The relationship between Diageo-controlled United Spirits and the UB group has taken a curious turn. A company meeting called last week to put to vote a number of related material party transactions, saw minority shareholders vote against all UB group-related transactions except for one. Link.
In another development, shareholders rejected a postal ballot for a related party transaction, in which United Spirits was to enter into an arrangement with Diageo, to make and sell products under license and also market products made by Diageo. This resolution required three-fourths of non-promoter shareholders to vote in favour, but it got only 70.2% votes in favour. Link.
Let’s come back to Saturday’s announcement, of the results of the EGM on related party transactions. Strangely, the UB group voted in this meeting though the EGM’s notice mentioned that they could not vote in these resolutions.
United Spirits said these votes were not counted in deciding the fate of the resolutions, but whether the UB group takes any legal recourse remains to be seen. Though shareholders have voted against these transactions, these are all pre-existing contracts. Whether United Spirits is required to cease to honour them is an important question that arises since this will amount to a retrospective cancellation.
Also, in many of these contracts, the financial obligation of United Spirits may have already come to pass, that is it has already given a loan, already given money for buying property. And, many of these contracts were entered into in June 2013, and it was on July 4 2013 that Diageo announced the completion of the shareholder purchase agreement with UB Holdings.
The company itself is unsure about the way ahead, and had mentioned earlier that it is not clear if shareholders can retrospectively void valid actions by a company. It says it is also unsure of the status of the UB group entities, and whether they are indeed related parties. It is examining this issue, according to the company.
The UB group’s votes have not been accounted for, because it’s a related party. But the group perhaps believes it’s not a related party perhaps, explaining why it voted. Even if it were to be proven right, United Spirits has said that addition of UB group votes will not change the outcome. That is, the votes will still be against the UB group transactions put to vote. But if UB group is not a related party, then the question is whether these resolutions should have been put to vote, in the first place. It looks like a messy situation.
Some of the UB-group transactions relate to loans, trademark-licensing agreements, property transactions, sponsorships and aircraft services. Only three resolutions were passed, one was pertaining to net worth erosion, a sales promotion services agreement with Diageo and the sole UB group related transaction—a trademark licensing agreement.
The main opposing parties to the resolution have been institutional shareholders. They have played a critical role in these proceedings, since the promoter and allied entities have not been allowed to vote.
Why have these transactions come to the fore now?
- United Spirits has incurred significant losses due to provisions charged for loans, investments and doubtful debts and advances, amounting to Rs 5,334 crore. Though these are book entries, since more than 50% of its peak net worth (equity plus reserves) was eroded, it has to be referred to the Board of Industrial and Financial Reconstruction (BIFR). The law governing sick companies states that the company must hold a general meeting of shareholders, to explain to them the causes for the erosion. This is straightforward.
- But a change in the listing guidelines and as per circulars issued by Sebi, in the first general meeting of a listed company held post October 1, all related party transactions that were in existence as of April 17 2014 and continuing beyond March 31, 2015 should be put to vote. These pertain to transactions that are material, that is either individually or taken along with previous transactions in a year amount to more than 10% of consolidated turnover of a company.
- This combination of the reference to BIFR and attracting this circular of Sebi has meant that United Spirits has had to ask shareholders to approve all related party transactions.
Resolutions that were passed:
- The proposal regarding the erosion of net worth.
- Diageo has a sales promotion services agreement with United Spirits, dated October 1, 2013. This entitles United Spirits to a commission based on sales of certain products in exchange for marketing these products. In FY14, the amount earned was only Rs 16.4 crore but this amount could presumably increase.
- United Spirits deal to license the Pegasus trademark from United Breweries Holdings, for an upfront payment of Rs 250 crore and Rs 263 crore payable over a 10 year period, till June 2023.
Resolutions that were rejected
- Loan agreement dated July 2013, with UB Holdings, loan of Rs 1337 crore and payable in 2021.
- Agreements dated September 2011 and December 2011, that require UB Holdings to sell certain properties to United Spirits, consideration of Rs 33 crore.
- Services agreement between United Spirits and Kingfisher Finvest, Rs 17 crore per year, with no end date specificed.
- Advertisement agreement with Watson entered into in October 2013, pertaining to Force India. Lumpsum amount of $8.7million and £4.1million payable, and over the term of the agreement till 2017, Rs 400 crore is payable.
- Sponsorship agreement with United Racers & Bloodstock Breeders entered into in June 2013, consideration payable is Rs 7.5 crore per year, till 2023.
- Sponsorship agreement with Mohun Bagan Football Team, entered into in June 2013, and consideration payable is Rs 8 crore per year, over a 10-year period.
- Aircraft Services agreement with UB Air, entered into in June 2013, with an annual sum of Rs 25 crore plus security deposit of Rs 5 crore, and is payable till Vijay Mallya remains as non-executive director and chairman of United Spirits.
- Property call agreement with PE Data Centre Resources, agreement executed in June 2013 and one-time fee paid to United Spirits of Rs 28.14 crore.
- Contribution agreement with Vittal Mallya Scientific Research Foundation, entered into in June 2013, and in force for 10 years, with annual contribution in the range of Rs 2.5 crore to Rs 25 crore.