Mumbai, July 2: Mukesh Ambani’s attempt to enforce his right of first refusal to a stake sale by brother Anil in Reliance Communications Ltd (R-Com) may flounder because of a loosely worded clause in the non-compete agreement between the two sides.

Anil’s legal eagles will almost certainly seize on this to nix his brother’s claim.

The clause reads, “If at any time, either group …. desires to sell or transfer all or substantially all of its holding together with control of any of the companies or a business or a material part of the undertaking of a business as a going concern in that group, it shall first offer … the opportunity to purchase the company holding, business or undertaking to the other group.”

This sparks a legal quibble. The proviso seems to suggest that any stake sale must be bundled with transfer of control before the right of first refusal gets activated.

Blame it all on the phrase “together with control”. If the phrase had read “with or without control”, Mukesh might have had a very strong case.

The other problem is that there is no precise definition in the agreement of what a “substantial stake” means.

Reports indicate that Anil Ambani plans to sell about 50 per cent of his 66.12 per cent stake in R-Com in exchange for a 35 per cent holding in MTN. On the face of it, this is a substantial stake sale.

But the Anil Ambani camp believes Mukesh violated this clause first when he sold a 5 per cent stake in Reliance Petroleum Ltd to Chevron along with an option for Chevron to buy another 24 per cent. If he did, can he now challenge the R-Com deal with MTN?

Definition of control

The Anil camp can open up an escape hatch by arguing that the right of first refusal gets activated only if Anil contemplates a stake sale along with transfer of control.

This is because the non-compete agreement has a very open-ended definition for the word “control”.

The preamble to the agreement defines the key terms used in it. Control is defined as “the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner of any entity”.

This definition grants a lot of latitude and permits control through a direct and an indirect shareholding in R-Com.

The deal with MTN will leave the Anil Dhirubhai Ambani Group (ADAG) with a 16.12 per cent direct stake and an indirect stake of 17.5 per cent — which means an overall holding of 33.62 per cent in R-Com. The Anil camp could argue that this could be enough to control the company under the terms of the definition in the non-compete agreement. Most Indian promoters control their companies for far less anyway.

Second, the definition of control in the non-compete agreement also permits persons to act in concert through shareholder agreements or rights. There is nothing that prevents MTN and Anil Ambani from hammering out a shareholder agreement under which they will act and vote in concert. Most partners in cross-border merger deals protect their interests through similar shareholder agreements.

In the end, it boils down to a chicken-and-egg question. Mukesh Ambani will almost certainly argue that the intention to sell a substantial stake — and a 50 per cent stake sale is substantial — enjoins Anil to offer the stake to him first.

The Anil camp, on the other hand, will contend that the question of offering the stake to the other side arises only if the stake sale is accompanied with the transfer of control. And in this instance, the litmus test fails.

The Anil Ambani camp has already obtained legal opinion to support its claim that a right of first refusal isn’t enforceable under section 111 A of the Companies Act which permits unfettered sale or transfer of shares.

If that argument falters, the Anil Ambani camp will certainly be able to nitpick on the wording of the non-compete agreement.

Meanwhile, R-Com and MTN have until July 9 to decide whether they should go through with the deal.