Jet Airways proposes to replace Articles

Articles of Association detail a firm's internal rules and regulations; having one is statutory

Jet Airways, seeking shareholder approval for a 24 per cent stake sale to Abu Dhabi-based Etihad, has proposed to replace its Articles of Association (AoA) with a new one. The AoA details a company’s internal rules and regulations; having one is statutory. The new AoA is to reflect the shareholder agreement between Jet and Etihad, some of which might 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 and removal of directors. 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. Minority shareholders also do not have an exit option in this deal, as the investment is below the takeover code trigger level of 25 per cent.

An email seeking comments, sent to the Jet Airways spokesperson, got no response. The new AoA provides for several special rights to Etihad. Apart from the much publicised right of first refusal for further stake sale, tag-along rights and a lock-in provision, restricting the current Naresh Goyal-led promoter group, Etihad gets several rights on the board.

Article 44 of the new AoA says five members present in person (who shall include at least one authorised representative of the promoter and one 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 each of the promoter and investor are 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 the article is not only against the principle of equitable treatment of shareholders and provides unequal rights to a particular shareholder but might also be in violation of the Companies Act,” said J N Gupta, founder, Stakeholders Empowerment Services (SES).

Investors are also worried about the the provision in the proposed Articles which empowers Etihad to appoint one of the auditors. The listing agreement requires that the audit committee recommend to the Board the appointment/ re-appointment of the statutory auditors. Therefore, the article could be a breach of the listing agreement. “SES believes the article might usurp the role of the audit committee and send negative signals to the market about its autonomy, and the intentions of the company with reference to governance,” SES said in a note, recommending investors to vote against the proposal.