Who is "Fit and Proper?"
CL Financial steps up its claim on Republic Bank
by Peter D Neptune- Managing Editor
Why would the Pension Fund decide to sell its most valuable shares just as it was about to cash in on the capital gains of the market?
As head of the southern Caribbean's largest bank, John Jardim's dream of a smooth transition of power when he retires at the end of this year seems destined to be a nightmare. And, the nightmare constantly evolves, as each player in this high-stakes game for control of the bank's "plays his hand." Buoyed by windfall profits following the flotation of the its dollar three years ago, Trinidad and Tobago saw its finance industry soar to new heights. The free flow of foreign exchange and stronger economic activity resulted in record profits of more than TT$500 million annually for the sector.
Bank assets also skyrocketed with funds under management by the two major banks surpassing US$1.3 billion (TT$7.8 billion) each. Controlling a hefty share of the local foreign currency market, Republic Bank led the growth in the finance sector with profits of more than TT$100 million following the year of the float. With further economic liberalization entering the equation, it became possible for banks to introduce new products and services which are routinely found in the developed world. This again boosted the non-interest earning portfolio of the banking sector to become a significant contributor to total revenue. On July 1, Republic Bank's board announced the appointment of Ronald Harford as Deputy Managing Director with the intention of having him succeed current Managing Director, John Jardim, when he retires in December.
Harford's was one of the first in a line of appointments to
be made by the board. These new appointments were part of a succession
planning program being pursued by the board to ensure continuity
in its operations and to sustain growth. However, this was not
to be, as the Bank's largest shareholder Colonial Life Insurance
Company (Clico), objected to the appointment program. 
While the Bank's day-to-day operations were progressing smoothly, behind the scenes, the Board was doing a balancing act. It sought to identify common ground for managing the Bank's developmental program with the growing challenge being presented by the Bank's major shareholder, which has been looking on patiently at operations from the sideline. With relations between Republic Bank's board and Clico reaching a climax, the Bank initially offered the soon-to-be vacant post of Managing Director to Michael Mansoor- again without consulting Clico.
At the time, Mansoor was Managing Director of ANSA McAL, a conglomerate based in Trinidad. The response was swift. Clico immediately called for an Extra-ordinary General Meeting (EGM) to change the Board. The insurance firm targeted at least eight of the eleven members of the board for removal. In fact, only Managing Director designate, Ronald Harford was asked to stay. Another executive, Ronald Huggins, who headed Republic's subsidiary, Bank of Commerce, was also proposed as director. Deeming the Board's decision to offer Mansoor the post of Executive Director and its refusal to register Clico as the owner of an additional 107,041 stock units purchased by the investment company several months ago as a: "challenge to its constitutional right to own property," Clico's corporate secretary, Peter Salvary says they were left with no alternative but to petition an Extra-ordinary General Meeting to have the present board "significantly changed."
"In refusing to register our shares, the Bank has assumed the role of regulator, contrary to the dictates of the legal authorities. The Board also appointed a senior executive of a competing conglomerate to the Bank's executive team without prior consultation. "Even after receiving a letter expressing disapproval at this course of action, the Board proceeded to appoint another person to the position of Deputy Chief Executive Officer. "When the EGM is approved, we intend to appoint, to the board of Republic, a number of persons who are more sensitive to the responsibilities of the institution, inclusive of those of its shareholders," says Salvary.
Under the Financial Institutions Act of 1993, the Central Bank of Trinidad and Tobago (CBTT) has the power to determine whether a shareholder in the financial sector is "fit and proper" to hold controlling interest in a bank. After an investigation into Republic Bank's claim, the CBTT acknowledged Clico's claim to the majority shareholding. In stating its willingness to review the situation if new information surfaces, the CBTT noted that it will be monitoring the activities of, not only the controlling shareholders, but also the directors, controllers and managers of financial institutions in order to be assured that they are "fit and proper" in accordance with the Law.
