RIGHT OF FIRST REFUSAL - AN OFFENSIVE OR DEFENSIVE LEGAL DEVICE?

By Ruma Dubey

Jet Airways has crash landed today, after flying high on the wings of Etihad deal.

And once again, at the center of this whirlpool is the Right of First Refusal (RoFR) agreement. This sounds familiar as this was the same clause on which SEBI had raised objections to the Diageo – United Spirits deal. Going ahead, this is probably one clause which might come up time and again when such huge deals are struck by our Indian companies with foreign companies. Thus it is best to try and understand what this RoFR means so that when this comes up the next time, you know what exactly it means and will know how that cookie crumbles.

Right of First Refusal. This is layman terms would simply mean that one party will have the first right to refuse an offer, after which it can be given to the others. And that is really what it means here in the corporate context too. When a promoter sells part of his stake to a company, say ABC Ltd, and when the promoter wants to sell his entire or part of the stake at a later date, ABC Ltd will be given the first choice to buy the stake on offer and it has the first right to refuse the offer. And only when ABC refuses can the promoter offer it to a third party.

This is exactly the clause on which the United Spirits – Diageo deal got SEBI’s nerves hackled. Beginning Nov’12, Diageo bought 19.3% stake in United Spirits at Rs.1440/share. SEBI gave the go-ahead for the open offer for 26% stake on 31st Jan’13, also at Rs.1440/share. And after the preferential allotment of shares, Mallya holds just 13-14% stake in United Spirits; it is this stake which brought in the RoFR clause. Now, Mallya can sell his remaining stake at a future date and Diageo will have the RoFR. SEBI was caught in a pickle because no price was mentioned in the document in case Mallya decided to sell his remaining stake at a future date. Though it would most likely be Rs.1440/share, SEBI felt that it was unfair to the minority shareholders to leave details of RoFR so ambiguous. The Competition Commission has also objected to the deal saying that Diageo is being given preferential treatment and voiced concern over the possible impact of this merger on market competition. Well, the light at the end of the tunnel seems to be in sight Top officials of Diageo and United Spirits, including its chairman Vijay Mallya, are likely to meet this week to discuss regulatory and other issues and the required changes are expected to be made.

In the Jet-Etihad deal, once again the bone of contention is the RoFR wherein Etihad has sought a RoFR in the deal to buy out promoter stake at a later date. Jet Airways is selling 24% for around US$ 330-350 million. Etihad also needs clarity to protect itself against future vagaries in case Jet promoters try to sell their part or full stake at a later stage. Promoters currently hold 80% stake in the company.

There is no objection raised by SEBI but the Govt is worried and wants clarity on this issue as RoFR has to be within the 49% FDI norm which does not allow a foreign company to have a controlling stake in the company. Thus this clause of RoFR needs to be clear to avoid Etihad running into turbulent weather in the future and flouting FDI norms.

Etihad is also said to have raised some concerns over Jet planning to dilute some stake through the Offer For sale route. The Abu Dhabi based carrier also wants crucial positions on the Board of Jet and this, many say is its way of negotiating to get the best value for money.

RoFR is not a new law cropping up now but has been a cog in the wheel for many large deals – Essar-Vodafone, Mukesh Ambani used it to thwart Rcom-MTN deal and we saw it in Vedanta-Cairn deal too.

RoFR is a legal weapon used often as a threat to wrangle out a better deal. It is often criticized for being a posturing weapon but many a times, it is indeed a protector of minority shareholder interest. Like all laws, effectiveness and need of RoFR continues to be debated but once again, like all laws, this will exist.

For now, instead of getting into a long drawn debate it is best to know that United Spirits-Diageo issue is getting resolved and so will this Jet-Etihad; there is really no cause for worry.