Fallout at Stassen
The Board room battle at the 40-billion rupee, asset-rich company
The dispute between the founder directors at the Harry Jayawardena-controlled Stassen’s and Milford companies when three partners took Mr. Jayawardena to court this week to either buy him out or sell out (to him) could end up in the biggest collapses in the corporate world in recent times. The stakes are certainly high for a group that started with a small capital and is now said to have a total net value of some Rs 40 billion with assets and properties spread out across the country.
Last Monday, the trio filed action in the Colombo Commercial High Court against Mr. Jayawardena, Managing Director of Stassens, saying they have lost confidence in him and sought to exit the company or buy out his shares. Tuesday saw them filing a similar petition on Milford Exports for the same reason. The petitioners also asked for an interim order preventing the company and or Mr. Jayawardena taking any step whatsoever to alter the present status quo of the Board of Directors of the company until the final hearing and determination of this action. In Stassen's, they collectively hold 49.99 percent, while at Milford their stock amounts to 40 percent.
The Commercial High Court Judge Ms. Rohini Walgama issued notice returnable on Mr. Jayawardena August 28. The groups have stakes or direct control in companies and banks like HNB, Aitken Spence, Distilleries, Lanka Milk Food, Browns Beach, Sampath Bank, Sri Lanka Insurance, plantations – Balangoda/Madulsima, Lanka Milk Food, DFCC, Apollo and Asiri.
The petitioners say the estrained relationship between Harry Jayawardena and the petitioners began in or around 2005 – when the former began taking his own decisions without consulting the others. Mr Jayawardena was an executive at the tea department of state-owned Conselexpo in around 1971 when Mr Vittachi was its chairman. Subsequently the petitioners (the other two also worked at Consolexpo) and the first respondent become close friends and when they quit the state company, they formed Stassen Exports Ltd in September 1977.
The company grew after that, branched out into other areas and bought up or invested in other companies. The problems began as the expansion in 2005 occurred. The two petitions filed this week tell the entire story (the A-to-Z) of a successful partnership that soured all because one man wanted to go it alone and break the team that made it happen. Here is their story, based on the petitions:
V. P. Vittachi was chairman of Consolexpo, one of the largest exporters of tea and other produce during the 1970s when Harry Jayawardena, R.K. Obeysekere and Zaki Alif were senior or junior executives in the company.
In 1973, Mr Vittachi left as Chairman of Consolexpo, following his retirement from public service. In 1977, the other three resigned from Consolexpo since the political environment at that time did not permit them to continue their employment there. Subsequent to leaving their employment at Consolexpo and having no employment at the time, they decided to work together as a result of their close knit friendship, bond, trust and confidence in each other.
They approached Mr Vittachi for advice on how they could pool their resources and export tea and other produce and thereby earn their livelihood. As a result of these discussions, they formed an enterprise to export tea and other produce and on 7th of September 1977 jointly formed a private company named Stassen Exports Limited for this purpose.
They approached Mr Vittachi for advice on how they could pool their resources and export tea and other produce and thereby earn their livelihood. As a result of these discussions, they formed an enterprise to export tea and other produce. Their main objective was to eventually become a medium scale exporter of tea.
On 7th of September 1977, they jointly formed a private company named Stassen Exports Limited to carry on the aforesaid enterprise.
The name “Stassen” was decided on by them since it was felt to be important that the company should have a western-sounding name that was marketable in foreign tea markets. This name held further significance to them, since “Stassen” was a given name of Mr Jayawardena and it was agreed by all four of them that naming the company based on the given name of one of them reflected the strong friendship, bond trust and sense of brotherhood that existed between them.
They started operations on a very small scale from a single small room in a building leased by a company controlled by Haris and Arjuna Hulugalle (Hulugalle brothers) which the company was permitted to use, since they could not afford to pay rent at the time. The Hulugalle brothers also permitted them to use their staff and all infrastructure facilities for the business of the company.
