prepared or reviewed by –

(i) a company official having familiarity with the matters about which disclosure is to be made

(ii) a company official familiar with the requirements of the Exchange, as well as any applicable requirements of the securities laws.49

However, where there are indications of an untoward price movement even before the offeror makes the initial approach, the responsibility for making the announcement rests on the offeror, who is also expected to be vigilant about such price movements. Similarly, the Board of Directors of the target company is also bound to make an appropriate announcement when negotiations are nearing the stage of an offer being made or there is an untoward price movement.50 An announcement of an offer

39 Supra note 1, Rule 3

should contain particulars such as the terms of offer (including all conditions relating to acceptances, listing and increasing of capital to which the offeror or the commencement of the offer shall be subject), the identity of the offeror, any existing holding in the offeree company which the offeror owns or over which has control, or which is owned or controlled by any person acting in concert with the offeror, or in respect of which the offeror has already received any undertaking of acceptance from the shareholder.51 A copy of the announcement or a circular setting out contents of such announcement should be sent to every shareholder of the offeree company immediately after the announcement of the offer, and the date on which this is done would be deemed to be the date of commencement of the offer.52

Once an announcement has been made of an offer, such offer cannot be withdrawn except where there is a failure of a condition precedent53. The offeror should forward the offer document to the Board of Directors and every shareholder of the offeree company within twenty eight days of the announcement of an offer.54 The offeree Board is required by Rule 12 to obtain independent advice and also keep its shareholders informed of such advice.55 It should within fourteen days of the receipt of the offer document forward to every one of its shareholders its views, comments and advice on the offer document along with the advice given to it by the independent advisor under Rule 12. The offer document should contain the statements and particulars set out in the Schedule to the Code56, such as the details of any agreement, arrangement or understanding existing between the offeror or any party acting in concert with a director or shareholder or a person who held such status within the preceding six months in the offeree company. It is an unalterable condition of every offer for equity share capital that the offer shall not become or be declared unconditional as to acceptances unless the pfferor has acquired or agreed to acquire either pursuant to the offer or otherwise shares carrying more than fifty per centum of the voting rights attributable to the equity share capital of the offeree company.57 Where the target company has several classes of equity share-capital, the offeror should with the approval of the Commission make separate58 comparable offers for each class.59

The Code emphasises the right of the shareholders to accurate and full information. Rule 16 is particularly important, as it provides that any document or advertisement addressed to any shareholder shall be prepared with the same standard of care and accuracy as if it were a prospectus within the meaning of the Companies Act. Rule 17 also requires the highest standards of accuracy and fair presentation with respect to profit forecasts and asset valuations. It is also important to note that even the-offeror is bound to obtain independent advice where there is a reverse take-over or where the Board of the offeror is faced with a conflict of interest.60

An offer will be initially open for acceptance for twenty one days after the offer document is forwarded to the offeree Board and shareholders, and in the event of the offer being revised, the revised offer should be kept open for at least fourteen days from the date of posting of the written notification of the revision61. After an offer has become or is declared unconditional as to acceptances, the offer shall remain open for acceptance for not less than fourteen days after the date on which it would otherwise have expired, unless the offer becomes or is declared unconditional as to

51 Supra note 1, Rule 9. 52 Supra note 1. Rule 10. 53 Supra note I, Rule 11. 54 Supra note 1, Rule 13(1). 55 Supra note l,Rule 12(1). 56 Supra note 1, Rule 14. 57 Supra note I, Rule 19. 58 This requirement does not apply to a mandatory offer under Rule 31. See, supra note 1, Rule 20(3). 59 Supra note 1, Rule 20. 60 Supra note 1, Rule 12(3). 61 Supra note 1, Rule 21(1).

acceptances on or before an expiry date and the offeror gives or has given at least fourteen days’ notice in writing to the shareholders of the offeree company that the offer shall not be open for acceptances beyond that date. The Code prohibits the giving of such a notice between the time when a competing offer has been announced and until the resultant competitive situation has ended.62

