It is not clear whether Jet and Etihad are acting in concert which should trigger an open offer

Takeovers in India, as in most other markets, are typically guided by a set of principles which, at the most basic level, are aimed at ensuring that all shareholders have a reasonable and equal opportunity to participate in any benefits flowing from a transaction. But ensuring that similar class of shareholders must be afforded similar treatment can be tricky.

Take the recent Jet Airways-Etihad deal. Under the transaction, Jet Airways will issue fresh shares to Etihad, giving Etihad a 24% ownership in Jet. Etihad is to buy these shares at R754.74 each. On the day of the announcement, shares of Jet Airways were trading at around R541.15 each. Is Etihad buying into Jet Airways a takeover? If so, can public shareholders of Jet Airways expect Etihad to buy their shares at the price they are buying into Jet?

Under the regulations, takeovers are governed by the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, and there are two ?tests? to determine whether an acquirer should make an open offer to the public shareholders of a listed company. The first is the acquisition of voting rights and the second is the acquisition of control.

Under the takeover code, the threshold under which voting rights change hands is 25%. This threshold is relatively easy to benchmark, and Etihad has ensured that at 24%, its holding, is just under this limit.

Acquisition of control remains contentious. Under the SEBI code, ?control? includes ?the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner: provided that a director or officer of a target company shall not be considered to be in control over such target company, merely by virtue of holding such position.?

As a part of this transaction, Jet Airways proposed changing its articles and giving certain ?rights? to Etihad. These are both ?transaction related? and ?control related?. Transaction rights include the ?right of first refusal?, which stipulates that both Naresh Goyal and Etihad possess the right of first refusal in case the other sells their shares to a third party, and ?tag along rights?, under which if Naresh Goyal sells his shares to a third party, this article gives Etihad the right to ?tag along? and sell their own stake to the same third party. ?Control related? rights give Etihad the right to appoint three of the 14 board members, including the vice-chairman. Further, its nominees will be appointed on all board committees, all subsidiaries and all board committees of subsidiaries. In addition to these two sets of changes, there are restrictive clauses being included in the articles: Naresh Goyal needs to maintain a minimum shareholding of 26% and together with the promoter group, a minimum of 51%.

As an aside, should the ?right of first refusal? and the ?tag along rights? be a part of the articles of the company? They are, after all, an agreement between two sets of shareholders so should be in the shareholder agreement and not the article. In India, the reason why companies insist on inserting these in the articles of association is for enforceability of these rights, because there are judgments of courts (including the Supreme Court), which state that provisions of shareholders agreements are not enforceable among shareholders unless they are inserted in the articles of association of the company.

Does the right to appoint directors on the board and board committees amount to a change of control? That Etihad can appoint one of the two auditors. Does the fact that the chairman of the board, Naresh Goyal, will not have a casting vote mean change of management? But Naresh Goyal will continue to hold 26%, implying he can block special resolutions, and the existing promoter group 51%. If this is not more of the same, then what is? But if they are going to be cooperating in all aspects of the business from fleet acquisition to catering services, will they not be taking decisions jointly? And if they will, does it not mean that by virtue of this Etihad is as much in control as Naresh Goyal is? And are the two then not acting in concert? Is this then not a trigger for the open offer?

At the shareholder meeting on May 24, Jet had shareholders approve the preferential issue to Etihad, but given the back-and-forth on the above questions, withdrew the resolution regarding amending its articles. Clearly, the hint of a change of control has meant some clauses in the shareholder agreement will now be re-written.

But it still does not answer what constitutes change in control? In the case of Subhkam Ventures, the Securities Appellate Tribunal held that board seats and certain affirmative rights given to an investor do not constitute change of control. The Securities and Exchange Board of India appealed this decision in the Supreme Court, but the case was disposed off before a judgment was passed, still leaving this question unanswered.

The author is managing director, Institutional Investor Advisory Services India, an advisory firm dedicated to providing participants in the Indian financial markets with voting recommendations on shareholder resolutions, independent opinions, research and data on corporate governance issues. Views are personal