Reliance-Future Group Deal: Why’s Amazon Objecting And Is It Likely To Succeed?

Amazon.com Inc. has initiated arbitration proceedings against the Future Group before the Singapore International Arbitration Centre, according to two people privy to the development. The U.S.-based e-commerce major has sent a legal notice to its Indian partner alleging violation of contractual obligations by Future Group.

The Rs 27,513-crore deal between Mukesh Ambani’s Reliance Retail Ltd. and Kishore Biyani’s Future Group violates its contractual rights, Amazon has alleged. Future Group declined to comment on the development, while Amazon told BloombergQuint that it has “initiated steps to enforce our contractual rights”. “As the matter is sub-judice, we can’t provide details,” it said.

The Future Group had in August approved the sale of its retail, wholesale, logistics and warehousing assets to Reliance Retail Ltd. Last year, Amazon.com NV Investment Holdings had invested in Future Group by acquiring a 49% stake in Future Coupons—a promoter group entity of Future Retail.

Under the shareholders’ agreement, Amazon was granted a call option allowing it to acquire all or part of the promoters’ shareholding in Future Retail, which could be exercised between the third and tenth years in certain circumstances subject to applicable law. At that time, Future Coupons and Future Retail had also entered into a shareholders’ agreement which gave the former certain rights over the latter, according to exchange filings.

The shareholders’ agreement stated that Future Retail will require prior approval from Future Coupons on certain matters. These include:

Transfer or license of all or substantially all of the assets of Future Retail or material assets.
Transfer of assets above a certain threshold to a related party.
Amendment of articles of association in conflict with the terms of the shareholders’ agreement.
Any issuance of share capital in contravention of the shareholders’ agreement.

It’s surprising that Amazon took this long to send the legal notice and initiate the arbitration proceedings, corporate lawyer Murali Neelakantan told BloombergQuint. “I would’ve expected this when the board meetings were held by the Future Group companies and the decision of the deal with Reliance was taken,” Neelakantan said. “Most likely, Amazon would have been aware of the restructuring.”

If Amazon has a contractual right, yet it has no objection to the restructuring, the no objection should be in writing, Anand Desai, managing partner at DSK Legal pointed out. Ordinarily, he explained, it can’t be an oral understanding as the contract should say any variation or waiver must be in writing.

Usually, when an investor has a call option exercisable at a future date, the shareholders’ agreement has detailed clauses saying in the meanwhile, those shares can’t be sold to someone else, and may also state that if you sell to anyone else, it’ll be subject to my rights to call the shares from them at the price specified in the agreement. So, this prior contractual agreement can interfere with a subsequent sale to another party.

Anand Desai, Managing Partner, DSK Legal

Neelakantan agreed, and added that under a shareholders’ agreement at the holding company level, specially where there is a call option to acquire shares at a later date, there would be certain protections.

One of the basic protection we expect to see is that any disposal of assets [by Future Retail] will require Future Coupons’ consent. Now, clearly, an investor can’t have a call option for assets in future when most of those assets are likely to disappear. But given the existence of these rights, one can speculate that Amazon was asked to but chose not to invest. In such a situation, Future Group and Reliance are likely to take the Pay Up or Shut Up argument i.e. make the investment or suffer the consequences of a dilution.

Murali Neelakantan, Corporate Lawyer

On the question of what next, Neelakantan anticipates that since the shareholder, court and regulatory approvals for Reliance-Future Group deal are pending, Amazon may not go for an emergency arbitration by which an immediate interim relief is sought.

I don’t suspect there is a time pressure for Amazon in terms of the deal getting through, asset disposal etc. In case that threat becomes real, Amazon can always go to a high court in India, file an application under section 9 of the Arbitration Act which allows for interim relief even before the arbitral proceedings have started.

Murali Neelakantan, Corporate Lawyer

By initiating the legal action, Neelakantan said, it seems like Amazon is looking for an exit and will eventually settle the case if it’s promised a payday.

If the shareholders’ agreement has a negative covenant that gives Amazon the right to say that shares or assets can’t be sold, an arbitral tribunal can enforce such a negative covenant if it believes this to be justifiable, Desai said.

‘And if Amazon is looking for a payday, it may say that my investment was a 10-year plan. So, you project profits for the next 10 years and pay me all that money discounted to today’s . And that could be viewed by an arbitratal tribunal as a legitimate ask,’ he added.

Watch the full interview here