Generally, no offer (whether revised or not) is capable of becoming or being declared unconditional as to acceptances after 4.30 p.m on the sixtieth day after the date on which the offer document was forwarded to target shareholders.63 However, the Sri Lankan Commission has the power to authorise the extension of an offer beyond the initial sixty day period where a competing offer has been made or announced,64 on which occasion it is the duty of the offeror to inform the target shareholders of the new expiry date of the offer.65 It is open to any acceptor to withdraw his acceptance after twenty one days from the first closing date of the initial offer, that is after forty two days from the date of the initial offer.66 Similarly, the offer will lapse where all conditions are not fulfilled within the same forty two day period or the date the offer becomes or is declared unconditional as to acceptances, whichever date is the later.67 The consideration to which the offeree shareholders are entitled to under the offer shall be posted to them as soon as practicable, and in any case not later than twenty one days after the offer becomes or is declared unconditional in all respects or twenty one days after receipt of valid acceptances where such acceptances were tendered after the offer has become or been declared unconditional in all respects.68 The offeror is bound to issue statements containing the information specified in Rule 24 to the Stock Exchange and to request that announcements be made on the dealing day immediately following the day on which an offer expires, or becomes or is declared unconditional as to acceptances, or is revised or extended69 The Stock Exchange may suspend the dealing in the offeree company’s shares and, where appropriate, in the offerer’s shares until the relevant information is given70.

The Sri Lankan Code differs from the London City Code in its insistence that all statements and announcements required to be issued or made under the Code as well as all documents issued in relation to a take-over or merger transaction should be forwarded to the Commission for its approval by the offeror or offeree, as the case may be, before such statement, announcement or document is issued, made or despatched71. It seeks to achieve fair and equal treatment by prohibiting an offeror from entering into any agreement or arrangement to deal in, or make purchases or sales of shares of, the offeree company while an offer is in contemplation, if such dealings have attached thereto favourable conditions which are not being extended to all shareholders.72

Similarly, the Sri Lankan Code provides that if an offeror purchases shares in the offeree company for an amount exceeding the offer price, the offeror must increase the offer to an amount not less than the offer price.73 The Code also seeks to eliminate coercion by prohibiting fresh offers for target company shares, or any acquisition of such shares, being made by an offeror or person acting in concert with him within a period of twelve months from the withdrawal or lapse of an offer already made74.

62 Supra note1, Rule 23. 63 Supra note 1. Rule 22(1). 64 Supra note 1, Rule 22(2) 65 Supra note 1, Rule 22(3). 66 Supra note 1, Rule 21(2). 67 Supra note 1, Rule 22(4). 68 Supra note 1, Rule 22(5). 69 Supra note 1, Rule 24. 70 Supra note 1, Rule 25. 71 Supra nole 1, Rule 18. 72 Supra note 1, Rule 33. 73 Supra note l,Rule3O(2)

The mandatory offer

A classic example of the requirement of ‘fair and equal treatment’ is Rule 31 of the Sri Lankan Code which compels a purchaser acquiring thirty per centum or more of voting rights in a company to make a cash offer to all other shareholders at the highest price paid by such purchaser in the previous twelve months.75 Such an offer is known as a ‘mandatory offer1. Rule 31 provides that an announcement should also be made immediately when a person or persons acting in concert acquires, by a series of transactions over a period of time or otherwise, shares carrying thirty per centum or more of the voting rights of a company, or while holding between thirty per centum and fifty per centum of the voting rights of a company acquires in any period of twelve months, additional shares carrying more than two per centum76 of the voting rights in the same company.

The requisite announcement is to the effect that it has become obligatory on the part of such person to make an offer in terms of Rule 31.77 The mandatory offer should be extended within thirty-five days from the date of the announcement to all holders of equity shares carrying voting rights of the same class to purchase for cash, or in exchange for shares with a cash alternative, the shares of such holders at not less than the highest price paid by the offeror for shares of that class within the preceding twelve months78.