Mr Obeysekere and Mr Alif attended the tea auctions and handled all aspects of the core business of the company relating to the export of tea, working in very trying conditions. During this period, the company did not have the necessary infrastructure to handle the operation of exporting tea, including even rudimentary facilities such as a “Tea Room” (tea laboratory). As such they were compelled to use the Tea Room facilities of Easwaran Brothers for their activities, travelling in public transport for company purposes and often, working late into the night, since they had to wait until Easwaran Bros’ finished their use of the Tea Room. The company had to use the telex and telephonic facilities of the Central Telegraphic Office for communication with their foreign buyers, which also was attended to by Mr Obeysekere and Mr Alif.
The main reason that Mr Obeysekere and Mr Alif had to bear the burden of running the entire aspect of the export operations which involved inter alia, trading, tasting, evaluating tea samples, attending auctions, post auction sampling, procuring material for processing of products, supervision of processing of product for export and trading for the next business, which was the core business of the Company, was that Mr Jayawardena was unable to handle such business, being despised in the tea trade due to his arrogance whilst working at Consolexpo. Hence, it would have been detrimental to the company had he attended the tea auctions for purchases, which was critical for the business of the company. In fact he never attended the tea auction after formation of the company.
In the circumstances, it became Mr Jayewardena’s role in the company to manage the finances and administration whilst Mr Obeysekere and Mr Alif devoted their time to handle the entire tea operations. The bond and friendship between them was such that Mr Alif was Mr Jayewardena's Bestman at his wedding.
All the decisions of the company were taken in mutual consultation and agreement with each other and the shareholdings of the company initially reflected the proportions in which the partners agreed to share the profits from the enterprise. Considering the seniority and the stature of Mr Vittachi and his value to the Company, he was allotted 20% of the issued shares of the company.
As Mr Jayawardena was the former Tea Manager at Consolexpo and senior in relation to Mr Obeysekere and Mr Alif, he was allotted 20% of the issued shares of the company. Mr Obeysekere and Mr Alif were allotted 9.99% each of the issued shares. Jayawardena advised the other three that he had persuaded one Tilak Fernando, who was a senior employee at the Tea Department at Consolexpo, to join them in their enterprise and that he ought to be given 20% of the company upon joining. He also told them that he would hold this 20% stock in his name in trust for Mr Fernando until he joined the company. As a result of the implicit trust and friendship between them, this decision was agreed upon without any suspicion or doubt.
It was also agreed that the remaining 20% of the issued shares of the company would be allotted to Haris Hullugalle and Arjuna Hulugalle, for having provided the company with the use of its office premises, staff and other infrastructure. These shares, which were initially allotted to one A.C.M. Villavarayan (who was an employee of the Hulugalle brothers), were later transferred to the Hulugalle brothers. The two ‘Subscriber Shares’ of the company were allotted to two employees of the Hulugalle brothers.Mr Obeysekere and Mr Alif together with Mr Jayawardena were appointed as directors of the company and Mr Vittachi became its Chairman. Mr Jayawardena was appointed as the Managing Director. In addition, the said A. C. M. Villavarayan was also appointed a Director, since he was assisting in setting up the company. Mr Villavarayan resigned as a director of the Company in or about December 1978 after the company had got off the ground.
Neither Mr Fernando nor Mr Haris Hulugalle nor Mr Arjuna Hulugalle were appointed as Directors of the company, since the formation, goals and operations of the company were initiated, decided upon and executed by the four friends acting in consultation with each other. Thereafter the Hulugalle brothers informed them that they wished to sell their shares. Consequently, Mr Obeysekere and Mr Alif purchased 5% each of the shareholding of 10% held by Mr Arjuna Hulugalle, which resulted in their respective shareholding increasing to 14.99% each, in the company. The shares of Mr Haris Hulugalle were acquired by Mr Jayawardena.
In 1982, they agreed to appoint one Dr. Ghaffar and Srinath Sirimanne to the Board of Directors of the Company. Dr. Ghaffar and Mr Sirimanne who were employees of the company, were so appointed in view of their expertise in the manufacture of tea and export of other produce. Neither Dr. Ghaffar nor Mr Sirimanne participated in any policy decisions of the company, which continued to be carried on by the directors. In 1978, they decided to form a separate company for the purpose of trading in Green Tea.
