The concept of “control” in takeover regulations in India has evolved and developed over time. If one were to trace the history of the definition of control, it might appear that the draftsmen consciously decided to keep the definition wide and to allow the Securities and Exchange Board of India (SEBI) great flexibility and discretion in a given case.
The Takeover Regulations Advisory Committee, in its report to SEBI in July 2010, sought to make this definition even wider by recommending the inclusion of “ability” (in addition to the “right”) to appoint a majority of the directors or to control the management or policy decisions of a company. Fortunately, this recommendation was not integrated into the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (takeover code), as it would have raised the apprehensions of potential investors about being deemed to be “in control” of a company when they intended only to invest. This change in the definition would also have introduced a grave element of uncertainty, throwing it open to myriad interpretations.
The current takeover code has a slightly altered the definition of control from its predecessor. A new proviso has been added to the definition and, on a plain reading, it is clear that control is defined in an inclusive manner. Control includes the right to: (a) appoint a majority of the directors; (b) control the management or policy decisions exercisable by a person or persons acting individually or in concert, whether directly or indirectly, including by virtue of their shareholding or management rights or shareholders’ agreements or voting agreement or in any other manner. Further, the emphasis is on control being de facto and not de jure.
The definition of control was comprehensively deliberated and analysed by the Securities Appellate Tribunal (SAT) in the Subhkam case, where it was held that: “Control, according to the definition, is a proactive and not a reactive power.”
This was a landmark judgment, as SAT for the first time held that control is a “power by which an acquirer can command the target company to do what he wants it to do. 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. In that event, the acquirer is only reacting rather than taking the initiative. It is a positive power and not a negative power. The test really is whether the acquirer is in the driving seat.”
In the Subhkam case, SAT also examined whether a set of affirmative voting rights conferred on the acquirer of a target company under an agreement gave the acquirer control of the target company. Examining the implications of these rights, SAT declared that such rights protected the acquirer’s investment in that the basic structure of the company could not be altered without the acquirer’s knowledge, and did not provide the acquirer with control over the day-to-day working of the company, and thus did not confer “effective control” of the target company on the acquirer.
It was further held that the affirmative rights protected the acquirer from the whims and fancies of the promoters of the company, thus effectively safeguarding the acquirer’s investment. SAT observed that although these rights would serve as a fetter on the functioning of the target company, all such fetters would not translate into control over the target company.
Back to square one
SEBI challenged the Subhkam judgment before the apex court and, in view of the intervening events (i.e. Subhkam selling its substantial shareholding in the company and another company acquiring a majority stake), the apex court disposed of the appeal by keeping the question of law open and clarified that the order passed by SAT in the Subhkam case would not be treated as a precedent.
It seemed that the Subhkam judgment gave a certain degree of precision to the definition of control, but the apex court’s decision turned SAT’s findings into a mere obiter (or passing remark), leaving the question of law – i.e. whether a set of rights conferred on an acquirer of a target company under an agreement constitutes control – to be decided on another occasion.
To conclude, its only logical to say that it is not enough to be in the driver’s seat, one must be in control of the steering, the gears, the clutch and the brakes of the vehicle being driven. That should be the real test for control!
Pankaj Agarwal is a partner and Neha Udeshi is an associate at Amarchand Mangaldas, Delhi. The views expressed in this article are those of the authors and do not reflect the position of the firm.
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