Avoid the 'template' approach

When the holding of each promoter is significantly high, an open ended SHA can lead to major turbulence in the organisation as is in the case of Indigo where each promote

Indigo has hit an air pocket. It is surprising that the most successful airline in the country with a market share of over 40 per cent is getting into a gridlock on their growth strategy, thanks to an unexpected way the shareholders agreement between the two promoters is reaching an end point. While the matter appears to be simple and legalistic, it actually has major possible implications for the future of the organisation and its stakeholders. We will discuss the importance of a well-crafted shareholders agreement and the need for its dynamic alignment with the organisational strategy to protect the long-term interests of all stakeholders. 

A shareholders agreement (SHA) is a legally valid contractual agreement among a group of shareholders, normally among promoters. It is critically important to define the terms and conditions of transfer and transmission of shares by the signatories, particularly if it involves outside the families of the promoters. The crucial role of SHA was first widely discussed and recognised when Emami took over Zandu Pharmaceuticals in 2009. Due to major disputes between the two promoter families, the Vaidya family decided to sell their entire 23 per cent promoter stake to Emami without first offering it to the Parekhs, the other promoter with about 18 per cent stake. The transaction could not be stopped by the Parekhs as no SHA existed between the promoters. 

Since then family businesses and business partners have generally been cautious to have a clearly drafted SHA to avoid ambiguity of ownership that might impact the family and business. Such a SHA would also have an exist or termination clause, always prepared based on multiple scenario analysis of  the implications of the chosen exit route on the promoter family and the organisation.

When the holding of each promoter is significantly high, an open ended SHA can lead to major turbulence in the organisation as is possible in the case of Indigo where each promoter has over one-third holding. Naturally, an outside buyer will have significant influence on the organisation’s strategy and performance. There are likely to be major headwinds created in the process affecting its strategy and leadership. 

Wealth implications to other promoters/shareholders is also high. A badly drafted SHA can lead the families end up experiencing avoidable hard landing, all due to pilot error. Since a lot of the promoter wealth is locked in shares that are dependent on market caps and valuations, major lapses in managing the SHA can give rude shocks to the families involved. 

Given that ownership structure and organisational strategy are intertwined, both need to evolve with time to be in tune with the changing aspirations of stakeholders and market dynamics. If the SHA is frozen in time, specific clauses in the SHA may pose significant leadership challenges to change strategy. For instance, the Indigo promoters ought to have recalibrated the SHA while going for listing or later by synergising the same with the growth strategy; this is particularly so in a VUCA world. 

Therefore, family owners and business partners must recognise that just crafting a well thought out SHA is not good enough. They have to revisit the SHA periodically, make amendments or fine tune specific clauses of the SHA and sometimes add new clauses so that SHA never hinders management to change strategy being in sync with the changing dynamics of the market and keep the organisation nimble, flexible and responsive. 

Promoters should ensure that they study the policies and processes forming part of a SHA. They should not be “template”-driven and blindly go with external advice without understanding the implications of any provision. Unfortunately, not all smart business leaders are aware of the criticality of a well drafted, completely contextualised SHA. They should do multiple scenario analysis and develop a SHA that is appropriate for their context.

Indigo co-founders/promoters not paying adequate attention to this aspect prior to listing has triggered a crisis. This, like the Zandu Pharmaceutical case, must raise an alarm bell among the family owners and business partners to not only reinforce the need for crafting robust and well thought out SHA for respective organisations, but also highlight the need for revisiting and recrafting SHA from time to time. It also raises question about the prudence of continuation of certain clauses of SHA of the promoters prior to listing that may fall foul with the letter and/or spirit of corporate governance in an organisation listed in the stock market.

Share ownership and strategy have to be closely aligned fundamentally. It is basic that any discussion on ownership structure, shareholder agreements and strategy of both family and business, involves assessment of the implications of the decision on every constituent of the system; this is crucial to help protect individual promoters’ interests and also the institutions they create. The heart of a SHA lies in trust but the legal provisions should provide to protect it always. 
 

Ramachandran is professor and executive director, Thomas Schmidheiny Centre for Family Enterprise, Indian School of Business; Ray is professor, Indian Institute of Management Calcutta