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Sri Lanka

Employee share trusts (EST) of listed companies established with the purchase of shares, unlike employee share option schemes (ESOP), were not subject to shareholder or Colombo Stock Exchange (CSE) approval until May 2001. The rationale for this was that an ESOP would require an increase in the issued capital of the company, whereas an EST, established by the purchase of shares, does not dilute an existing shareholder's holding. If, however, the company was issuing new shares for the purpose of establishing an EST, then the approval of shareholders and the CSE was required. Under the Companies Act (1982), paragraph (b) of the proviso to §55, a company is expressly empowered to give financial assistance towards the purchase of shares to be held by or for the benefit of employees of the company.

The recent establishment of an EST by a leading hotel chain, amid rumours of a possible hostile takeover, prompted the CSE to issue a new listing rule effective May 9 2001. Under this rule, prior approval of shareholders by special resolution at a general meeting is required where a listed company, directly or indirectly, provides funds for the purpose of "creating or establishing a plan, scheme or arrangement enabling its shares to be purchased or to be held by any existing or new entity, director, employee or shareholder of such listed company, any person or by a trust or similar device created for such purpose".

The new rule restricts the discretion vested in the board to utilize an EST to encourage and motivate employees. Shareholders' and employees' interests may not necessarily be co-terminus. This may result in conflict and thwart management objectives. It is significant that the listing rule is limited to the creation or establishment of a plan, scheme or arrangement and does not envisage any subsequent acquisition of shares for the benefit of employees under such a plan.

Anandi Gunawardhana

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