Long term issues to be wary of when opening your arms to that green…
The past few months have seen the headlines abuzz with news regarding the tripartite dispute between Amazon, Reliance, and the Future Group. While the dispute has resulted in a widespread discussion in relation to the enforcement of interim foreign arbitral awards, this article seeks to briefly analyze the actual cause of the dispute that has arisen between Amazon Inc. (“Amazon”); and Future Coupons Private Ltd. (“Future Coupon”) and Future Retail Ltd. (“Future Retail”) (collectively hereinafter referred to as the “Future Group”) and provide the reader with certain broad suggestions on pre-emptive measures that may be explored to prevent such occurrences.
In 2019, Amazon after lengthy negotiations with the Kishore Biyani led Future Group, acquired a 49% stake in one of Future Group’s unlisted firms, Future Coupons (“Agreement”). As part of the deal, Amazon negotiated for itself, a ‘call option’ allowing it to buy partial or entire stake of the promoters in Future Retail for a period ranging from three to ten years from the date of the Agreement. Future Coupons is the promoter entity of Future Retail and holds 7.3% stake in it and therefore through this transaction, Amazon indirectly got a 3.6% shareholding in Future Retail.
In 2020, the Future Group, reeling under a mountain of debt and battered by the impact of the COVID 19 pandemic and the subsequent lockdown on retail businesses, began to explore the sale of a portion of its share capital, in its insurance and retail business. Finally, in August 2020, the Future Group entered into an agreement with Reliance Retail Ventures Limited (“Reliance Retail”), a subsidiary of Reliance Industries Limited (“RIL”), to hive-off and sell its retail, wholesale, logistics and warehousing businesses from its various listed entities to RIL. While it appeared that Amazon had initially given the deal its blessing, Amazon initiated arbitration proceedings against the Future Group, initially stating that it had breached its obligation to inform Amazon before entering into any sale agreement with third parties.
While the terms of the documents that were signed as part of the Agreement are not available in the public domain, we understand from publicly available sources that Amazon claims that Future Group’s deal with RIL is a breach of the terms of the Agreement, which inter alia barred Future Coupons and its promoters from selling any stake or forging any alliance with 30 other entities in the retail space, including RIL, without Amazon’s consent. Additionally, Amazon also alleged that there was a violation of the non-compete clause and the call option provided to Amazon to purchase shares of Future Retail under the terms of the Agreement.
Separately, Amazon had also approached the Securities and Exchange Board of India (“SEBI”) with a complaint against the Future Group, requesting SEBI to investigate Future Retail for insider trading by leaking the interim award of the Singapore International Arbitration Centre (“SIAC”) to RIL.
The Legal Battle
Amazon, in an attempt to immediately block the Future Group’s deal with Reliance Retail, had approached SIAC to initiate emergency arbitration against the Future Group. After hearing averments made by the parties, the emergency arbitrator passed an interim award in favour of Amazon, which has injuncted Future Retail and Future Coupons from taking any further steps in respect of the sale transaction with RIL or its group entities . Further, Amazon had also sent letters to SEBI, the Bombay Stock Exchange(“BSE”) and the National Stock Exchange (“NSE”), asking them not to approve the Agreement as there was an interim stay order on the implementation of the same.
In relation to the approval from BSE and NSE, the Future Group, along with their shareholders, had submitted a court-approved agreement to BSE and NSE, for approval for the amalgamation of Future Consumer, Future Enterprises, Future Lifestyle Fashions, Future Retail, Future Supply Chain and Future Market Network. While the BSE has given a no-objection certificate (“NOC”) to the Future Group for the amalgamation, the same has not been obtained from NSE as on the date of this article. SEBI on the other hand has received four complaints, in connection with Future Group’s agreement with Reliance Retail, on it’s complaints redressal system and thus, has sought clarification from the aforementioned stock exchanges on these unresolved complaints.
While everyone was looking forward to SEBI’s stand on this matter, unpredictably, the anti-trust regulator in India i.e. the Competition Commission of India (“CCI”), gave its nod to this proposed acquisition, despite the fact that Amazon had approached the CCI alleging that Future Group’s agreement with Reliance Retail would be in violation to the terms and conditions of the Agreement.
Presently, this legal battle is being contested in the Delhi High Court and both the parties have been presenting weighted arguments regarding the enforcement of the interim award granted by the emergency arbitrator. The Delhi High Court has reserved the order and is yet to decide on its stance on the matter. As per the most recent news articles available on the arbitration proceedings, the SIAC has rejected the Future Group’s contention that Future Retail be excluded from the arbitration and is in the process of finalising the nominee arbitrators of the parties according to its internal procedures.
The legal battle has led to the stocks of the listed companies of the already debt-ridden Future Group taking a dive, from which they are yet to recover. The time-consuming legal proceedings and numerous objections filed by Amazon have also lead to a delay in the Future Group-Reliance deal, starving the Future Group of a much needed cash infusion that was required to pay off its debts on time, leaving the once revered retail king Kishore Biyani in a desperate state.
Food for Thought….
Oftentimes, companies and their founders/management in their haste and excitement to close the deal ignore the long-term repercussions that may result from not paying attention to details. In the present scenario, it appears that the Future Group hastily overcommitted itself to a negative list of almost 30 buyers to whom it could not sell it’s shares, without considering the creation of a carve out to protect itself in tough times. One can safely assume that this was so because the financial status of the Future Group at the time that the deal was being entered into with Amazon did not warrant the consideration of the dire financial times that the Future Group would face in the times to come. The ultimate outcome seems to have resulted in Amazon having a claim to indirect control over INR 30,000 Crores (Rupees Thirty Thousand Crore) worth of Future Group assets after investing a mere INR 1,431 Crore (Rupees One Thousand Four Hundred and Thirty-One Crore) in Future Coupons.
Future Group’s experience on this deal should serve as an awakener for companies looking to raise capital from investors in a blind rush and hopefully make them review the terms and conditions under which they accept money with a magnifying glass. The Investees should always carefully consider the controlling interests (direct or indirect) that the investor will have over the Company, from a long term perspective, regardless of the financial position that the investee company maybe in at the time of accepting the investment. Restrictions on the free transfer of shares such as agreeing to a negative lists of competitors, rights of first refusals and future obligations that will be enforceable against the company/founders, such as call options should be carefully considered, with a long-term view, keeping in mind the sector they operate in, the plausibility of finding a buyer should that be required, and the need for future funding.
In our experience, another important aspect that founders and businesses should carefully consider is the guarantee of exit options that they provide to investors. Often, there are far reaching consequences attached to the failure to provide an exit including potential loss of control and being subjected to a forced sale. While we cannot crystal ball-gaze into what the future may hold in the Future Group-Amazon-RIL dispute, the learning we would like to impress upon the founders and businesses, is to take a comprehensive view and protect themselves against overcommitting to obligations before signing on the dotted lines and accepting funding.
We hope this has been an interesting read. Please do reach out to us on the contact details provided on our website with any queries you may have.
-Prashant Kataria (Partner), Tushar Thimmiah (Senior Associate)
This material and the information contained herein prepared by the authors is intended to provide general information on a subject or subjects and is not an exhaustive treatment of such subject(s). Algo Legal is not, by means of this material, rendering professional advice or services. The information is not intended to be relied upon as the sole basis for any decision. Algo Legal shall not be responsible for any loss whatsoever sustained by any person who relies on this material.