"Control" Under The Takeover Regulations, 2011

The position of law on the interpretation of the term "control" forms the rationale for requiring prospective acquirers obtaining such 'control' to be bound by onerous open offer obligations to acquire the additional shareholding of the target company

In India, the law governing the acquisition of "control" of listed companies was laid out by the Securities and Exchange Board of India ("SEBI") in the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 ("Takeover Regulations 1997"). The Takeover Regulations 1997 was replaced by the SEBI (Substantial Acquisition of Shares and Takeover Regulations, 2011 ("Takeover Regulations 2011").

The Takeover Regulations 2011 deals inter alia with the acquisition of shares, voting rights and control of listed Indian companies. Though SEBI replaced the Takeover Regulations 1997 with the Takeover Regulations2011, the definition of the term "control" has not been amended.

As per Regulation 2(1)(e) of the Takeover Regulations 2011, the term "control" includes the right to appoint a 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 definition has two separate and distinct features i.e. (i) the right to appoint a majority of directors; and (ii) the ability to control the management or policy decisions by various means referred to in the definition. This control of management or policy decisions could be by virtue of shareholding or management rights or shareholders' agreement or voting agreements or in any other manner.

There is a lot of concern and disarray among investors and target companies pertaining to the pivotal issue of what constitutes "control" for the purposes of takeover regulations,specially in the context of a minority shareholder exercising veto or affirmative vote rights.

I. THE JUDICIAL INTERPRETATION

(a) Subhkam Case

The interpretation of the term "Control" has been discussed in depth in the case of Subhkam Ventures (I) (P.) Ltd. v. SEBI .

Regulation 12 of the Takeover Regulations 1997 provided that 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 Takeover Regulations 1997.SEBI in making such requirement took the view that the following rights of Subhkam Ventures under the Shareholders Agreement, viz. (i) the right to appoint a nominee on the board of directors of the target company; (ii) the requirement of the presence of the director nominated by Subhkam Ventures to constitute a quorum for board meetings of the target company and (iii) affirmative voting rights constituted an acquisition of "control" of the target company by Subhkam Ventures thereby also inviting the provisions of Regulation 12 of the Takeover Regulations 1997.

The point of law that were being disputed in this case were therefore whether these rights constituted "control" for the purposes of the Takeover Regulations, 1997- the rights being right to nominate a director on the board of the company, the right to be present to constitute quorum and the affirmative voting rightsall of which are essentially "negative control rights".

Subhkam Ventures filed an appeal to the SEBI Appellate Tribunal ("SAT") against SEBI's decision to treat the acquisition as an acquisition of "control". The SAT overturned SEBI's decision holding that "control", as per the definition of the term in the Takeover Regulations 1997, is "a proactive and not a reactive power". It is a power by which an acquirer can command the target to do what he wants it to do. The SAT in its order further held that control really means creating or controlling a situation by taking the initiative. Power by which an acquirer can only prevent a company from doing what the latter wants to do is by itself not control. SEBI, feeling aggrieved by the decision of the SAT, appealed to the Supreme Court.

The SEBI's decision of bringing "negative control" within the purview of "control" under the Erstwhile Takeover Code raised serious concerns among the private equity fund and venture capitalist community as these rights are commonly granted to investors under investment agreements entered into by them with target companies. Furthermore, most investors consider these rights critical in order to have some level of supervision over the target company's operation and management. The entire investment community therefore looked to the Supreme Court to settle the question of "control" for once and for all and to clarify the point of law on the issue.

Subsequently, both SEBI and Subhkam Venturesreached an out-of-court settlement in the matter and hence in November 2011, the Supreme Court passed an order disposing of the appeal. The order of the Supreme Court also specifically stated that the order of the SAT would not be treated as a precedent in the matter of law .

(b) ArcelorMittal Case

However, in 2018, in the case ofArcelorMittal India Private Limited v. Satish Kumar Gupta and Ors ("ArcelorMittal case"), the Supreme Court was inter alia interpreting the term 'control' under Section 29A(c) of the Insolvency and Bankruptcy Code, 2016 ("IBC") referred to the definition of 'control' as provided under the Takeover Regulations, 2011.

Section 29A(c) of the IBC refers to a corporate debtor "under the management or control of such person". The Supreme Court interpreted 'control' under Section 29A(c) of the IBC to denote only positive control, meaning that a mere power to block special resolutions of a company cannot amount to "control". The Supreme Court referred to the Subhkam Case and held that the observations of SAT in the Subhkam Case can be applied to interpret 'control' under Section 29A(c) of the IBC.

(c) NDTV Case

In the case of NDTV , Vishva Pradhan Commercial ("VPCL") gave a loan of nearly Rs.350 crore to NDTV and the loan agreement had several clauses, which as per a complaint, violated SEBI norms. Pursuant to a review of the complaint, SEBI concluded that "under the garb of a loan agreement, NDTV was being sold to VPCL, which amounted to commissions of a fraud upon the shareholders". SAT however held that through these loan agreements or call option agreements, VPCL can only acquire 26 percent equity shares of NDTV and the SEBI finding that VPCL has acquired 52 per cent of NDTV shares is not based on any cogent evidence nor does this transaction allow VPCL to acquire direct or indirect "control" over NDTV.

The SAT further referred to the Subhkam Case and held that "control" is aproactive power and not a reactive power. The SAT also observed that the aforesaid interpretation had been used by the Supreme Court in ArcelorMittal India Private Limited.

CONCLUSION:

The position of law on the interpretation of the term "control" forms the rationale for requiring prospective acquirers obtaining such 'control' to be bound by onerous open offer obligations to acquire the additional shareholding of the target company. Thus, the definition of "control" becomes critical.

The recent SAT ruling in the NDTV case is certainly a welcome one since it provides further support to the view that negative control does not amount to control for the purposes of Takeover Regulations, 2011. However, it is yet to be seen whether this is a final determination of the issue of the definition and concept of "control" under Indian corporate and securities laws.

Disclaimer – The views expressed in this article are the personal views of the authors and are purely informative in nature.