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Institutional EYE

Commentary on Corporate Governance Issues

Fortis Healthcare: Is it over?

Fortis board’s announcement that they have accepted the Munjal-Burman offer may just be the beginning of a new round of battle with shareholders and bidders. The shareholders’ decision on the 22 May 2018 EGM on removal of directors will be critical in deciding how the situation plays out, as will be the shareholder meeting to vote on the ‘sale’.

Fortis Healthcare Limited’s (Fortis) board has decided to whom it will like to ‘sell’ the business. Given that the process had its infirmities, questions will continue to be raised on the decision, and clarity sought on how the decision was reached. But, till the board reconsiders the decision, the decision stands.

The legitimacy of the ’establishment board’ [1] is currently in question. Two institutional shareholders, Jupiter Asset Management Limited and Eastbridge Group that together hold 12.04%, have asked the company to convene an EGM to remove the then four board members, and appoint three independent directors [2]. This EGM will be held on 22 May 2018, and IiAS has recommended supporting these resolutions. Should these four directors be removed and the slate of three get appointed, it provides a perfect opportunity for the board to revisit its decision on who the buyer should be. Particularly given that the Fortis board’s decision to accept the Munjal-Burman offer was made by a 5-3 majority vote.

If the ‘establishment board’ wants to ensure that their current decision stays, the best option is to send out a shareholder notice on the offer before the votes for their removal come in. Once the shareholder notice is sent, it will become that much more difficult for the board to change its decision, even if some of the directors are voted out of the board in the 22 May 2018 EGM. The board could also sign a subscription agreement with the Munjal-Burman entities, which may come with breakage clauses that could create strong disincentives for a revisit of the transaction or any of its terms [3].

If shareholders support the removal of the ‘establishment board’ members, the board (comprising the residual members) may want to revisit its decision. If so, Fortis’ agreement with Manipal-TPG may possibly stand: there is an Implementation Agreement that has been signed by the Fortis board. Although Manipal has expressed its decision to no longer pursue Fortis, surely the board could rejuvenate Manipal’s interest.

But revisiting the transaction may not be easy. Fortis has already reneged on the Manipal-TPG bid by accepting the Munjal-Burman bid. Back-tracking on the second bid will have longer-term reputational implications and may impact the acquisition of RHT’s assets and sale of the SRL, which are next on the cards.

If the remaining bidders are serious, they may consider a legal intervention through injunctions on the process and the vote. Alternatively, the bidders could side-step the board and go directly to shareholders with an offer.

But for all of this to happen, the bidders too need to be aggressive. So far, they have been circling around Fortis but none other seem ready to go all-in. This may perhaps be because the Fortis board has been unreasonable in asking for bids without allowing a due diligence. Independent of the board’s assertions in its defence of compelling bidders to make binding offers, all bids carried their uncertainties – in the Munjal-Burman bid, Rs. 10.0 bn is coming in as warrants, in which just Rs. 2.5 bn will come in as an upfront cash infusion with an option to infuse the remaining Rs. 7.5 bn. There is room for bidders to increase price, if they have greater certainty on what to expect: in having to bid blind, some of them could have likely priced in an exaggerated approximation of the potential liabilities.

The non-disruptive possibility is that the ‘establishment board’ is not voted out and the transaction with Munjal-Burman combine is approved when put to vote. The combine will need to work much harder than they may have expected. One, to clean-up the company including its ‘establishment board’ and then run the business. Two, to build credibility with the investors – not being an obvious choice, the defects in the sale process stigmatizes them far more than they may have expected.

What happens next will be determined by how shareholders vote in the coming week. And, how bold the buyers wish to be.

For the full report, please click here.

[1] The ‘establishment board’ comprised Harpal Singh, Brian Tempest, Tejinder Singh and Samina Vaisoha (See Exhibit 1)

[2] Following this the board invited the three Suvalaxmi Chakravorty, Indrajit Bannerji and Ravi Rajgopal to join the board as additional directors, pending shareholder approval. They also invited Rohit Bhasin to join the board.

[3] If Fortis’ board has signed a subscription agreement already, it must disclose the terms and conditions of such an agreement in a filing with the stock exchanges.

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