Proposed amendments may require deal restructuring

By Aayush Kapoor and Karuna Thapa, Shardul Amarchand Mangaldas & Co
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The recently enacted Companies (Amendment) Act, 2017, brought a fresh set of revisions to the Companies Act, 2013, aimed at plugging loopholes and facilitating ease of doing business. However, certain proposed amendments (which have not yet been notified) may inadvertently affect the structuring of M&A and private equity transactions.

Aayush KapoorPartnerShardul Amarchand Mangaldas & Co.
Aayush Kapoor
Partner
Shardul Amarchand Mangaldas & Co.

Subsidiary company: The 2013 act until now defined a subsidiary as a company where the holding company exercises or controls more than half of the “total share capital”. The amendment act has replaced “total share capital” with “total voting power”. Thus, an investee company could also qualify as a subsidiary of a shareholder who, through voting rights acquired under a shareholders’ agreement or pooling arrangement or differential voting rights, exercises more than half of the voting power in the company. Scenarios where preference shareholders acquire voting rights on all matters if dividends remain unpaid for two years or more could also lead to confusion as to a company’s ownership.

Associate company: Under the 2013 act, an associate company means a company in which another company has significant influence. “Significant influence” has now been defined to mean control of at least 20% of “total voting power” (instead of total share capital), or control of “or participation in business decisions” under an agreement, which has widened its scope. M&A and private equity deals usually involve shareholders having veto rights and board presence, both of which are critical to protect their interests. “Significant influence” has been determined on the basis of either holding of 20% of total share capital or control over (not “participation in”) business decisions. This amendment could result in shareholders who hold less than 20% of the total voting power, but have veto rights and/or board representation, being seen as “participating in business decisions” of the company, thereby qualifying the investee company to be treated as an “associate” of such shareholders. Consequently, obligations (consolidation of accounts, etc.) under the 2013 act would apply to such entities.

Beneficial interest: Section 89 of the 2013 act prescribes disclosure obligations for persons holding beneficial interest in a company and the registered owners. The amendment act proposes to define “beneficial interest” to “include, directly or indirectly, through any contract, arrangement or otherwise, the right or entitlement of a person, alone or together with any other person, to: (i) exercise or cause to be exercised any or all of the rights attached to such share; or (ii) receive or participate in any dividend or other distribution in respect of such share”.

Karuna ThapaSenior associateShardul Amarchand Mangaldas & Co.
Karuna Thapa
Senior associate
Shardul Amarchand Mangaldas & Co.

Further, proposed revisions to section 90 of the 2013 act require individuals who qualify as “significant beneficial owners” (SBOs) to make a disclosure to the company. The amendment act recognizes an individual as an SBO when such an individual, either “alone” or “together”, or “through” one or more persons or a trust (including a trust or person resident outside India): (i) “holds beneficial interest of not less than 25%”, or such other percentage as may be prescribed, of shares in a company; and/or (ii) has the “right to exercise, or actually exercises, significant influence or control”, over the relevant company.

The Companies Law Committee in its report indicates that such wide definitions were included in order to pierce complex structures and trace individuals who are the ultimate SBOs of an Indian company. Each company now has to disclose details of its SBOs (whether operating through an investing company, a trust or otherwise) to the Registrar of Companies. Such determination would have to be made at each holding level and identification as an SBO may change from time to time. Further, individuals who exercise voting rights under voting arrangements (such as pooling arrangements) that are typical in M&A deals (and who do not necessarily enjoy economic benefits attached to the shares of the company) may be identified as SBOs if they meet the requisite threshold. Similarly, holding shares through a trust structure will result in complications given that the beneficial interest and voting rights may be with multiple individuals (being the beneficiaries and/or the trustees). As per the draft rules framed under the proposed section 90, an exemption may be granted only in cases where the registered owners of shares are listed entities (or wholly owned subsidiaries of listed entities).

While the amendment act may be lauded for its goal, further clarity is needed, particularly in the interest of ease of doing business.

Aayush Kapoor is a partner and Karuna Thapa is a senior associate at Shardul Amarchand Mangaldas & Co. The views and opinions expressed are solely those of the author and do not necessarily reflect the official view or position of the firm.

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