Despite this declaration, Republic Bank contends that Clico
is still legally not "fit and proper" to be its major
shareholder claiming that this can be proven by a detailed look
at the investment firm's business relationship with the Board
over the past five years. These strategies, the Board argues,
have not been in the best interest of the Bank and the financial
community as a whole. In an advertisement defending their position,
the Bank stated that: "twenty-five hundred Trinidad and Tobago
Electricity Commission (T&TEC) Pension Plan members were powerless
when their Pension Plan's shares in Republic Bank were sold at
$9.46 fifteen months ago, only to see the value rise a whopping
$19.02 by July 1996." The Board also expressed the fear that
if Clico successfully removes it, the legal action being pursued
to reverse this transaction may be dropped.
Despite absenting himself from the decision-making procedure involving the Bank's stock, Andre Monteil was both Chairman of the T&TEC Pension Plan Committee and a senior executive at Clico. According to sources, as trustees of the fund, Republic Bank should have been informed about the sell-off in advance, as this would have allowed for more investors to bid for the shares. Due to the decision to sell, the Fund lost a significant part of its portfolio with had a high growth potential, he adds.
Apart from the Republic Bank shares, the Pension Fund Committee
also sold significant portions of its holdings in Angostura Limited,
Bank of Nova Scotia Trinidad and Tobago Limited, Lever Brothers
(WI) Limited, Royal Bank of Trinidad and Tobago Limited, Trinidad
Cement Limited (TCL) and West Indian Tobacco Company Limited.
"Most of these shares were purchased by Clico- a subsidiary
of the C L Financial Group, and Viveka Holdings, a private holding
company whose board consists of some members of the current Clico
board. We estimate that Clico and Viveka together have made about
TT$100 Million off the purchase of the Fund's equity portfolio,"
says the source.
"The main question in our minds right now is: Why would
the Pension Fund decide to sell its most premium shares just as
it was about to cash in on the capital gains from the market?"
Errol McLeod, President of the Oilfield Workers' Trade Union,
whose members make up the majority of the Pension Plan of T&TEC,
estimates that each worker lost about TT$40,000 in potential pension
benefits as a result of the Fund's equity sell-off. 
"That portfolio has gained TT$97 million since it was sold on March 10, 1995. If you take the capital gains and the dividends and you divide that by the estimated 3,000 beneficiaries, each of them would today be in receipt of some $40,000 each." He places the blame for selling the equity on the shoulders of the Fund's Management Committee. McLeod claims that the decision to sell T&TEC's equity portfolio came two weeks after the committee received a recommendation from Trinidad and Tobago Stocks and Shares, a brokerage firm, to increase its investment in equities.
Quoting the broker's recommendation, he noted: "It is our view that the economy appears to be now firmly set on a growth path and we therefore recommend a shift in our investment policy. "Under these circumstances, we suggest you consider increasing you investment in equities from 23 percent to 30 percent, while reducing your bond and money market investment to 70 percent. This would allow your portfolio to benefit from capital gains on the stock market, while having the ability of retaining the necessary liquidity requirement. Republic Bank, Royal Bank and the Bank of Nova Scotia all had good results in their last financial year and are expected to continue this trend in 1995." The Management Committee did exactly the opposite, says McLeod.
Focusing on the issue of Clico's qualification for being a "fit and proper" majority shareholder, Republic has argued that banking is based on trust and because of Clico's track record in its previous agreements with the Board, it cannot be entrusted with control of the country's largest financial institution. So far, the courts have disagreed and the Board's case against Clico was dismissed as, according to Justice Anthony Lucky, "there was not enough evidence to show a breach of trust."
In handing down his judgment in the case, Justice Lucky said Clico bought the shares legally on the open market, at the stock exchange, in accordance with the provisions of the Securities Industries Act. "The transaction was open, as opposed to closed or private, and I find that there was no evidence to implicate Mr Monteil (then Chairman of the T&TEC Pension Fund) or the other defendants as manipulating the stock exchange. "With respect to the fair dealing rule... the shares were sold on the open market at the stock exchange at the highest price on the day of the sale. Viveka does not owe a duty to the beneficiaries who, based on the share price index made a considerable financial gain."