A mandatory offer shall be conditional only upon the offeror receiving acceptances so as to result in the combined shareholding in the company of the offeror and persons acting in concert with him carrying fifty percent of the voting rights in the company79 and should include confirmation by the offerer’s financial adviser that resources are available to the offeror sufficient to satisfy full acceptance of the offer.80

In the context of Rule 31, recent take-over bids such as the Lankem Ceylon Ltd bid for the controlling interest in Kotatgala Plantation Ltd and the attempt by Vanik Incorporated Ltd to gain control over Forbes Ceylon Ltd have raised the question whether the requirement to make a mandatory offer in terms of this Rule is applicable where control is achieved or is sought to be achieved indirectly by acquiring control over some other unlisted company – to which the Sri Lankan Code has no application – which controls the target company. In the like situation, the London City Panel would apply what has been described as the ‘chain principle’81 which will enable the Panel, at its discretion, to impose an obligation to make a mandatory offer where the share-holding in the target company constitutes a substantial part of the assets of the unlisted company or one of the main purposes of acquiring control over the unlisted company was to secure control of the target company. It is noteworthy that General Principle 10 of the London City Code expressly provides that “Where control of a company is acquired by a person, or persons acting in concert, a general offer to all other shareholders is normally required.” Although it has been argued that the chain principle can be invoked in Sri Lanka to impose an obligation to make a mandatory offer in a similar situation, the peculiar language of Rule 31, the absence in the Sri Lankan Code of any general principles similar to General Principle 10 and the failure to confer on the Securities and Exchange Commission of Sri

75 Supra note 1, Rule 31 (1) and Rule 31 (3) corresponding lo Rules 9.1 and 9.5 of the London City Code.supra note 3. 76 Supra note 1, Rules 7(b), 8(2)(b) and Rule 31. The London City Code is much more stringent in this regard, and makes an acquisition of one per centum of the voting rights sufficient to trigger-off the requirement of a mandatory offer. See, .supra note 3, Rule 9.1 (b). 77 Supra note 3, Rule 8(2)(b). 78 Supra note 1, Rule 31 (3). The Rule also requires the approval of the Securities and Exchange Commission where any such shares have been acquired for a consideration other than cash and the offer involves more than one class of equity share. Rule 31 (4) also empowers the Commission to adjust the price where the ‘highest price’ referred in Rule 31 (3) is not applicable in a particular case. 79 Supra note 1, Rule 31(2). 80 Supra note 1, Rule 31(5). 81 Supra note3, Rule9.1 Note 7.

Lanka the degree of discretion enjoyed by the London City Panel strongly militate against such an interpretation.

The Sri Lankan Code prohibits the appointment of a nominee of the offeror or person acting in concert with the offeror to the Board of Directors of the offeree company or the transfer or exercise of voting rights in the company by such offeror or person acting in concert until the offer document is forwarded to the Board of the offeree company and to its shareholders.82 Where any Director of a company or such Director’s close relations sell shares to a purchaser, as a result of which the purchaser is required to make an offer under Rule 31, such Director should ensure that as a condition of the sale the purchaser undertakes to fulfill his obligation under this Rule, and such Director does not resign from the Board until the offer document is so forwarded.83

Take-over litigation in the Sri Lankan context

Litigation can take various forms in the field of take-overs. While the legal framework for regulation as well as the structure and format of the Sri Lankan Code, with its multifarious interpretational problems, can give rise to a great deal of inevitable litigation, opportunities for litigation could also be easily created as a devise or mechanism to further or frustrate a take-over offer. In the take-over context a law suit could involve a wide range of participants. An offeror may sue a rival offeror, the target company or some of its shareholders. Shareholders of the target company may sue other shareholders of the same company. Similarly, the target company might sue the offeror, and so could a shareholder of the target company. Sometimes shareholders of the offeror may sue the offeror, or shareholders of the target company may do likewise. It is also possible for any of the participants enumerated above to sue the Colombo Stock Exchange or the Securities and Exchange Commission of Sri Lanka.