This company was called Milford Exports Ceylon Limited. The structure was the same as Stassens. It was intended that the shareholdings of Milford Exports (Ceylon) Limited would reflect the shareholdings in the company.However, at the time of deciding upon the share allocation of Milford Exports (Ceylon) Limited, Mr Jayawardena convinced the others that he would hold the 20% of the issued share capital proposed to be allotted to the Hulugalles’ in his name in trust for the latter since the political situation at that time was extremely unfavourable towards Mr Haris Hulugalle and a direct shareholding by them would be detrimental to Milford Exports (Ceylon) Limited at that time. “As a result of the implicit trust and friendship between them, this proposal was agreed upon by the petitioners without any suspicion or doubt. In fact, subsequently Haris Hulugalle was accused of being involved in a Naxalite conspiracy against the government,” the petitions said.
As such Mr Jayawardena held 60% of the issued shares of Milford comprising his allocation of 20% and the remainder which he claimed to hold on trust as aforesaid. Milford thereafter, expanded into a successful exporting company, achieving a high status in the tea industry and winning the Presidential Award for export of food and beverages consecutively for five years. With the rapid growth of Milford as well as Stassen, they decided to invest the profits and reserves of the two companies in strategic investments in other companies.
The first major investment that was made in Hatton National Bank in 1988. They purchased a shareholding in the Hatton National Bank through Milford and made in Hatton National Bank in 1988. They purchased a shareholding in the Hatton National Bank through Milford and Stassens totalling a sum Rs. 77.7 million. Substantial direct investments for strategic purposes were made by Stassens and Milford in Lanka Milk Foods, Distilleries Company of Sri Lanka, Madulsima Plantations, Limited, Balangoda Plantations Limited, Browns Beach Hotel Limited, Sampath Bank Limited and Milford Holdings Limited.
Through these companies the four managed to acquire substantial or controlling interests of Balangoda Plantations Limited, Madulsima Plantations Limited, Brown’s Beach Hotel Limited, Ambewella Farms Limited, Pattipola Farms Limited, Milford Holdings Limited and the Sri Lanka Insurance Corporation Limited.
In 2005, the three noticed a gradual change in Mr Jayewardena's attitude towards them and in the manner in which he conducted his affairs in relation to Stassens and Milford. The first signs of a strain in the friendship, trust, bond and partnership between the two parties surfaced during this period. This change had initially manifested itself during the period that Jayawardena was appointed to various positions in government and State corporations, such as Senior Advisor to the President, the Board of Investments and SriLankan Airlines. He began to pursue an aggressive business strategy, often testing the limits of legality, which created discomfort and concern to the other three directors. When they expressed these concerns to Mr Jayawardena, he showed displeasure at his “authority” being challenged and openly intimidated them into submission to his decisions.
Culture of fear
He threatened to use his majority powers in Milford and Stassens and his political powers through connections in government to cow them into submission. This deterioration in the relationship led to Mr Jayawardena increasingly acting unilaterally in managing the business and making decisions that impacted the parties. His public behaviour and his behaviour towards competitors and staff, creating a culture of fear and intimidation, caused them to reasonably believe that Mr Jayawardena could in fact carry out his threats.
Acting unilaterally and dictatorially he began making investments through Milford and Stassens and the other companies under the investment umbrella of these two firms. Mr Jayawardena had not told or consulted the others when making or procuring these investments such in Aitken Spence & Company Limited, DFCC Bank Limited, Lanka Bell Limited, Lanka Hospitals Limited (Apollo Hospitals) and Asiri Hospitals Limited, all of which are held or controlled through Distilleries Company of Sri Lanka, its subsidiary Milford and Sri Lanka Insurance Company Limited.
Mr Jayawardena started Stassen Distributors Limited, set up for transhipment of food products without the knowledge or approval of the others and they are completely excluded from this firm. He along with one Mr. Jansz are the signatories to all the bank accounts of Stassen Distributors. The use of the name “Stassen” in this company has not been authorised by the three directors.
