IPO disclosures shows Coca-Cola has significant veto powers over partner Jubilant

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Hindustan Coca-Cola Holdings Ltd’s draft red herring prospectus for its initial public offering (IPO) reveals several clauses in the inter-se agreement giving Coca-Cola substantial governance rights compared to its Indian partner, Jubilant Beverages.

Under the current structure, HCCOH holds a 60 percent stake and the Jubilant Group 40 percent.

The company filed its IPO documents last week. The issue is expected to be an offer for sale (OFS) of shares worth Rs 8,500-9,000 crore by HCCOH, according to market estimates.

Post-IPO, HCCOH's stake in the company will come down to about 45 percent but Jubilant's will remain unchanged, as it is not planning to sell.

One such clause in the inter se agreement between HCCOH and Jubilant dated November 6 pertains to restrictions on sale of shares by Jubilant.

According to the agreement, Jubilant’s shares are subject to a five-year lock in period. Even after this period, Jubilant cannot simply sell its shares in the open market to institutional investors.

If Jubilant seeks to exit or trim its holding via open market block trades or private placements, it must first submit a curated list of potential buyers to HCCOH for mandatory approval.

Legal experts say granting a co-promoter outright approval authority over who can purchase equity in a publicly listed enterprise is rare in capital markets, since it effectively places restrictions on Jubilant’ s secondary market liquidity.

There are also many clauses within the agreement which require Jubilant to follow HCCOH when it comes to governance matters, board dynamics and executive selection.

According to the pact, Jubilant’s directors are required to vote in lockstep with Coca-Cola. On specified core strategic matters, the two partners are obligated to negotiate a written consensus beforehand and Jubilant’s nominee directors are legally bound to vote in accordance with that mutual agreement.

Restrictions on board agenda and appointments

Further, Jubilant’s nominated directors are not permitted to introduce or deliberate on these reserved matters at board or committee meetings without prior approval.

This top-down voting consensus extends directly to C-suite selection, where both partners must jointly propose candidates for chief executive officer and chief financial officer.

There are also restrictions on Jubilant passing special resolutions without HCCOH’s approval.

The pact also binds Jubilant to broad non-compete and non-solicitation covenants, legally barring it from pursuing competing beverage ventures or poaching key operational talent and enterprise clients.

The contract establishes various so-called fall-away thresholds. While Jubilant loses all governance and nomination rights the moment its stake drops below 25 percent, HCCOH retains its governance levers until its holding falls below a much lower floor of 15 percent.

HCCOH holds unilateral optionality over board seats. If Jubilant's stake dips below designated limits, HCCOH is entitled to strip Jubilant of its default majority board seats.

While Jubilant technically retains the right to name the board chairperson under standard ownership splits, the underlying mechanics ensure that ultimate strategic veto power and board alignment remain anchored with Coca-Cola.

Safeguards intended for avoid any promoter conflicts

Emails sent to HCCOH and Jubilant remained unanswered at the time of publication of this article.

A person privy to the matter said these safeguards are intended to avoid any fight between promoter groups in future. They also aim at preventing any hostile takeover attempts by third parties.

The proposed IPO is an offer for sale where HCCOH is parting with a portion of its stake. Jubilant’s 40 percent stake is crucial in that regard, since if any investor manages to purchase up to 25 percent stake, it can trigger an open offer.

The global Coca-Cola company owns the intellectual property (IP) of all the products and it licences the same to the Indian joint venture.

“World over, Coca-Cola company has similar pacts with local bottlers where the company retains most of the governance rights. India has seen many disputes between promoter groups and having such specific safeguards pre-empt such tussles and avoid legal uncertainties,” another person privy to the development said.