What ground or cause of action is used to institute legal proceedings is of little importance in this kind of litigation. As one Australian practitioner quipped, the two principles to fight a hostile takeover are: “(1) get locus standii 2) litigate.”84 Grounds or causes of action for litigation are available in abundance in Sri Lanka. The avenues supplied by the Constitution of Sri Lanka, the Companies Act, the Securities and Exchange Commission of Sri Lanka Act and the Company Take-overs and Mergers Code are so laden with opportunity for litigation that it will not be necessary to enlist the aid of the less exotic grounds of antitrust85, defamation86 or criminal law87 used in less fortunate jurisdictions of the developed world.

Prerogative writs and Article 126 applications constitute the main public law remedies in Sri Lanka. Writs of certiorari, prohibition and mandamus have been expressly incorporated into law by the Constitution of Sri Lanka with a view of keeping administrative authorities within their legal bounds. It is clear that the Securities and Exchange Commission of Sri Lanka is amenable to these remedies as it is a statutory body “having the legal authority to determine questions affecting the

82 Supra note 1, Rule 31(6). 83 Supra note 1, Rule 31(7)., 84 Vrisakis, “Litigation in Contested Takeovers” (1987) 61 Australian Law Journal page 645. 85 In Australia, Section 52 of the Trade Practices Act of 1974 which was enacted to protect consumers from unscrupulous corporate advertising and promotional activity generally, is now invoked far more often in battles for corporate control than in the area of consumer protection litigation. See, Clarke “Misleading or Deceptive Conduct in Relation to Takeovers” (1989) 7 Company and Securities Law Journal, page 108. 86 See Arthur, Kirby and Rein, “Defamation Suits as a Weapon in Corporate Control Battles” (1981) 37 The Business Lawyer 1. 87 For instance, in the United Stales the Racketeer Influenced and Corrupt Organizations Act of 1970 (18 U.S.CA. SS 1961-1968), which was enacted to halt the infiltration of organized crime into the economy has been used to ward off hostile bidders.

rights of subjects”88 without having to rely on the later development of the English law represented by the Datafin decision.89 This case is of greater significance to the Sri Lankan legal fraternity for the reason that it shifted the focus from the source of the power sought to be reviewed by the proceedings in question to the nature of the power. As Lloyd LJ put it90, notwithstanding that there was no statutory or contractual nexus between the participating bodies and the London City Panel the actions of the Panel was reviewable as it was “exercising public law functions” and furthermore, the exercise of such functions had “public law consequences”.

This landmark decision has also some bearing on another question that could arise in Sri Lanka, namely whether a prerogative writ would lie to review a decision or determination of the Colombo Stock Exchange, which is a limited liability company constituted by stockbroker companies operating on its trading floor. In Trade Exchange (Ceylon) Ltd. v Asian Hotels Corporation91 the Supreme Court of Sri Lanka held that a company was not amenable to prerogative writs even though almost all its shares were held by a government-owned statutory corporation as the company was a legal entity distinct from its members. The Datafin decision shows that even a voluntary body can be controlled by prerogative writ on the basis of the public nature of its functions. Indeed, the English courts have held that the London Stock Exchange, which is also constituted as a limited liability company, is in principle subject to judicial review.92 The courts have also taken the attitude that although judicial review is not available in regard to the exercise of purely contractual powers, the authority of a contractual nature which various self regulating organisations have over their members help these organisations to perform their public functions, and accordingly the failure of such an organisation to perform a contractual obligation could still be reviewable.93

In the course of the Datafin judgement, Lord Donaldson MR emphasised the fact that a breach of the City Code so found by the Panel could lead to a de-listing of a company’s shares on the Stock Exchange which may in itself lead to judicial review. In Sri Lanka, listing can be suspended or cancelled by the Securities Commission directly94 or the Commission may direct the Colombo Stock Exchange95 to de-list a company, and it would be unjust in the least to allow the Commission and the Stock Exchange to take shelter behind the corporate veil when judicial review is sought against the implementation by the Stock Exchange of a direction issued by the Commission to de-list a company. It is therefore likely that the Sri Lankan courts will follow the lead of the English decisions in holding that the Colombo Stock Exchange is amenable to prerogative writ.

