Background:- MSK Projects India Limited (‘MSK’ or ‘the Target Company’), issued and allotted fully paid-up equity shares to Subhkam Ventures (I) Private Limited (‘Subhkam’), erstwhile Subhkam Holding Private Limited, on preferential basis representing 17.90 percent of the post preferential issued share capital of MSK (out of total issue of 19.91 percent). A Share Subscription and Shareholders Agreement (‘the Agreement’) was executed between Subhkam, the existing promoters of MSK and MSK to govern the investment made by Subhkam in MSK.
Since the proposed acquisition exceeded the threshold limit of 15 percent of the voting rights in MSK, Subhkam filed a draft Letter of Offer with the Securities Exchange Board of India (‘SEBI’) under Regulation 10 (See Note-1 ) of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (‘Takeover Code’) to acquire shares not less than 20 percent of the total voting capital from the public shareholders (‘Open Offer’).
SEBI based on a review of the Agreement, held that Subhkam had ample power to exercise control over MSK. Therefore, SEBI directed Subhkam to revise the Letter of Offer and make an Open Offer under Regulation 10 and also Regulation 12 (See Note- 2) of the Takeover Code.
Subhkam filed an appeal under Section 15T of the Securities and Exchange Board of India Act, 1992 against the order of SEBI.
Issue for consideration before Securities Appellate Tribunal (‘SAT’) :- Whether the rights available to Subhkam, by virtue of the Agreement, gives Subhkam ‘Control’ over MSK which would trigger an Open Offer under Regulation 10 and Regulation 12 of the Takeover Code instead of only under Regulation 10 of the Takeover Code?
Takeover Code
- The Takeover Code requires an Open Offer to be made under Regulation 10 on acquisition of shares carrying voting rights in excess of the 15 percent or under Regulation 12 upon change in Control (See Note-3), irrespective of whether change in control takes place pursuant to the acquisition of shares carrying voting rights or not.
- Where the change in control is simultaneous pursuant to the acquisition of shares in the Target Company, the Acquirer would be required to make an Open Offer to acquire shares from the public under Regulations 10 and 12 of the Takeover Code.
Acquirer’s Contentions
By virtue of the Agreement, the Acquirer did not acquire Control over the Target Company; therefore, Regulation 12 of the Takeover Code did not get triggered. Moreover, as per the recital in the Agreement, the Acquirer has no intention to take Control over the Target Company.
The Acquirer is a financial investor in the Target Company and the affirmative rights provided in the Agreement are only to protect its substantial investments made in the Target Company and Acquirer does not intend to acquire control over the Target Company.
SEBI Contentions
In view of various clauses of the Agreement, the Acquirer has acquired control over the Target Company and therefore is required to make an Open Offer under Regulation 10 and Regulation 12 of the Takeover Code instead of only under Regulation 10. SEBI referred to the following clauses based on which SEBI arrived at the conclusion that Acquirer has control over the Target Company.
– Clause 3.2(c) & 7.2 – Enables the Acquirer to appoint its nominee on the Board of Directors of the Target Company.
– Clause 4.1– Restricts the Target Company from changing its basic contours between the signing of the Agreement and the Allotment of Shares.
– Clause 7.3– Enables the Investor Director of the Acquirer to be a member of any committee of the Board and to vote at all meetings of such committees.
- Clause 7.7 – Ensures presence of the Investor Director to constitute quorum for Board Meetings.
– Clause 7.8– At an adjourned meeting, the Directors present shall constitute the quorum except that they cannot consider and vote on matters enumerated in Clause 9 which deals with protective provisions.
– Clause 9 (a) to (o) – Enables the Acquirer to influence major policy decisions of the Target Company by virtue of its ‘affirmative vote’. (Vote of the Investor Director required with respect to matters listed in clause 9).
SAT Ruling
- ‘Control’ as defined under the Takeover Code is a proactive and not a reactive power. Control is a power by which an Acquirer can command the Target Company to do what the Acquirer wants it to do. The power by which an Acquirer can only prevent a Target Company from doing what the latter wants to do is by itself not ‘Control’.
- The matters listed in Clauses 9(a) to 9(o) of the Agreement neither provides any operational control over the business of the Target Company nor in the nature of control of management or policy decision of the Target Company.
- Appointment of key executives like CEO, CFO or the Company Secretary with the Affirmative vote of the Investor Director does not mean that the Acquirer can have its own candidates appointed in the above positions.
- The provisions of Clause 9 do impose fetters on the Target Company for the purposes of good governance and it is conventional for the financial investor to protect their investment from the whims and fancies of the promoters who manage the Target Company.
- In addition to above, it also observed that if the entire Open Offer is accepted, therefore if 20 percent shares are tendered, still the Acquirer would be far short of a simple majority that is necessary for getting ordinary resolution passed and therefore in the circumstances it cannot be held that Acquirer has gained control over the Target Company. In such a situation, therefore, the Acquirer is not required to make an Open Offer also under Regulation 12.
Our Comments:- In Private Equity transactions, acquisition of ‘Control’ as defined under Takeover Code has always remained a contentious issue and in the past has been litigated on the facts of each case. However, drawing an inference from SAT ruling, one can arguably conclude that if the investor is mere a financial investor wherein protective clauses has been provided in the shareholders agreements to protect the investments through affirmative rights shall alone not be the decisive factor to arrive at the conclusion that Acquirer is being vested with control over the Target Company.
Note:-
- 10. No acquirer shall acquire shares or voting rights which (taken together with shares or voting rights, if any, held by him or by persons acting in concert with him), entitle such acquirer to exercise fifteen per cent or more of the voting rights in a company, unless such acquirer makes a public announcement to acquire shares of such company in accordance with the regulations.
- 12. Irrespective of whether or not there has been any acquisition of shares or voting rights in a company, no acquirer shall acquire control over the target company, unless such person makes a public announcement to acquire shares and acquires such shares in accordance with the regulations:
- (c) “control” shall include 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.
Explanation.—(i) Where there are two or more persons in control over the target company, the cesser of any one of such persons from such control shall not be deemed to be a change in control of management nor shall any change in the nature and quantum of control among st them constitute change in control of management:
Provided that the transfer from joint control to sole control is effected in accordance with clause (e) of sub-regulation (1) of regulation 3.
(ii) If consequent upon change in control of the target company in accordance with regulation 3, the control acquired is equal to or less than the control exercised by person(s) prior to such acquisition of control, such control shall not be deemed to be a change in control;
