Jet and Etihad deal is finally ready to take off …..
Jet-Etihad deal which was announced a year back after the government allowed 49% Foreign Direct Investment (FDI) in Indian aviation companies has finally cleared all the regulatory hurdles in India and is ready to take off.
The deal was announced last year in April when Abu Dhabi-basedEtihad Airways (hereinafter referred to as “Etihad”)entered into an Investment Agreement (IA) with Jet and its existing promoters to subscribe to 24% equity shares in Jet for USD 379 million (price per share of INR 754.74). Apart from the Investment Agreement, the following documents were also executed/drawn:-
- Shareholders Agreement (SHA) between Jet, Etihad and existing promoters;
- Commercial Cooperation Agreement (CCA) between Jet and Etihad;
- Corporate Governance Code (Code).
The transaction was subject to number of regulatory approvals in India such as Foreign Investment Promotion Board (“FIPB”), the Competition Commission of India (“CCI”) and SEBI.
Accordingly, the applications were moved before the said regulators along with the above mentioned agreements for their approvals.
FIPB and SEBI Approval:
Before giving its final nod to go ahead with the transaction, the Central Government, Ministry of Finance has sought the comments of SEBI on the above agreements. In response thereto, SEBI vide its letter dated September 25, 2013 has given its comments including the following:
The rights proposed to be acquired by Etihad do not, prima facie, appear to result in change in control and consequently, do not attract the provisions of regulation 2(1)(e) read with regulation 4 of SEBI (SAST) Regulations, 2011. Consequently, Etihad would not be deemed as person acting in concert (PAC) with the current Promoter group of Jet in terms of regulation 2(1)(q) of SEBI (SAST) Regulations, 2011.
With regard to CCA, SEBI has stated that it would be guided by the decision taken by the other regulators.
On October 10, 2013, the FIPB accorded its approval and accordingly, on November 20, 2013, Jet issued and allotted the equity shares to Etihad.
The CCI vide its order dated November 12, 2013 approved the transaction and inter-alia held that the combination proposed in the transaction/ deal was not likely to have “appreciable adverse effect” on competition in India.
However in the said order CCI has stated about the Joint Control over jet i.e.
It is observed that the Parties have entered into a composite combination comprising inter alia the IA, SHA and the CCA, with the common/ultimate objective of enhancing their airline business throughjoint initiatives. The effect of these agreements including the governance structure envisaged in the CCA establishes Etihad’s joint control over Jet, more particularly over the assets and operations of Jet.
The said observation of CCI has raised the concern for SEBI about the Joint Control over Jet and accordingly, on February 11, 2014, SEBI issued a show cause notice (“SCN”) to M/s Tail Winds Limited, Mr. Naresh Goyal, Ms. Anita Nares Goyal and Etihad Airways PJSC (Noticees) alleging Joint Control over Jet by Etihad and the promoters under SEBI (SAST) Regulations, 2011 requiring an open offer to the shareholders of Jet under Regulation 4 of the said Regulations.
In response to the said show cause notice, the Noticees made the representation before SEBI and made the following submissions:
I. M/s Tail Winds Limited submitted that it was no longer a shareholder of Jet and was also not a party to CCA. Thus, the question of acquiring control as alleged does not arise at all.
II. Mr. Naresh Goyal and Ms. Anita Naresh Goyal submitted that:
- The observations made by CCI are made in the context of the provisions of Competition Act, 2002 and thus reference to or reliance upon the observations in the order of the Competition Commission are wholly irrelevant, immaterial and not germane to the provisions of SEBI (SAST) Regulations, 2011.
- Moreover, the objective of both the legislation are different i.e. CCI regulate combinations which cause appreciable adverse effect on competition in themarket whereas SEBI (SAST) Regulations, 2011 aims at providing an exit toshareholders in case of change in control.
- The Transaction documents do not accord Etihad (i)any affirmative, veto or blocking rights; (ii) More than 2 out of 12 directors on the board of Jet; (iii) Any quorum rights at the board of general meeting; (iv) any casting vote rights; (v) any pre-emptive or tag along rights.
- The Promoters of Jet have (i) 51% shareholding in Jet; (ii) the right to appoint 4 out of 12 directors; (iii) the right to nominate the Chairman and the Chairman so nominated will have a casting vote on any matter.
III. Etihad Airways PJSC submitted that:
- CCA types of agreements are entered into by airlines to expand their respective networks to compete more effectively with other airlines andsuch an agreement merely facilitates rationalization of costs, efficiencies of scale and the ability to service different parts of the world by leveraging the presence of the partner airlines in that market.