In Council of Civil Service Unions v Minister for the Civil Service96 Lord Diplock categorised the grounds available for judicial review in the United Kingdom as illegality, irrationality and procedural impropriety. In the English case of R v Panel on Take-overs and Mergers, ex party Guinness97 Lord

88 per Lord Atkin in R v. Electricity Commissioners, ex party London Electricity Joint Committee Company [1924] 1 KB 171 at page 205 as abridged by Lord Diplock in O’Reilly v. Mackman [1983] 2 AC 374 at page 279 by dropping the words “having the duly to act judicially” from the Atkinian formula. 89 See, R v. Panel on Takeovers and Mergers, ex party Datafin [1987] 1 QB 815 which is particularly important to English law insofar as it extended the application of prerogative remedies to the London Takeover Panel, which is a non-statutory body regulating the conduct of takeovers and mergers in the London Stock Exchange on a voluntary basis. 90 Supra note 89 at page 847. 91 (1981) 1 Sri LR 67. 92 See, R v International Stock Exchange of the United Kingdom and Republic of Ireland Limited [1993] 1 All ER 420. 93 See, The Governor and Company of the Bank of Scotland, Petitioners [1989] BCLC 700

Donaldson observed that there were difficulties attendant upon reviewing the decisions of a body such as the City Panel, which has no visible means of legal support, on these established grounds. Review was difficult on the ground of illegality, because the Panel acted as both legislator and interpreter of its rules

The mechanism provided by Article 126 of the Constitution of Sri Lanka for the enforcement of fundamental rights might also provide the framework for take-over litigation. The Constitution of Sri Lanka guarantees various fundamental rights including the right to equality, and provides for the redress of actual or imminent violations of fundamental rights by executive or administrative action. While there is no doubt that actions of the Securities and Exchange Commission of Sri Lanka will readily be regarded as “executive or administrative action”, recent decisions of the Supreme Court of Sri Lanka show that the Supreme Court will not hesitate to extend its jurisdiction to actions of a company which acts as the instrumentality of the State in applying government policy. Accordingly, it is possible that action taken by the Colombo Stock Exchange to give effect to any directive of the Securities and Exchange Commission will be amenable to the Constitutional remedy, if it violates a fundamental right guaranteed by the Constitution.

As for the private law, Sri Lankan soil is extremely fertile for litigation. The Companies Act and the Securities and Exchange Commission of Sri Lanka Act provide further avenues to the adventurous for profitable litigation. Notwithstanding the early warning given by Justice L.M.D. de Silva that “litigation would clog the effective working of a company”98 if internal disagreements involving shareholders or directors could be brought up before the Courts without restriction or limitation, provisions of the Companies Act, specially the minority protection provisions, have provided ample latitude for company litigation in Sri Lanka.

The provisions of the Securities and Exchange Commission Act of Sri Lanka dealing respectively with fraud” and insider trading100 give rise to the important question whether any person affected by an infringement of these provisions could seek redress through a civil suit. In the take-over context, the issue would be whether an enjoining order or injunction could be obtained with a view of restraining an offerer from making or proceeding with a take-over offer where there is a violation of statutory duty. It is pragmatic to suppose that where any legislation expressly provides that no remedy, whether civil or criminal shall be available, the Courts have no power to create a remedy. There is also clear judicial authority for the proposition that where a statute prescribes a specific civil remedy for its violation, no other remedy is available.101 By a parity of reasoning, the same position will prevail

