The Supreme Court of India has granted status quo in the ongoing legal battle between United Spirits Ltd. and its lenders, directing the parties not to carry out any transaction pertaining to the sale of United Spirits shares to British liquor major Diageo till April 2014, while allowing the winding-up proceedings against United Spirits to continue.
Now the Court would hear the issue in detail in April. It was argued from the side of the appellants that the deal had received approvals from the Reserve Bank, market regulator SEBI and the Competition Commission of India. It was further argued that the valuation of the shares was transparent, the Consortium of Banks, the Respondents in the present case, was aware of the transaction and there was no wrongdoing.
To that Respondents’ principal counter argument was that not only the transaction was grossly undervalued but also that it was agreed to without their consent. They further argued that the day the permission of the Company Court was granted, the shares had already crossed Rs 2,330 per share. As per media reports, Diageo currently holds 28.78%, including the shares in the disputed transaction in United Spirits. The objective of the entire transaction was to acquire majority stake in USL but that could not be done because various lenders did not release the pledged shares.
So, before the apex court gives a hearing to the detailed arguments and counter arguments, it will serve a great purpose to refresh ourselves to understand the saga of a deal which was cheered by a lot and how it got caught in the legal tangle.
Somewhere in early November 2012, the Indian media sniffed a deal between Diageo, makers of Johnnie Walker scotch whiskey and Smirnoff vodka, with United Spirits Limited (‘USL’), a company synonymous with flamboyant tycoon Vijay Mallya, which has more than half of India’s branded liquor sales. The deal – where Diageo chose to take substantial ownership and management rights in United Spirits Limited — was said to involve a 25% stake purchase for $870 million, or Rs 5,236 crore (‘Deal’). The idea behind the deal, as was declared by the parties to the transaction, was to synergise the mutual strengths of the Diageo and USL. i.e., Diageo’s strengths in marketingand innovation together with USL’s scale, leading local spirits brands, strong routes to market, and an exceptional supply base.
By an order dated 26th February 2013, the Competition Commission of India (CCI) granted its approval to the deal. The acquisition transaction wherein Diageo Plc (Diageo) and its indirect wholly owned subsidiary, Relay B.V. (Relay) shall acquire shares and control of USL. CCI in a detailed order gave its verdict on the likely adverse effect of the deal on the competition and held that: In regard to the narrow price sub-segments in the overall Whisky segment, in which even if the brands of USL and Diageo were considered to be positioned as close competitors, it is observed that there are multiple brands of other players who are present and effectively competing with the brands of USL and Diageo in those segments, and as already observed, the volume in these price segments is also miniscule in comparison to the overall volume of the Whisky segment. Further USL and Diageo are mostly present in different price spectrums in the branded spirits market with negligible overlap between their products in each of the branded spirits segment. As already observed, the proposed combination may bring new products and more variants of the existing brands at different price points which would ultimately enable the consumer to expand his choice set. Moreover, as already stated, the manufacture, production, distribution and sale of alcoholic beverages in India fall within the regulatory purview of the state governments. Under the prevailing regulatory control of the state governments, the introduction of new brands in the market as well the pricing of existing or newly introduced brands of the alcoholic beverages in India is not, therefore, entirely at the choice of the enterprises and even if free from state control, it is determined by the market within the overall regulatory framework provided by the respective states.
The Competition Regulators further held that: “The present transaction in the highly differentiated market was assessed in the appropriate analytical framework. As noted, products refer to the various “qualities” (brands) of spirits and the different firms strategise to appropriately position their products in the corresponding price range. In this framework, the proposed combination may allow for increasing product differentiation as a consequence of both brand proliferation and brand extension.
The Regulator finally concluded that: “In the present case, Diageo’s acquisition of USL may give a boost to the premiumisation strategy. Thus, new premium brands of the established brands (brand proliferation) and new premium brands (brand extension), are likely to be introduced in the market for spirits. The degree of product differentiation across price segments is likely to increase in the post combination scenario. The combination may increase and improve consumer choice and since the combining parties produce distant substitutes, the synergy of the firms will not detract competition.”
SEBI granted its approval to the deal with an unusual inclusion of an important clause in the open offer document that will allow buyers to sell the assets of the company. Diageo will have to take prior approval from USL shareholders through a special resolution to sell USL’s assets. The merchant banker had sought a clearance to allow Diageo to sell USL’s assets after the open offer with just a board approval.
The particular clause in the open offer document reads: “The acquirer and the PACs (persons acting in concert) currently do not have any intention to alienate, whether by way of sale, lease, encumbrance or otherwise, any material assets of the USL group during the period of two years following the completion of the offer, except in the ordinary course of business… with the prior approval of the board of directors of the target (USL) as being in the interest of the USL group, or by way of alienation of material assets of the USL group that are determined by the board of directors of the target as being surplus and/or non-core.”
Further the clause read: “It shall be the responsibility of the board of directors of the target or of any of its subsidiaries to make appropriate decisions in these matters in accordance with the requirements of the business of the USL group… if the acquirer and the PACs intend to alienate any material asset of the USL group, within a period of two years from completion of the offer, the target shall seek the approval of its shareholders.” SEBI had initially questioned the intention of the acquirer, but later cleared the open offer application on condition that such a sale can happen only after USL’s shareholders approve it subject to shareholder approval.