They addressed a personal note dated 13th June 2005 to Jayawardena, setting out the essence of their grievances and concerns about the manner in which he was behaving and requested him to remedy these matters.
This letter requested him to stop humiliating the three directors, provide the parties with proper and transparent return on their interests by the declaration of regular formal dividends; and to consult and keep each of them informed of major investments or decisions with regard to the companies of the group.
On the 15th of July 2005 the estranged three wrote requesting Mr Jayawardena to cease his oppressive conduct. Here they protested against the manner in which the affairs of Stassens were being conducted and in particular the acquisitions made by these companies; the unlawful exercise of powers by Mr Jayawardena; the possible violations of law that may have arisen from the acquisitions made by him and requested him to enter into a legally binding shareholders agreement and honour sound corporate governance policies.
They met Mr Jayawardena in an attempt to discuss the issues between them and resolve their differences amicably. However, these discussions proved absolutely fruitless, since the he turned violently abusive towards Mr Vittachi, even threatening to shoot him. He further made it clear that only he and he alone could give any directions relating to Stassens, Milford and the other companies within the group.
Thereupon, much to the surprise of these three, Mr Jayawardena wrote to Mr Vittachi on 20th August 2005, addressing him as the Company Secretary of Stassens and Milford directing him to summon extra ordinary general meetings of Stassens and Milford to determine the outcome of the letters the three had written to him before.
On the 6th of October 2005, Mr Obeysekere and Mr Alif met Mr Jayawardena in the Board Room where he agreed to enter into an equitable agreement on how Milford and Stassens should be managed and operated and to also provide for mechanisms by which they could sell-out their interests in the companies or in the alternative buyout Jayawardena’s interests in them.
Mr Jayawardena in a letter dated 8th October 2005, specifically confirmed to them that the said principles were acceptable and that he too agreed that the four points stated in the said letter should be discussed and a decision arrived at within the time frame set out in the said letter dated 6th October 2005. Around this time, Mr Jayawardena acting through Distilleries Company of Sri Lanka and Sri Lanka Insurance Company Limited, which are companies controlled by Stassens and Milford proceeded to consolidate control over Commercial Bank by moving a resolution to remove its Chairman, Mr. Mahendra Amarasuriya and to substitute him with Mr Jayawardena’s nominee.
The three directors were not informed or consulted in this process. Mr Jayawardena started intercepting correspondence that had been specifically addressed to Mr Vittachi, Chairman of Distilleries Company to prevent him from responding to crucial queries addressed to him in that capacity by the Chairman of Commercial Bank .
Mr Jayawardena thereupon presented the directors with fait accompli in the form of a backdated circular resolution of the Board of Directors of Distilleries Company purporting to authorise the aforesaid course of action, which Mr. Obeysekere and Mr. Vittachi had no alternative but to reluctantly sign, in order to preserve some semblance of a relationship with Mr Jayawardena, particularly in view of his agreement to the principles set out in the letter dated 6th October 2005.
To the amazement of the three directors, they received a letter dated 16th January 2006 from Mr Jayawardena referring to their letter of 12th December 2005, the Draft Shareholders Agreement and the reminder dated 11th January 2006, completely reversing his previous commitment made by the letter dated 8th October 2005 and stating that he did not wish to proceed with the Agreement as the largest shareholder of the companies in question and that such an agreement was not in his interest.The three friends sought the intervention of an Attorney – at – Law, who had a long association with Mr Vittachi and Mr Jayawardena, having been on the Board of Directors of Sri Lanka Insurance Corporation Limited to seek his intervention to facilitate a settlement by way of a buyout or sell-out of the shares of the respective parties, since any hope of re-establishing a working relationship had faded. Consequently, they were informed by him that Mr Jayawardena had agreed to work towards a settlement and that he had requested them to forward a valuation of all of their respective interests in Milford, Stassens and several other entities through which they together with Mr Jayawardena had made strategic investments.
They retained the services of Ernst & Young, Singapore, to conduct a comprehensive valuation on the companies in May 2006. This was completed in October 2006. The valuation was at a high of Rs. 27 Billion.