98 Ceylon Textiles v Sir Chiitampalam Gardiner (1952) 54 NLR 313 at page 316 99 See, supra note 2, Section 28(2) which appears to have followed closely the famous Rule 10b-5 enacted under Section 10 (b) of the Exchange Act of the United States. 100 See, supra note 2, Sections 32 and 33. 101 See, Clegg, Parkinson & Co. v Earby Gas Company [1896] 1 QB 592

where the statute confers specific penal and civil remedies. Where, however, a statute observes total silence as regards remedies, or as in the case of the anti-fraud and anti-insider dealing provisions of the Sri Lankan Act, expressly confers only a penal remedy, the presumption is that a civil right of suit accrues to a person who suffers as a result of the violation of the statute.102 Although judicial authority seem to be divided on the question whether a civil remedy could be implied in the context of a statute enacted to benefit the public at large rather than a particular category of persons103, the point would not arise in the context of the Sri Lankan statute as one of its primary objectives is the protection of the interests of investors.104 There can therefore be little doubt that the violation of these provisions can be redressed by civil suit.105 However, the conferment of an express right of civil action by statute can not only remove any doubt that might exist in regard to the availability of such a right of action, but also put to rest issues such as who among several loss sufferers is entitled to sue and the question of locus standii on the part of the regulatory agency.’06 It is predictable that these provisions of the Sri Lankan legislation are most likely to be a haven for frustrating action by target companies.

The role of the judiciary has been conceived of in public law as one of supervision, and the courts have always been inhibited in interfering with specialised statutory agencies. As Bingham MR stated in a recent judgement, “in a highly sensitive and potentially fluid financial market,….the courts will not second guess the informed judgement of responsible regulators steeped in knowledge of their particular market.”107 As a Canadian judge observed in relation to the Canadian Securities Commission.

“Where- sophisticated legislation of this type is in existence, together with a body skilled in its administration as is the Commission, Courts have been careful to consider whether the interjection of traditional remedies was necessary or desirable. A wide degree of latitude in the exercise of jurisdiction has been accorded to bodies such as the Commission.”108

Similarly, in R v Panel on Take-overs and Mergers ex party Data/in109 the English Court of Appeal showed great reluctance to exercise its supervisory jurisdiction with respect to decisions of the London City Panel. The Court emphasised the special nature of the Panel, the market in which it operates, the time scales that are inherent in that market and the need for speedy decision making, the public nature of the functions performed by the Panel and the need to safeguard the position of numerous third parties who may be affected, in holding that even if in an exceptional situation it decides to exercise its jurisdiction, the form of relief would be declaratory rather than substantive so as not to interfere with the work of the Panel. However, the English courts have intervened, at least in exceptional situations, to stop the continuation of one set of proceedings which may prejudice the fairness of other proceedings.110

102 See, Culler v Wandsworth Stadium Limited [1949] AC 398 103 Clegg, Parkinson & Co, v Earby Gas Company, supra note 24

In the field of private law, it is relevant to note that “the difference between injunction applications in respect of take-over bids and others not involving securities legislation” has been stressed in recent judicial decisions in many jurisdictions.111 However, it is doubtful whether such a distinction will be drawn by the Sri Lankan Courts.

There appear to be several factors that might influence a Sri Lankan court to adopt a different attitude towards the work of the Sri Lankan Securities and Exchange Commission. These factors will emerge from a comparison of the London Panel with the Sri Lankan Commission. Firstly, the constitution of the London City Panel enables important professional bodies involved in take-overs to pick their representatives in the Panel, while the Sri Lankan legislation empowers the relevant Minister to appoint to the Commission persons “who appear to the Minister to have wide experience and shown capacity in legal, financial, business or administrative matters.”112 Secondly, while the members of the London Panel enjoy security of office, the ability of the relevant Minister to remove any member of the Sri Lankan Commission without assigning any reasons and the inability to test such removal in a court of law113 raise serious questions in regard to its autonomy. Thirdly, while a system of secondment from the private sector ensures the London Panel of a skilled executive, the Sri Lankan Commission has been hard pressed due to financial and other constraints in this respect, the only secondments worthy of mention being from the Attorney General’s Department. Fourthly, the Thawakkal affair and the Vanik-Asia Capital conflict has brought into focus the issue of conflicts of interest in the Sri Lankan take-over scene. Last but not least, the Sri Lankan Code does not have any system of administrative appeal, whereas the decisions of the London City Panel are appealable to a tribunal whose skill and integrity is beyond doubt. No doubt these factors are bound to affect the credibility of the Sri Lankan Commission in the eyes of the Sri Lankan courts.

