HDFC-Max deal: Proxy firms question non-compete fee

The merger of HDFC Life and Max Life has already started drawing fire of proxy advisory firms, within days of the announcement on the formation of the country’s largest private sector insurance company.

The advisory firms have questioned the rationale of the Rs 850-crore pay-out as non-compete fee to the Analjit Singh-led Max group.

The non-compete fee will be paid by the merged entity rather than by the acquirer. “So, the current minority shareholders of Max Financial Services (parent company of Max Life) will have to bear part of the non-compete fee," said Sriram Subramanian, founder and managing director of InGovern Research Services, a proxy firm.

Amit Tandon, founder and managing director of Institutional Investor Advisory Services India Limited (IiAS), has also questioned certain aspects of the deal that are seemingly unfavourable to the minority shareholders.

“The promoters of Max remain as shareholders of the combined entity so will not compete with themselves. Second, as a small investor, not only do I not get the same price, I get to hold shares in an entity whose net worth will be reduced, and eventually the book value, too, after the pay-out,” Tandon added. On Monday, HDFC Life and Max Life Insurance announced a swap ratio of 3:7 for their merger, expected to be completed in 12 months. The deal envisages non-compete fee of Rs 501 crore, payable after the transaction is completed. Singh will not be able to start a life insurance business for four years, according to the agreement. Besides, the promoters will also receive three equal instalments totalling Rs 349 crore. In total, there would be a pay-out of Rs 850 crore.

A legal expert said there have been several instances in the past where the Securities and Exchange Board of India (Sebi) was displeased with the conditions and considerations of such deals. "Whatever is the consideration for the non-compete fees, the value which needs to be considered is one that the buyer has paid. Accordingly, the same is required to be paid to the shareholders and that is how it protects the interest of (minority) shareholders," said R S Loona, managing partner, Alliance Corporate Lawyers.

In a joint press statement, both the companies had said the pay-out of non-compete fee was subject to a resolution cleared by minority shareholders.

Max Financial Services will seek an upfront approval of its public shareholders (greater than 50 per cent of the votes cast) for payment of the non-compete fee and Max Life will seek consent from its shareholders holding more than 75 per cent stake for the proposed transaction. Separately, Max India will also seek an upfront approval of its public shareholders for the proposed transaction, the press release had said.

The proposed transaction will also need the approval by a majority of shareholders and voting will be at court-convened shareholder meetings of each at HDFC Life, Max Life, Max Financial Services and Max India. The closing of the proposed transaction will also be subject to certain conditions, including regulatory approvals.