During this time, Mr Jayawardena made deliberate attempts to alter the balance of the Board of Directors of Milford and Stassen in order to weaken the position of the directors within the group, strengthen himself.
He also took steps to oust Mr Vittachi from the Chairmanship and the Directorate of DCSL, attempted to remove him from the Chairmanship and Directorate of Milford and Stassens and appoint his wife and another nominee of his to the Director board.
Having removed Mr Vittachi from the Directorate of DCSL and consequently from the chairmanship, Mr Jayawardena caused himself to be elected as the chairman of DCSL, in addition to his position as its Managing Director. At the DCSL AGM in response to a query regarding the absence of Mr Vittachi, Mr Jayawardena misled shareholders by informing them that he had resigned from the position of director of DCSL for personal reasons.
The three directors became aware that Mr Jayawardena had instructed the Financial Controller of Stassens not to make any payment due to Mr Vittachi and by a letter on 6th December 2006, they informed Mr Jayawardena that he was acting unlawfully and to withdraw the said instructions.
On the 6th of December 2006, when Mr Vittachi attempted to enter the office premises of Stassens (which also houses the Milford office), he was refused entry by security personnel who claimed that they were acting under the instructions of Mr Jayawardena. Thereupon, Mr Vittachi made a complaint to the Grandpass Police Station that he was being prevented from lawfully entering the office premises of Stassens of which he was the Chairman and director.
Subsequently after a series of court actions filed by Mr Vittachi and counter actions by Mr Jayawardena, the latter held a Stassen’s board meeting without informing the three petitioners. At that meeting Mr Jayawardena elected himself as the chairman in the absence of the other three directors, effectively removing Mr Vittachi as chairman. The petitioners objected following these unlawful actions.
The day after at another meeting, Jayawardena appointed his wife, Mrs. Priyadharshini Jayawardena and Mr Cedric Royle Jansz to the Stassen’s Board of Directors.
Then in July 2007, Mr Jayawardena presented a valuation from M/s KPMG India, of Stassen’s and its subsidiaries and associate companies. However the contents of this document was no more than a broad comment on the Valuation prepared by M/s Ernst & Young, Singapore submitted by the petitioners to Mr Jayawardena.
M/s KPMG, India’s valuation of the entities was Rs. 2.6 billion against Ernst & Young’s median valuation of Rs. 24.67 billion. This valuation was absurdly low, as manifested by the fact that the offer the petitioners had made to Mr Jayawardena for his proportionate interests, exceeded four times the total value given by M/s KPMG on all of the companies.
Consequently several rounds of discussions were held between the facilitator and the respective auditors in Singapore and in New Delhi at their respective offices during the month of August 2007 and between the representatives of the parties and the auditors in the presence of the facilitator in Singapore in September 2007.
Both parties failed to reach an agreement and the Attorney withdrew from his role. In January 2008, Mr Jayawardena told the petitioners he was no more interested in negotiations and told them to do whatever they wanted.
Worsening the situation, he also issued an office memorandum to all staff stating that all official travel “should be undertaken without my specific approval. Same will apply to the other members of the staff as well. No official travel should be approved to any member of the staff, without consulting me. This has become necessary as travel undertaken for the last few months by various Executives and Directors have not been beneficial to the Company and little or no results have been achieved. It has now become the practice for the slightest excuse to send various people overseas when such expenditure is not justified compared to the usefulness of the trip.”
The increasing hostile situation faced by the petitioners led to a deterioration of the health of Mr Vittachi who at his request, transferred his shares in Stassen Exports Limited and CBD (save one share each) to the third respondent (his daughter and soe heir).
Then having exhausted all avenues to amicably settle the differences, the petitioners sought relief in court. The petitioners state that at times Mr Jayawardena became abusive and even threatened physical harm during the time when the relationship soured.
They said that Mr Jayawardena ran the companies as if it was a proprietary concern and that the basis and / or foundation upon which the company was incorporated has now ceased to exist. They said Mr Jayawardena was continuing to exclude the petitioners from the management of the company and run it as he solely wishes.