Why Future Group has the right to sell its assets to whomsoever it wants

Can a public listed company be bound by a private treaty transaction entered into by its promoter? That’s at the crux of Amazon’s bid to thwart Future Group’s sale of assets to Reliance Retail.

The answer to this question is not simple. It is unlikely to please Amazon too in this particular case.

But before we get to that, here is a summary of facts: Future Retail Ltd (FRL), a listed company, signs an agreement with promoter entities including Future Coupons Ltd (FCL). The agreement gives some special rights to FCL, the key being that FRL shall not sell or transfer assets without getting FCL’s consent. Ten days later, Amazon buys a 49 percent stake in FCL for Rs 1431 crore. FCL in turn invests this amount in FRL and ends up with a 9.83 percent stake in the listed firm.

The two also sign a shareholding agreement. Under this agreement, FCL’s special and material rights under the first (FRL) shareholding agreement were given to Amazon. In effect, Amazon would decide how the promoter group of Future must vote on issues concerning FRL.

Now, here’s the thing. If both the shareholding agreements are read together, it amounts to Amazon securing indirect control over FRL.

That falls afoul of the law. In India, foreign direct investment in multi-brand retail comes with a lot of riders. One, government approval is required. Two, if Amazon acquires control, direct or indirect, it needs to make an open offer to the shareholders of FRL. That’s required under SEBI regulations.

Three, the capital market regulator also requires that material changes – such as change in control – are disclosed to shareholders. While shareholders were informed that the promoter group had entered into an agreement which imposed “certain share transfer restrictions” of their shares in FRL “including restrictions to not transfer shares to specified persons,” the change in control was not spelt out. That’s again a violation of SEBI regulations.

With multiple breaches of laws, can the FCL shareholding agreement then be binding on FRL?

It is perhaps with an eye on this issue, that the FCL agreement had a disclaimer clause to the effect that both Amazon and FCL confirm that the former’s investment is in FCL only, and Amazon is not exercising ‘control’ over FRL. Indeed, in its application to the Competition Commission of India too, Amazon had sought permission to invest in FCL, which is a non-retail business.

If that is the case, then Amazon cannot dictate what the promoter shareholders of FRL must or must not do. The Future Group is then free to go into a scheme of arrangement to merge and sell assets to whomsoever it pleases. Moreover, the Companies Act specifically allows for firms to go in for a scheme of arrangement provided three-fourths of its shareholders and creditors agree to the scheme, and approvals are sought from SEBI, CCI and the National Companies Law Tribunal.

This has been done. It is also worth noting that FCL’s shareholding FRL is limited to 9.83 percent. Amazon is not a shareholder in FRL.