Flamboyant businessman Vijay Mallya will get USD 75 million (Rs 515 crore) from Diageo as part of an "agreement" for his exit from United Spirits, a company founded by his family and now run by the global liquor giant.
Besides, Diageo has agreed that Mallya will have no "personal liability" to the UK-based company in relation to the findings of the alleged financial irregularities at the company that had triggered an acrimonious fight between them. These allegations, which surfaced after an internal inquiry, related to the period before Diageo acquired controlling stake in United Spirits Ltd (USL) from the Mallya family.
Under the agreement, Mallya will resign as Chairman and non-executive director of USL, as also from the boards of other USL group companies.
However, his son Siddharth Mallya would remain on the board of the USL group company which holds the Royal Challengers Bangalore IPL franchise and Diageo can not "seek to remove him from that board for a period of two years". Father will have honorary title of the team's Chief Mentor.
Mahendra Kumar Sharma, an independent director, will be the new chairman of United Spirits.
Giving details of the agreement reached with Mallya, Diageo said it has "agreed to pay USD 75 million to Mallya in consideration for his resignation and the termination of his appointment and governance rights and his relinquishing of the rights and benefits attached to his position as Chairman and non-executive director", among other factors.
The payment is also for "his agreement to five-year global non-compete (excluding the UK), non-interference, non-solicitation and standstill undertakings, and his agreement that he and his affiliates will not pursue any claims against Diageo, USL and their affiliates".
Diageo said it will pay USD 40 million of this amount immediately with the balance being payable in equal instalments over five years.
Separately, Diageo has agreed that Mallya will have no personal liability to Diageo in relation to the findings of the inquiry by USL (announced on 25 April 2015) into certain matters referred to in its financial statements and the qualified auditor's report for the financial year ended 31 March 2014, and its prior agreement with Mallya regarding his position at USL.
Diageo also said it has extended Smirnoff's sponsorship of the Force India Formula 1 team of which Mallya is team principal and part-owner for the next five seasons.
The cost of this sponsorship continues to be USD 15 million per season.
Commenting on the agreement with Mallya, Diageo's CEO Ivan Menezes said, "India is an exciting growth opportunity, and USL has the management team, strategy and capability to deliver on that opportunity. The agreement announced today is in the best interests of both Diageo and USL and allows USL to build on its strong platform in one of the biggest spirits markets in the world."
Diageo also said that USL's board will appoint Mahendra Kumar Sharma, currently independent non-executive director and Chairman of the Audit Committee of USL, as Chairman of USL.
Diageo is the majority shareholder of USL with a 54.78 per cent holding, excluding the 2.38 per cent owned by the USL Benefit Trust.
The company further said that the new pact ends Diageo's prior agreement with Mallya regarding his position at USL and "therefore brings to an end the uncertainty relating to the governance of USL".
Regarding USD 75 million payment to Mallya, Diageo said it will be charged to exceptional items in the year ending June 30, 2016.
Giving details, Diageo said the earlier agreement included obligations on Diageo to support Mallya continuing as Chairman and non-executive director of USL in the absence of certain default events.
"Disputes that had arisen under that agreement are concluded by today's agreement and, accordingly, Mallya has resigned from his position as Chairman and non-executive director of USL, as well as from the boards of other USL group companies," it added.
In addition, Diageo has agreed to "release Mallya from his personal obligation to indemnify" certain entities against their liabilities.
These include liability of Diageo Holdings Netherlands BV, a Diageo group company, under its previous guarantee to Standard Chartered in respect of a USD 135 million loan facility of Watson Limited (a company affiliated with Mallya) from Standard Chartered.
"In May 2015, the borrowings under this facility matured and went into default. Following extensions, the guarantee was called by Standard Chartered on January 29, 2016.
Diageo settled the guarantee with Standard Chartered at that point and fully provided for the USD 135 million principal amount outstanding under the facility in its results for the six month period ended December 31, 2015.
"In aggregate, Diageo paid Standard Chartered approximately USD 141 million under this guarantee, including the USD 135 million principal amount, as well as payments of default interest and various fees and expenses.
Watson remains liable for all amounts paid pursuant to the guarantee, while Diageo firm is entitled to the benefit of the security package underlying the facility and the security providers have undertaken to take all necessary actions in that regard.
