Monday, May 24, 2010

A Great Deal? Really?

I'm frankly underwhelmed and quite disappointed by the deal announced at the end of last week - Abbott buying the domestic formulations business of India's Piramal Healthcare. My concerns are largely based on the structure of the deal not being one that ensures that minority shareholders benefit proportionately as they should. There's clearly a loophole in Indian Company Law that needs to be plugged as this deal illustrates. There's been a lot of press on this and clicking on the title of this post will link you one article.

Consider:

- Selling a business that accounts for a big chunk of the Company's revenues doesn't need anything more than a simple majority (>50%) of shareholder votes. You might have guessed that the controlling shareholders collectively own 49% of the company in question. Shouldn't something like this need a special resolution (>75% of shareholder votes)? The value of what will remain after the sale is debatable.

- The company has chosen the postal ballot route for having this resolution passed - which doesn't require the Chairman (and major shareholder) to stand up in front of a room full of shareholders and explain exactly how much they propose to pay by way if a special dividend and also why they chose this route instead of, for example, spinning the business out into a new company that would be owned by all shareholders and then acquired giving all shareholders a proportionate share of sale proceeds. This shouldn't be legal should it?

- I don't know this company in particular well enough and I'm not alleging anything but given recent experience are we at all confident that auditors will be able to confirm with any certainty that payments, advances and loans made by the Company have not been made with less than honourable motives and intentions?

It's time for the Department of Company Affairs, SEBI and India's Institute of Chartered Accountants to step up.

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