Jet Airways, which is seeking shareholder approval for a 24% stake sale to Abu Dhabi-based Etihad, has proposed to replace its Articles of Association (AoA) with a new one.
The AoA is a statutory document that provides for internal rules and regulations of the company. The new AoA reflects the provisions of the shareholder agreement between Jet and Etihad, some of which may be prejudicial to the interest of minority shareholders.
The new article empowers Etihad to have a say in critical matters such as appointment of auditors, appointment of vice chairman, removal of directors etc. These rights are usually exercised either by the shareholders directly or through the duly appointed board. Governance groups have frowned upon these proposals and are asking investors to oppose the proposal.
An email sent to Jet Airways spokesperson did not elicit any response.
Minority shareholders also do not have an exit option in this deal as the investment is below the takeover code trigger level of 25%.
Jet is seeking shareholder approval for this replacement, which provides for several special rights to Etihad. Apart from the much publicized right of first refusal, tag-along rights and lock-in provision, which restricts the current promoter group led by Naresh Goyal, Etihad also gets several rights on the board.
Article 44 of the new AoA says that five members present in person (who shall include at least one authorized representative of the Promoter and one authorized representative of the Investor) shall be the quorum. The article provides that a general body meeting would not meet the quorum requirements unless at least one representative of the promoter and investor is present.
This is seen by investor groups and governance institutions as an inequitable treatment for a certain set of investors and even illegal.
"We believe that the article is not only against the principle of equitable treatment of shareholders and provides unequal rights to a particular shareholder but may also be in violation of the Companies Act," JN Gupta, founder, Stakeholders Empowerment Services (SES) said.
Investors are also worried about the the provision in the Articles which empowers Etihad to appoint one of the auditors of the company. The listing agreement requires that the audit committee should recommend to the Board, the appointment/ re-appointment of the statutory auditors. Therefore, the article may be in violation of the listing agreement.
"SES believes that the article may usurp the role of audit committee and send negative signals to the market about the autonomy of the audit committee and the intentions of the Company with reference to governance," SES said in a note recommending investors to vote against the proposal.