Another liability is of Diageo Finance plc against its liability under its previous guarantee to Standard Chartered of 30 million British pound of borrowings made by United Breweries Overseas Limited (a subsidiary of UB Holdings Ltd) from Standard Chartered.
The borrowings went into default, and the guarantee was called in May 2015.
"Whilst Diageo continues to have the benefit of counter-indemnification from UBOL, it does not believe that is likely to result in meaningful recovery. This guarantee was entered into by Diageo Finance in April 2012 several months prior to the execution of definitive agreements in respect of the original USL transaction with UBHL.
"As part of the arrangements agreed at that time, Diageo was granted pre-emption rights over certain shares in USL that were pledged to a third party by UBHL and Kingfisher Finvest India Limited," Diageo said.
Regarding the shareholding agreement with UBHL, the holding company of Mallya-led group, Diageo said it had agreed at the time of initial USL transaction to put in place a shareholders agreement.
"UBHL has indicated that it may be prevented from agreeing to terminate the Shareholders Agreement immediately by reason of certain legal and court restrictions which may apply as a result of winding-up proceedings to which it is subject in India.
"Diageo understands from UBHL that it proposes to seek court leave for an agreed termination of the Shareholders' Agreement and Diageo has received certain undertakings in this regard from Mallya," it added.
Regardless of whether UBHL obtains court leave for termination of the Shareholders Agreement, Diageo said it believes that UBHL and Kingfisher Finvest's board appointment and other governance rights under the Shareholders Agreement have already ceased on account of prior breaches of the pact.
Whilst UBHL and KFinvest have previously disputed this, Diageo said it would contest strongly any attempt by UBHL and KFinvest to assert rights to appoint a replacement nominee director to the USL board. Further, Mallya has undertaken to Diageo that he will not seek or accept any nomination to the USL board.
UBHL is subject to non-compete obligations as regards USL until two years expire following termination of the Shareholders Agreement.
Also under the agreement, "Mallya has procured or agreed to procure the termination by the relevant counterparties of certain agreements to which USL is party which were entered into prior to Diageo's acquisition of USL shares from UBHL in July 2013 but which USL is currently prohibited from performing as a result of Indian related party rules and a prior negative shareholder vote.
"These agreements include USL's Formula 1 sponsorship agreement with Watson, an option agreement for the acquisition of certain Indian domestic real estate owned by USL, the sponsorship of Mohun Bagan Football Team and United Racing and Bloodstock Breeders, as well as a contribution agreement with Vittal Mallya Scientific Research Foundation and certain expense reimbursement agreements for aircraft services and property services."
These terminations are on terms that release USL from all liability under the agreements, including in respect of accrued, unpaid amounts, except for in three cases.
These include the Formula 1 arrangements where USL retains a fee liability to Watson but which only becomes payable if USL receives an equivalent amount from the Force India team, as also the refund of about Rs 28.1 crore option fee previously received by USL under the domestic real estate option agreement (plus accrued interest).
The third exception is regarding the payment of fees under the football sponsorship of about Rs 60 lakh in respect of the period prior to the negative shareholder vote in November 2014 and which is therefore not subject to any regulatory restriction.
As part of its arrangements with Mallya, USL has entered into an agreement with him which allows him or a party nominated by him to acquire up to 13 domestic properties from USL.
The properties have historically been used or occupied by Mallya and were previously the subject of the domestic real estate option agreement that has now been terminated.
If Mallya or his nominee elects to acquire any or all of these 13 properties, the price will be an independent valuer's assessment of their fair market value, with a 10 per cent discount applying to the valuation for three properties in Mumbai, Goa and New Delhi.
The applicable prices, including the post-discount price for the three properties in Mumbai, Goa and New Delhi, are expected to be higher than the prices which applied under the now-terminated domestic real estate option agreement.
Diageo further said it has agreed to acquire from Pestello Investments Inc (a company affiliated to Mallya) the 50 per cent interest that it did not already own in the company which owns United National Breweries' traditional sorghum beer business in South Africa.
Under this agreement, Diageo agreed to make an initial payment of USD 27 million and the agreement also provided for a potential earn-out payment of up to USD 14 million. The transaction completed on May 29, 2015. A payment of USD 1.2 million was subsequently made in respect of the earn-out.