Watawala serves itself amidst Treasury, SEC and minority shareholders anger

Majority stakeholders of Watawala Plantations Plc (WATA) yesterday voted in favour of the contentious sale of cash-cow marketing subsidiary to parent Estate Management Services Ltd. (EMS) despite concerns and objections raised by the golden shareholder the Treasury, the Securities and Exchange Commission and minority shareholders.

The special resolution for the 100% stake sale of subsidiary Watawala Marketing Ltd. (WML) came up for multiple questioning by minority shareholders at the EGM yesterday, but the management failed to come up with clear answers.

Before the resolution came up for vote, the golden shareholder’s representative Deputy Director General of Public Enterprises D. Senanayake in fact publicly expressed the Treasury’s objection and decision not to vote in favour based on advice conveyed by the Securities and Exchange Commission (SEC).

Quoting from SEC’s letter to the Treasury, Senanayake said the advice was “considering the serious impact on the future performance of WATA, we feel that it will be in the best interest of you (Treasury) and minority shareholders if you vote against the resolution”.

She also tabled a letter from the Treasury to the management. SEC’s intervention follows minority shareholders making representations.

Despite the high profile objections and reservations and anger of minority shareholders, the resolution was passed with 78% in favour and 8% opposing and the balance abstaining. Of the 18,240 registered shareholders, 96% classify as minority with a collective stake of only 10%. Not all were present whilst some of those who hold big chunks of minority stake had sided with the management.

As exclusively reported by the Daily FT yesterday, the resolution was for EMS to buy out WATA’s subsidiary for Rs. 741.6 million, double the price of the carrying value of the original investment into the subsidiary by WATA. EMS holds a 54% stake in WATA.

Sensing some degree of apprehension on the part of minority shareholders, some of the representatives of the Board came to the EGM with bodyguards. Among those who raised questions or issues were minority shareholder activist K.C. Vignarajah, owning a 0.56% stake, and Ceybank Unit Trust, owning slightly over 7%. The other major outside shareholder is M.M. Udesh’s Mouldex Ltd., owning 19%.

WATA’s minority shareholders questioned and opposed the valuation of the sale price, risk on viability of WATA sans profit-making subsidiary, planned sale sub optimal in terms of achieving WATA’s objective, lack of transparency on account of related party transaction and common directors’ conflict of interest, all of which exposes good corporate governance issues.

Minority shareholders had opined that the valuation wasn’t adequate considering the profit potential of WML and since selling it would also make WATA vulnerable, heightening overall business risk. The sale as it is proposed would also make WATA’s majority unduly gain at the expense of minority shareholders.