It is interesting to note that General Principle 7 of the London City Code114 prevents any action being taken by the board of the offeree company in relation to the affairs of the company without the approval of the shareholders in general meeting after the communication of a bona fide offer or when the making of such an offer might be imminent. In Dunford & Elliot Limited v Johnson & Firth Brown Limited115, where a target company management sought and obtained an injunction from the lower court restraining an offeror, the Court of Appeal set aside the injunction observing that “the very moving for an injunction would seem to be a breach of general principle 4116 of the Code: seeing that it is an action which is designed to frustrate the making of the bid.”117 It is noteworthy that the Securities and Exchange Commission of Sri Lanka has not incorporated into the Sri Lankan Code any provision analogous to General Principle 7. Furthermore, the absence in the Sri Lankan Code of any of the other anti-frustration rules found in the London City Code also makes it extremely difficult to support a judicial policy of discouraging litigation in the take-over context.

Conclusions

Sri Lanka is not the first country to adopt a take-overs code in the lines of the London City Code. It has merely followed the trend set by Singapore and Malaysia of seeking to benefit from the rich experience of the London City Panel on Take-overs and Mergers. While the London Code is non-statutory and operates as a voluntary scheme of self-regulation,118 the Sri Lankan Code is a set of

111 See, First City Financial Corporation Limited v Genstar Corporation (1981) 125 DLR (3d) 303 at page 314. 112 Section 3(l)(a)(ii) of the Securities and Exchange Commission of Sri Lanka Act 113 Ibid Section 5(2) 114 Supra note 3, page B2. 115 [1977] I Lloyds LR. 505 116 which is now General Principle 7 supra note 3, page B2. 117 per Lord Denning supra note 107 at page 510. 118 Supra note 3, page A l paragraph l(c).

rules having the force of law.119 The Sri Lankan Code may perhaps be contrasted with the Singaporian Code,120 which is expressly declared to be non-statutory in nature,121 and the Malaysian Code, which not only sets out at its very commencement’22 its underlying general principles, but also expressly lays down that “Persons engaged in take-over or merger transactions must observe the spirit as well as the precise wording of these General Principles and Rules.”123 The Sri Lankan Code, on the other hand, does not seek to spell out any general principles, and would no doubt lack the flexibility which is the main characteristic of the London, Singaporian and Malaysian Codes. Certainly, Sri Lanka’s approach shows that it has opted for certainty at the expense of flexibility.

A transplanted life form can survive only if its new environment is similar to its native one, or it is capable of adapting to its new environs. The same is true with regard to any importation of legal principles from one state to another. The question that arises in this context is whether the existing Sri Lankan legal environment is conducive to the smooth functioning of the Sri Lankan Code which is in essence a replica of the London City Code, or whether changes have to be brought about in the Sri Lankan legal framework to ensure its efficient working.

119 As already noted, the Sri Lankan Code lakes the form of rules made by the Securities and Exchange Commission of Sri Lanka under Section 53 of the Securities and Exchange Commission of Sri Lanka Act, supra note 2.

120 See, The Singapore Code on Take-Overs and Mergers, 1985.

121 See, Section 213(18)(a) of the Companies Act of Singapore. See also, Dunford & Elliot Ltd. v Johnson & Firth Brown Ltd. [1977] I LI R505.

122 The Malaysian Code on Take-Overs and Mergers, 1989 part II.

123 ibid., General Principle 1.1.