The Companies Act, 2013 and the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (Takeover Regulations) define ‘control’ as inter alia 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. The Takeover Regulations additionally clarify that a director or officer of a target company will not be considered to be in control over such target company, merely by virtue of holding such position.
The main point of ambiguity arises when we look at this “control” from a purely regulatory perspective to clearly highlight the boundaries and triggers for control. Regulations in India have mainly focused on de facto control, and this is further highlighted in latest rules and regulations.
Through a press release[1] in September 2017, SEBI stated that changing the current definition of ‘control’ may reduce the regulatory scope and increase the susceptibility to abuse. It was felt that any change or dilution in the definition of control would have far reaching consequences since a similar definition of ‘control’ is used in the Companies Act, 2013 and other laws, so they decided to continue with the practice of ascertaining acquisition of ‘control’ as on a case-to-case basis and as per the extant definition in the Takeover Regulations. Some of the most relevant judgments in relation to whether positive or negative control amounts to ‘control’ as under the Takeover Regulations have been discussed below.✦
In Subhkam Ventures v SEBI[2], SEBI took the view that protective covenants, such as affirmative votes given to the nominee director of the investor on matters such as amendment of the articles of association, changes in share capital, approval of the annual business plan, restructuring of the investee company, the appointment of key officials of the company, etc. amounted to acquisition of control by the investor. On appeal, the SAT Order made a distinction between proactive power (positive control) and reactive power (negative control) and stated that control is a power by which an investor can command the investee company to do what he wants it to do and power by which an acquirer can only prevent a company from doing what the latter wants to do is by itself not control. SEBI appealed the decision to the Supreme Court, however before the court could make a final determination of whether affirmative rights constitute control, the case was withdrawn as the investment had been exited. Under these circumstances, the Supreme Court clarified that the order passed by the SAT is not to be treated as a precedent.
Following a similar rationale, SEBI in Kamat Hotel v SEBI[3] noted that only the conferment of proactive rights would enable a person to control the company and not reactive power or the power to veto decisions. The scope of the covenants in this case was to enable the noticees to exercise certain checks and controls on the existing management for the purpose of protecting their interest as investors rather than formulating policies to run the Company. It was held that such rights did not amount to providing control over the day-to-day management over the affairs of the company.
Taking it a step further in Rhodia SA v SEBI[4], veto rights to protect minority interests were said to not constitute control. SAT concluded that while veto rights on day-to-day management decisions may not amount to control, it would when it is with respect to the structural and strategic decisions of the company.
In a similar vein, in Etihad and Jet Airways[5], SEBI took the view that the right of Etihad to appoint only 2 directors out of 12 did not amount to acquisition of control over Jet vis-à-vis the right to appoint majority of the directors. SEBI also examined the governance structure envisaged in the CCA and noted that Jet was free to decide matters related to its commercial operations and hence, Etihad did not exercise control over the management or policy decisions of Jet. In concluding that Etihad did not control the management or policy decisions of Jet, SEBI also observed that Etihad did not have any affirmative, veto or blocking rights at board or general meetings, any quorum rights at board or general meetings, any casting vote rights and any pre-emptive, tag along rights regarding the transfer of shares.
In Sandeep Save & Ors v SEBI[6], certain affirmative rights such as (a) the requirement to obtain the prior approval of the relevant authority with respect to undertaking a new project, change in capital structure, undertaking a scheme of amalgamation or reconstruction, etc.; (b) the right to appoint and remove directors on the board of directors of the company from time to time; (c) the right to appoint professionals to inspect and examine the working of the company, financial and accounting systems, to carry out concurrent audit, etc. would not constitute control as long as such rights are temporary in nature and they would cease to exist if the associated shareholding is disposed off. It was also observed that mere ‘paper rights’ do not amount to control as there was no actual intention to control the management of the company and there was not a single instance of “actual” exercise of such alleged control.
In contrast, CCI, in the matter of Alpha TC Holdings Pte Limited and Tata Capital Growth Fund I[7], held that reserved matter rights given to a minority financial investor could amount to exercise of control by such investor as the set of reserved matters for which consent of the investor was required dealt with strategic commercial decisions of the company and hence could not be considered as mere minority protection rights.
Conclusion
Due to the approach to determine the nature and existence of control on a case-to-case basis, there are at present multiple judgments examining what constitutes control, specifically positive and negative control in a piecemeal manner. While amending the definition of ‘control’ would have a cascading effect on other laws and would not necessarily offer clarity, this fragmented approach makes it difficult to determine exhaustively the rights and powers that would amount to ‘control’ and allows a lot of discretionary powers in the hands of the adjudicating authority to shape the contours and limitations of the term when seen in light of the Takeover Regulations.
[1] SEBI press release on Acquisition of ‘control’ under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, PR No.: 56/2017, 8 September 2017.
[2] Civil Appeal No. 3371 of 2010.
[3] Order number WTM/GM/EFD/DRAIII/20/MAR/2017, 31 March 2017.
[4] (2001) 34 SCL 597.
[5] SEBI Order in the matter of Jet Airways, 8 May 2014.
[6] (2003) 41 SCL 47 (SAT).
[7] CCI Order in the matter of Alpha TC Holdings Pte Limited and Tata Capital Growth Fund I, Combination Registration No. C-2014/07/192, 9 September 2014.
(Article is jointly Authored by Vaibhavi Shaunak, an associate with Trilegal and Mr. Siddharth Shaunak a graduating student from OP Jindal Global University.
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