Diageo says support to Mallya subject to 'absence of defaults'

United Spirits to urge shareholders to remove Mallya as director and chairman of board, if he refuses to step down

With United Spirits asking its own chairman, Vijay Mallya, to quit, majority owner Diageo on Monday said its “contractual obligations” to support his presence would not apply in the event of “defaults” by the Indian businessman and his group firm, UB Holdings Ltd.

A major boardroom battle broke out this weekend at United Spirits Ltd (USL), where UB Group had sold a controlling stake to Diageo, after its board "lost confidence" in Mallya and asked him to quit as chairman and director following a probe that showed fund diversion and other irregularities. Mallya refused to resign and said Diageo had "certain contractual obligations" to support his presence on the USL board as its chairman and director.

Diageo, which holds 54.78 per cent stake in USL, said in a statement this morning that it indeed has "certain contractual obligations to support Mallya continuing as non-executive director and chairman of USL, subject to certain conditions and in the absence of certain defaults."

UK-based Diageo, the world's largest spirits maker that has acquired nearly 55 per cent stake in USL for about USD 3 billion, further said that the Indian company has provided "its inquiry report and all related materials to Diageo" with regard to their decision to ask Mallya to quit.

"Diageo notes the recommendation of the USL board and will now consider its position under its agreements with Mallya and United Breweries Holdings Limited (UBHL) in light of the inquiry report and materials provided to it," it added.

The "internal inquiry" relates to "certain matters referred to in USL's financial statements and the auditor's report for its financial year ended March 31, 2014".

The USL board has also decided that, in the event of Mallya declining to step down, it would recommend to the shareholders of the company the removal of Mallya as a director and as the chairman of the board.

"Mallya has indicated he will not tender his resignation," Diageo said.

Giving details of the "contractual obligations", Diageo said it had entered into a Shareholders Agreement with UBHL as part of a transaction announced on November 9, 2012 and which came into effect on July 4, 2013 when Diageo completed the acquisition of its initial 25.02 per cent shareholding in USL.

Diageo later hiked its stake after buying further shares from non-promoter shareholders. "Under the Shareholders Agreement, the parties agreed to use their respective rights as shareholders such that, among other things, UBHL would be able to nominate one director (who would be Mallya) to the USL board.

"This right of UBHL is subject to it continuing to hold at least 1,307,950 shares in USL and Dr Mallya continuing to control UBHL.

"In certain circumstances where Mallya ceases to control UBHL, Mallya may become entitled to succeed to the right to nominate himself as a director of USL subject to his holding at least 1,307,950 USL shares," Diageo said.