Following Clico's announcement to call an EGM, both institutions launched massive advertising campaigns in both the electronic and printed media. In a stating its case to the public, Republic noted that it: "shoulders a tremendous responsibility in handling other people's money and the ideals of independence and integrity create confidence in a country's banking system.
"The Republic Bank board of Directors is concerned that a major conglomerate which is involved in a wide range of non-banking commercial activities, may compromise the bank's independence and integrity." It stated that the Board was serving the interest of not only the majority of its 12,000 shareholders but its customers, staff and the integrity of the financial system as well. The statement ended by urging the public to put pressure on the legislature to change its policy to prevent Clico from changing the Board. "We see the advertising program by the Republic Bank board as an act of desperation," says a source at Clico.
"We have invested a lot of our resources into this Bank and we have a legal right to appoint members of the Board and to have a say into how the Bank is being run. "In the past, we have maintained a hands-off attitude and allowed the board to oversee the everyday affairs of the institution, but we feel that their insistence on hiring an executive from a competing conglomerate, as well as withholding access to our property is going too far. We have had enough. "Their action is desperate because they know they do not have a legal basis for what they are doing. They want to hold on to power and are ignoring the directives being handed down to them by the regulatory bodies.
"They are taking it upon themselves to determine who should be 'fit and proper' owners of the Bank," says Corporate Secretary, Peter Salvary. "What they are saying is that Clico is not 'fit and proper' to be majority shareholder in the Bank, but they, or some other party they may endorse, are 'fit and proper' owners. That choice is simply not theirs to make. "The courts have also thrown out the case that Clico is not 'fit and proper' to hold a majority interest in the bank," he adds. "Clico has been patiently investing in sectors of the economy where it sees high potential, and the banking sector is a major part of this portfolio. We also have holdings in other banks, both locally and within the region. So their claim that we are not 'fit and proper' to be a majority shareholder is ridiculous."
Many stockbrokers agree with arguments put forward by Salvary, but because of the wider impact of the Bank on the economy and the financial system, they suggested that it would be better to find a negotiated settlement to the crisis. "Republic Bank shares were bought at the going market rate of $9.46 and it was just one of the many investments made by the CL Financial Group. Also, Republic Bank's shares were not the only investment that paid off very well, all the other investments appreciated by about 40 percent on average," says a local stockbroker.
"The Bank's board of Directors sole responsibility is to look after the shareholders interests and a fundamental right of shareholders is to choose their board of Directors. The issue that the board of Republic has chosen to deal with is not theirs to decide. It is the shareholders who have the right to vote at the EGM and to sell their shares if they want. "The proper approach would have been to fairly disclose the unbiased facts to the shareholders only, and allow them to decide their future as corporate law and the incorporation documents for the Bank provide. Once you put shares up for sale publicly, a company looses control over ownership. "You cannot, after the fact decide you don't like your new owner and discriminate against him," he adds.
While Trinidad's Finance Minister, Brian Kuei Tung and Attorney General, Ramesh Lawrence Maharaj were offering themselves as mediators in the issue, both Republic Bank and Clico were busy forging alliances for the upcoming battle at the EGM. Initial reports revealed that Clico had the support of Barbados based CIBC (West Indies) Limited, the third largest shareholder. Two CIBC directors, including current Managing Director, Sastri Ablack were even presented as new directors to replace directors marked for dismissal. But up to press time this was not confirmed and Republic Bank's board was able to woo them back. "We have always stood by Republic Bank management in this investment and we see no reason to change our position now," says Joseph Krukowski, an executive at CIBC. He also asked Clico to remove his name as one of the proposed Board members, in the event that they are successful at changing the Republic board.
Despite the advertising campaign, and the alliances being forged between the two parties, Clico seems to be holding the 'trump' card, and has been winning each of the legal actions being bought against them by the Bank. Now, a lot seems to be riding on the outcome of the other court matters and appeals which have been filed between the Bank and its largest shareholder. Even though the board managed to avoid the EGM which was set for mid-August, Clico can still wait until the end of the financial year to play its hand at the regular Annual General Meeting.
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