Defeat of Mistry resolution could trigger open offer in Indian Hotels

Mistry would be able to control policy decisions with other board members, says proxy firm SES

Proxy advisory firm Stakeholders' Empowerment Services (SES) has said that if the resolution to remove Cyrus Mistry from the board of Indian Hotels (IHCL) gets defeated at its extraordinary general meeting (EGM) next week, he might have to make an open offer to acquire shares under the takeover regulations.

"In the eventuality the Resolution is defeated, Mr. Mistry will have to make an open offer alone or along with Board members who had supported him. SES understands that it is an opinion which appears to be peculiar, but it is on a situation or case which is as peculiar as it can be," SES said in a voting recommendation report ahead of the December 20 EGM.

It added that although such a situation probably had no precedence in the Indian corporate history, "it will be interesting to see view of Market Regulator SEBI on the issue."

SES has picked Indian Hotels because it is the only Tata operating company, where the entire board had unanimously supported Mistry. IHCL board includes Mistry's brother Shapoor Mistry, managing director Rakesh Sarna, executive director Mehernosh Kapadia and six independent directors namely Keki Dadiseth, Deepak Parekh, Nadir Godrej, Ireena Vittal, Vibha Paul Rishi and Gautam Banerjee.

The SES report said, "with the Board on his side, Mr. Mistry would be able to control all policy decisions at the board level, either collectively or individually with other Board members. Tata Sons Ltd will no longer have any control over the board, policy or management. This would effectively put Mr. Mistry and other directors in the position of acquirer."

It added that "if it is a case that they are acquirer, then consequences of being an acquirer must follow. The consequences are as per section 4, which requires an open offer to be made."

Proviso to definition of Control excludes a director by virtue of his position, but when it becomes a collective and goes against majority shareholder, it cannot be excluded from definition of control, SES said.

According to Sebi takeover regulations, Rule 2 (1) (a) "acquirer" means any person who, directly or indirectly, acquires or agrees to acquire whether by himself, or through, or with persons acting in concert with him, shares or voting rights in, or control over a target company.

Clause (e) said "control" includes the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner.

It provided that a director or officer of a target company shall not be considered to be in control over such target company, merely by virtue of holding such position.

However, SES recommended that shareholders vote for the resolution to remove the former Tata Sons chairman. SES said that the removal of Mistry as a director was not likely to impact performance of the Company. However, as observed in other Tata companies, there was a high probability that continuation of Mr. Mistry might lead to 'Divided Board' which is a value destroyer for sure. "Thus, keeping the in mind the probable negative consequences of Mr. Mistry continuing on the Board as compared to no positive impact of his continuance and in the best interest of the future of the Company, SES recommends that shareholders should vote FOR the resolution," SES said in the report.