- It is inconceivable for Etihad to have the intention to control Jet as this would result in endangering the operating license of Jet. It would also jeopardize the rights of Jet to continue to fly to third countries as bilateral agreements with such countries generally require control to vest with nationals of a particular country.
- Press Note 6 requires that for a lawful investment into an Indian airline, effective control must remain with Indian nationals. Since, FIPB has already opined that the investment by Etihad in Jet, is in accordance with Press Note 6, the Etihad cannot, by law, be said to have acquired control over Jet under SEBI (SAST) Regulations, 2011.
- The concept of “control” for the purposes of competition law is specific to its own statute and applies to an entirely different context as opposed to the definition of control for the purposes of Takeover Regulations. The focus of the Competition Act is to determine whether there is control over an enterprise so as to constitute a “combination”.
- In the SCN, it has been alleged that a PAC relationship arises out of the CCA. In Daiichi Sankyo v. Jayaram Chigurupati, the Supreme Court has held that a target company cannot be a PAC with the alleged acquirer. As the CCA is entered into between Etihad and Jet, the alleged target company, the allegation that a PAC relationship arises out of the said CCA is legally unsustainable.
- Etihad cannot be said to have acquired control over Jet as none of the requirements of regulation 2(1)(e) have been fulfilled in the instant case as (i) mere existence of a shareholder’s agreement is not evidence of acquisition of control; (ii) the Noticee can appoint only two out of 12 members on the Board of Jet and one member on certain committees of the Board; (iii) the Noticee does not have any veto rights at the Board or Shareholders level; (iv) decision taken at co-operation committees and facilitation groups are under CCA are recommendatory in nature.
- Etihad has voluntarily decided to delete/modify various clauses of CCA including those which were basis of the observations of Competition Commission to ensure that there is absolute certainty that effective control of Jet Airways is and continues to vest in Indian nationals and the board of Jet Airways.
SEBI Nod to the deal
On analysis of submissions made by the Noticees and the comments submitted by MoF, SEBI accorded its approval to the deal and held that the transaction would not attract the provisions of SEBI (SAST) Regulations, 2011.
While giving its order, it relied upon the following facts:
- The MoF has clarified that the mandate of FIPB/ CCEA is to ensure compliance with FDI policy which inter-alia states that "a scheduled Operator Permit can be granted only to a company the substantial ownership & the effective control of which is vested in Indian nationals”. Thus, the approval from FIPB shows that the deal is in compliance with the FDI policy.
- The Competition Commission, vide letter dated April 9, 2014, has inter-alia, advised that - ".....for determination of “control” in a proposed combination, the Commission is guided only by the provisions relating to regulation of combinations in the Competition Act, 2002 (Act) and the facts and circumstances of each case. Every regulatory authority decides the cases as per their appreciation of the facts and documents made available and in accordance with the provisions of its statute and regulations.
- One regulatory agency may be guided by the findings of other regulatory agency on a particular issue only if the two laws are parimateria in their substance and are being applied on the same set of facts and circumstances. The definition of Control in the Competition Act, 2002is a purposive definition and applies for the specific purpose of combination of enterprises by way of inter alia, acquisition of one or more enterprises or 'control' over an enterprise by one or more persons. The expression 'affairs and management' as used in Competition Act is of much wider connotation than the expression "management or policy decisions" as used under SEBI (SAST) Regulations, 2011. There could be a situation wherein by controlling “the affairs and management" in a company, a person may be in a position to control "management or policy decisions" but it may not always be the case.
- To be acting in concert with an acquirer, persons must fulfil certain "bright line" tests. They must have commonality of objectives and a community of interests which could be acquisition of shares or voting rights beyond the threshold limit, or gaining control over the company and their act of acquiring the shares or voting rights in a company must serve this common objective. Implicit in the concerted action of these persons must be an element of cooperation.
- Since the Promoters were not parties to the CCA, and as per the Supreme Court’s verdict in Daiichi Sankyo, an acquirer cannot be a person acting in concert with the target company itself, it was held that the Etihad and Jet are not persons acting in concert.
- Even the terms of agreement including the following shows that the Etihad is not in Joint Control over Jet:
- Etihad’s right to nominate only 2 out 12 directors;
- Promoters right to nominate the chairman of the board of Jet, who shall have a casting vote;
- Etihad does not have any quorum rights at the board or general meeting; Lack of any veto/ affirmative voting rights,pre-emptive/ tag along rights with Etihad.
Prepared by: Ms. Ruchi Hans
Ms. Divya Vijay