With the reconstitution of the board of Fortis Healthcare, the shareholders of Fortis have heaved a sigh of relief after the debacle of previous bidding process to inter alia, transfer control over Fortis, orchestrated by the former promoter backed directors.
For ease of understanding, a brief timeline of the matter is provided below:
· The shareholding of the promoter group in Fortis had dropped from 34.44 percent in September 2017 to 0.77 percent in March, 2018. However, the board of Fortis continued to comprise of promoter backed directors.
· From March 23 onward, Fortis received bids (including revised bids) from five bidders with regard to possible transactions with Fortis. The bids proposed complex corporate restructuring exercises and involved infusion of funds and acquiring control over Fortis.
· On April 17, minority shareholders holding 12.04 percent of Fortis issued a notice for the removal of the former directors and recommended the appointment of three independent directors to the board. An extraordinary general meeting (EGM) to vote on the aforesaid matters was scheduled on May 22, 2018.
· On April 19, the old directors approved constitution of an Expert Advisory Committee (ECA) to evaluate bids and appointed financial and legal advisors. Subsequently, the independent directors recommended by the minority shareholders were also appointed by the former directors as additional independent directors.
· On May 10, as per news reports, it appears that the former directors went against the advice of the new directors, ECA and their expert advisors and accepted the bid offered received from Hero Enterprise Investment Office and Burman Family Office.
· On May 21, three of the four former directors, namely, Harpal Singh, Tejinder Singh Shergill and Sabina Vaisoha resigned from the board
· On May 22, in the EGM, out of the total votes polled, nearly 87.9 percent supported the removal of the fourth former director, Brain Tempest, from the board and the shareholders confirmed the appointment of the new directors.
· On May 28, the new board introduced a fresh, time-bound bidding process, inviting four of the old bidders and expression of interest (EOI) from fresh bidders.
How did the former directors go wrong?
The verdict of the majority of shareholders in the EGM overwhelmingly reflected their dissatisfaction not only with the decision of the former directors but also with the faulty bidding process adopted by them.
The bidding process had many infirmities. For instance, the board did not provide the bidders an opportunity to conduct a due diligence prior to placing their bids (including revised bids) nor did they place before the bidders the potential risk associated with the transaction. It appears that the former directors, coming under pressure, set up the EAC to review the bids. However, the scope of the EAC was restricted to reviewing binding bids.
The decision to accept the Munjal-Burman offer was made by a 5-3 majority vote, with all the new directors opposing the decision. The polarisation that existed in the board was evident from this decision. Further, as per news reports, the former directors appeared to have taken a decision against the advice of the EAC and their expert advisors. The Munjal-Burman offer had drawbacks, including the lack of experience in the bidders in the hospital industry. Further, all former directors seem to have had long associations with the founder directors and promoters of Fortis, Malvinder Singh and Shivinder Singh or their companies.
From their actions, it seems that the former directors did not live up to the principles laid down in Section 166 of the Companies Act, 2013, related to ‘duties of directors’. They may have failed to promote the best interest of the shareholders of Fortis and their actions have raised questions on their independence and their ability to take objective decisions.
Are things back on track?
Things seem to have taken a right course after reconstitution of the board. The new board has initiated a fresh and time bound bidding process for the transaction. On May 29, 2018, Fortis invited old and new bidders to participate in the bidding process.
Pursuant to an evaluation of EOIs and responses from earlier bidders, the board has shortlisted four bidders (Munjal-Burman, IHH Healthcare Berhand, Radiant Life Care, Manipal Health Enterprises and TPG Asia VI SF) which have been given 10 days for undertaking financial and legal due diligence of Fortis. The invitation seeks information from bidders on certain parameters and only unconditional binding offers can be submitted. Accordingly, June 14, 2018 has been designated as the last day for submitting the bids.
The new board has acted in a fair manner by giving an opportunity to all interested entities to place their bids. As shortlisted bidders have been granted permission to conduct due diligence for 10 days, it will allow the bidders to make a more informed decision while tendering the bids. The invitation for bids also lays down the criteria based on which the board along with financial and legal advisors will evaluate the offers.
The new board is taking steps to amend the series of corporate governance failures caused by the poor decisions of the former directors who appear to have failed to fulfil their fiduciary duties. The board must now preserve the sanctity of the bidding process by operating in a transparent and fair manner. They must at all times keep the best interest of the shareholders of Fortis in mind.
Sandeep Parekh is a partner and Rahul Das is an associate at
Finsec Law Advisors.