Related-Party Sale of a Subsidiary's Land
Jamuna Holdings Ltd (JHL) owns 75% of Sundarban Properties Ltd (SPL). JHL's chairman, Mr. Karim, also controls a private company, Karim Estates, which has agreed to buy a plot of land from SPL for BDT 120 million. An independent valuation puts the land at BDT 180 million. The SPL board has five directors: three are JHL nominees, one is Mr. Karim's brother, and one is independent. The transaction was approved at an SPL board meeting at which the JHL nominees and Mr. Karim's brother voted in favour; the independent director abstained. JHL's own board now needs to approve the transaction because it exceeds 10% of JHL's consolidated assets. The company secretary of JHL must advise on the approvals required and on the disclosure obligations.
1. Identify the conflict issues at SPL and advise whether the SPL board approval is effective.
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The SPL board approval is defective on two grounds.
First, the JHL nominees are interested. They are nominees of the majority shareholder, which is the parent of SPL, and the buyer is controlled by JHL's chairman. Their interest is indirect but real, and they should have disclosed it and abstained. Their votes should not count.
Second, Mr. Karim's brother is interested. A director who is a relative of a person interested in the transaction has an indirect interest. He should have disclosed and abstained.
If the three JHL nominees and the brother are excluded, only the independent director remains. He abstained. There is therefore no effective approval by a disinterested board. The resolution should be treated as not validly passed.
The correct course is for SPL to reconstitute the decision. Options include: (a) obtaining shareholder approval of SPL by a resolution of disinterested members, with JHL abstaining; (b) appointing an independent committee with a fresh independent director; or (c) referring the matter to JHL's audit committee. The price of BDT 120 million against a valuation of BDT 180 million is a BDT 60 million shortfall that must be explained and, if the sale proceeds, recovered.
2. Explain the approvals JHL must obtain and the disclosures it must make.
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Because the transaction exceeds 10% of JHL's consolidated assets, it is a material related-party transaction. JHL must:
Obtain audit committee approval. The audit committee should review the valuation, the terms and the conflict, and record its recommendation.
Obtain board approval. Mr. Karim must disclose his interest and abstain. If he controls the board, the matter should go to shareholders.
Obtain shareholder approval if the applicable threshold is crossed. The notice must contain an explanatory statement disclosing the identity of the related party, the nature of the relationship, the price, the valuation and the shortfall.
Make the prescribed disclosures in the annual report and in any stock exchange announcement, including the name of the related party and the amount.
Ensure the SPL minority is protected. If SPL has minority shareholders, their approval may be required, and JHL should abstain from that vote.
The company secretary should also check whether the sale requires any regulatory consent, for example under land or competition rules.
3. Advise on the liability of the directors and the remedies available to SPL.
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The directors who approved the sale at a BDT 60 million undervalue may be liable for breach of duty. Their duty is to act in the best interests of SPL, and a sale to a connected buyer at a substantial undervalue is difficult to justify.
The remedies are:
Recovery of the shortfall. SPL may claim BDT 60 million from the directors and from Karim Estates if it knew of the breach.
Rescission. If the land has not yet been transferred, SPL may rescind the contract. If it has been transferred, rescission may still be possible if Karim Estates is not a bona fide purchaser without notice.
Account of profits. Any profit made by Mr. Karim or Karim Estates may be recoverable.
Derivative claim. A minority shareholder of SPL may bring a derivative claim on SPL's behalf.
The independent director who abstained should ensure his abstention is recorded. The company secretary should recommend that JHL's audit committee investigate and that SPL obtain independent legal advice before completion.