Break pact with Mallya, proxy firm tells Diageo

SES also says shareholder pacts infringe rights of other shareholders; asks Sebi, MCA to take suo motu action

Proxy advisory firm Stakeholders’ Empowerment Services (SES) has advised Diageo to renege on its deal with United Spirits Ltd (USL) Chairman Vijay Mallya, if it is convinced of the findings of a forensic report.
 
“Diageo is in a catch-22 situation — should it honour its SHA (Shareholder agreement) or protect USL and its other shareholders? SES is of the opinion that if Diageo is convinced about the findings of (an internal) report prepared by USL MD & CEO, in accordance with fiduciary duty it has to other shareholders, it must renege its commitment under SHA,” the firm said in a report.
 
In response to queries on the shareholder agreement between Mallya and Diageo, a Diageo spokesperson said: “UBHL remains entitled under SHA to nominate one director to the USL board, subject to them continuing to hold at least 1,307,950 shares in USL and Dr Mallya continuing to control UBHL. Diageo’s contractual obligations to support Dr Mallya continuing as non-executive director and chairman of USL are subject to these conditions as well as the absence of certain defaults by UBHL or Dr Mallya. The terms of the shareholders agreement are subject to a confidentiality agreement.”
 
Experts said law in India did not recognise Super Share or Super Shareholder. However, indirectly an individual or an entity can act as super shareholder by recognising SHAs such as the one between Diageo and Mallya’s entities. Not only that, law has also permitted that the agreement remains confidential between the shareholders concerned.
 
“Such an arrangement allows a person or entity to exercise disproportionate authority, as is the case of USL. The agreement between Diageo and Dr Mallya (UB Group) allows Dr Mallya to remain chairman till he and UB group jointly hold more than one per cent equity and Diageo is bound to vote along. This effectively makes one per cent ownership equal to 55.78 per cent (assuming Diageo at 54.78 per cent and Dr Mallya at one per cent) stronger than rest 44 per cent in the present case,” the firm said in its report.
 
SES questions such provisions of law and specially the reason for these agreements to remain secret. “It seems the price paid by Diageo to Mallya was only for sacrificing economic benefit underlying the shares as political rights are retained by Dr Mallya indirectly through SHA. SES raises the question whether this does not amount to violation of provisions of the Sebi regulation that requires same price be paid to public shareholders as paid to controlling shareholder under open offer? While the public shareholders gave up both economic and political rights, Dr Mallya gave up only economic rights for same consideration. In fact, it amounts to reverse of control premium.”
 
SES said in its report: “In case USL has not referred the matter to Sebi/Ministry of Corporate Affairs (MCA) and stock exchanges, Sebi/MCA and stock exchanges should suo motu seek information from USL and initiate action under applicable laws to protect integrity of market and prevent corporate frauds.”
 
MCA and Sebi should both look into desirability of secret SHA giving super shareholder benefits to any one shareholder. In fact, if all these SHAs are allowed, they should be in public domain and should need to be ratified by shareholders at shareholder meetings, SES added.
 
Asked if the company had informed, a spokesperson for USL said that based on the facts and findings from the inquiry, “the USL board considered that a legal duty to report various improprieties and legal violations to the relevant government authorities had arisen. As such, the board of USL has directed the company to report the transactions in question to the authorities, as required under applicable law.”