In the same month RBI granted its approval to the deal.
As Mallya was expected to use part of the proceeds of the deal towards debt repayment and equity infusion in his ailing Kingfisher Airlines, the lenders to the airline, with whom the shares of USL were either pledged or mortgaged or hypothecated, were not happy with inter alia the valuation of the shares. And being unhappy the creditors to KFA took to court by filing winding-up petitions in the Karnataka High Court against United Breweries, had given corporate guarantees for the airline’s debt.
When the Company Judge of the Karnataka High Court granted permission by its order in May 2013 to sell 13,612,591 equity shares of United Spirits Limited (USL) held by it, to Relay B.V. and Diageo PLC and others acting in concert at a sale price of Rs. 1440 per equity share and other consequential directions.
The principal issues before the Company Judge apart from the jurisdictional ones were the allegations of violation of laws in the matter of pledge of shares, price of shares. That allegation also did not cut much ice with the court as it held that theUnited Breweries had prima facie disclosed compliance with the notice of the pledge under the law. The consortium of financial institutions which were opposing the sale of the shares to Diageo further alleged that more than Rs. 4,000 crore had disappeared from USL into a company incorporated in the British Virgin Island and hence needs to be enquired into. Thus the court declined to order such inquiry as it felt that since USL was not a party to the proceeding and that the monies invested in the acquisition of the Scottish distillery Whyte and Mackay a wholly owned subsidiary of USL is through financial assistance obtained from city bank, London in full compliance with forex regulations and viewed that at that stage of the proceeding in the company petition it was neither desirable nor called for.
As permitted, the transaction termed as Diageo Transaction which intended to secure Rs. 1714.79 crores @Rs. 1440/- per equity share of United Spirits Limited (USL) on 09.11.2012, the closing price of the said listed share was Rs. 1360 per share on the National Stock Exchange. While the share price averaged around Rs. 760 per share during the twelve months period preceding the date of contract and is currently over Rs. 1900 per share as a result of the transaction with Diageo. The sale was intended to pay off the certain creditors who had agreed to release the pledges in exercise of the right of the applicant for redemption, which would lead to receipt of Rs 119 crore, in excess, after payment of the dues. The transaction was concluded in July 2013.
Not happy with the ruling of the Company Judge, the lenders appealed against the order claiming that the applications as were considered by the Company Judge could not be entertained without first adjudicating upon their rights to seek admission of the winding up petition or for appointment of the provisional liquidator. They further challenged the authenticity of the alleged pledges as they believed that they were not bona-fide and the objective thereof was to secure a fraudulent preference of the creditors all of them are parties with whom the respondent had significant level of dealings. And that all the pledges were created after the filing up of the winding up petition therefore it wasliable to be set aside.
The Division Bench framed two issues to address the controversies in point. The one was on the jurisdiction of the court to allow such a transaction when winding up petition was pending and secondly whether the transaction could be construed as a transaction in the course of business of the Company and is it a bona-fide transaction and in the interest of the creditors of the company so as to validate the transaction by exercising power under section 536(2) of the Companies Act, 1956. On the question the court ruled that though permissible to entertain an application to sell shares even after filing of the winding up petition yet in the fact that the finding as to jurisdiction without assigning reasons for arriving at the decision was void. Therefore the court set aside the finding of the company court liable to be set aside.
On the issue whether it was a bona-fide transaction, the court ruled that the transaction should be bona-fide entered in and completed in the ordinary course of trade. It should be for the purpose of preserving the business as a going concern. It should ensure that the interest of the creditors in particular that of unsecured creditors do not get prejudiced.
The Court also did not agree with the Company Judge on its finding as to the bona-fide of the pledges and held that in the context the company deliberately suppressed true facts from the company judge. It found the transaction to be not bona-fide as the case involved suppression of the material facts by the Respondents and they misled the company judge. Thereby leading him to pass an order in ignorance of those facts, hence void on that ground alone. Besides on the allegations of more than Rs 4,000 crore has disappeared from USL into a company incorporated in the British Virgin Island, the Division Bench did not agree with the view taken by the company court that it was not called for at that stage of the case. The Division Bench held that in view of such a allegations and when key parallel transactions were going on and company judge was also kept in the dark then such a transaction cannot be held to be a bonafide transaction and hence liable to be set aside being void.
With the ball finally being in the court of the apex court, all the controversies are going to be laid to rest when the Court will delve deeper into the various issues and it may turn out to be a good ruling for the purposes of just not only immediate issues in the case but also the larger issues of corporate governance and propriety.
With British fair trade watchdog, the Office of Fair Trading (OFT), viewing Diageo’s acquisition of United Spirits against competition and as it may lead to higher whisky prices in the UK. And thinking to have a fresh look at the deal in the wake of a new proposal made by the companies to sell bulk of Whyte & Mackay business of Indian liquor major to address the competition issues in the British whisky market, the controversy seems not to be ending any time sooner.
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