 "The elusive concept of control")
The word 'control' means exercising direction and command over things. But this simple definition does not hold water in the complex and dynamic world of mergers and acquisitions.
Every year, regulators such as the Securities and Exchange Board of India (Sebi), Ministry of Corporate Affairs (MCA) and the Competition Commission of India (CCI) receive a lot of queries from legal advisors of companies to ensure that they are on the right side of the law.
Last year, Sebi, following the controversy around the Jet-Etihad deal, decided to take a look at the definition of control. But even after a year, the regulator is nowhere close to finding the answer.
According to sources, the regulator has not been able to zero in on a definition that lawyers had suggested. "The right to appoint a majority of directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly" is how Sebi's substantial acquisition and takeover code defines control. Any acquisition of more than 25 per cent of shares automatically construes as 'control' and leads to an open offer. The MCA and the foreign direct investment (FDI) rules go with that definition, but CCI has a different version.
The definition of 'control' under the Competition Act, 200, is wide, including "decisive control over the management or affairs of the enterprise". In the Competition Act, phrases such as distribution, production, trading, and service also become relevant terms. Lalit Kumar of J Sagar Associates believes the tricky part is dealing with control over management and policy decisions.
"While it is easy to determine control from the perspective of the right to appoint a majority of directors on the board of a company because it is a simple calculation to see if a person has a right to appoint a majority of directors on the board, however, the second test of control is always a question of facts and circumstances. The definition does not clearly lay down the tests to determine the meaning of control of management or policy decisions," he says.
However, many others are of the opinion that certain level of discretion with the regulator is expected. As was exercised in the case of SpiceJet, where the new promoter, Ajay Singh, was exempted from making an open offer, as SpiceJet was established as bankrupt.
"Given that 'control' is an elusive concept, by design any definition of control will grant discretion to regulator, and this is not the case just in India but the world over," says Suhail Nathani, partner, Economic Laws Practice.
Some lawyers argue that CCI is assuming a different definition, rightly so, as they are catering to a different perspective. But, not all see it that way. Another area that companies and advisors grapple with is a lack of consistency.
"However, the apprehension in India is the lack of consistency. There should be some amount of certainty in the form of precedence and uniformity of treatment across regulators. Assuming definitions are consistent, companies need comfort that if a case was dealt by one regulator in one manner the same would apply to similar cases across regulators," says Nathani.
Another interesting question that arises on 'control' is: whether affirmative voting rights or veto matters or reserved matters result in control? It is typical for the investors to have such rights in a company when they have invested funds to protect their investment.
There are some judicial precedents under Sebi Takeovers Regulations on the issue. The most recent one in this regard is an order of Securities Appellate Tribunal (SAT) in the matter of Subhkam Ventures. The SAT's order in 2010 made the issue clear by holding that such affirmative votes do not result in control over a company. But a subsequent appeal in the Supreme Court by Sebi held that the order could not hold precedence.
"In view of the Supreme Court's order, the SAT's order cannot be treated as a precedent. Therefore, the settled issue that reserved matters do not lead to control is far from being is a settled issue now," says Kumar.
However, he is quick to add that a view can be taken that affirmative voting rights do not lead to control.
With Sebi undergoing the exercise of redoing the definition of control just four years after the Substantial Acquisition of Shares and Takeovers regulations were revamped, perhaps there is a need for an operational list of cases similar to insider trading rules.
"As in the new insider trading code, there is a list of who is an insider and what price-sensitive information is. Something similar is needed to define that situation that can be construed as control," says a legal advisor.
Every year, regulators such as the Securities and Exchange Board of India (Sebi), Ministry of Corporate Affairs (MCA) and the Competition Commission of India (CCI) receive a lot of queries from legal advisors of companies to ensure that they are on the right side of the law.
Last year, Sebi, following the controversy around the Jet-Etihad deal, decided to take a look at the definition of control. But even after a year, the regulator is nowhere close to finding the answer.
Also Read
| CONTROL HAZE |
CCI
|
According to sources, the regulator has not been able to zero in on a definition that lawyers had suggested. "The right to appoint a majority of directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly" is how Sebi's substantial acquisition and takeover code defines control. Any acquisition of more than 25 per cent of shares automatically construes as 'control' and leads to an open offer. The MCA and the foreign direct investment (FDI) rules go with that definition, but CCI has a different version.
The definition of 'control' under the Competition Act, 200, is wide, including "decisive control over the management or affairs of the enterprise". In the Competition Act, phrases such as distribution, production, trading, and service also become relevant terms. Lalit Kumar of J Sagar Associates believes the tricky part is dealing with control over management and policy decisions.
"While it is easy to determine control from the perspective of the right to appoint a majority of directors on the board of a company because it is a simple calculation to see if a person has a right to appoint a majority of directors on the board, however, the second test of control is always a question of facts and circumstances. The definition does not clearly lay down the tests to determine the meaning of control of management or policy decisions," he says.
However, many others are of the opinion that certain level of discretion with the regulator is expected. As was exercised in the case of SpiceJet, where the new promoter, Ajay Singh, was exempted from making an open offer, as SpiceJet was established as bankrupt.
"Given that 'control' is an elusive concept, by design any definition of control will grant discretion to regulator, and this is not the case just in India but the world over," says Suhail Nathani, partner, Economic Laws Practice.
Some lawyers argue that CCI is assuming a different definition, rightly so, as they are catering to a different perspective. But, not all see it that way. Another area that companies and advisors grapple with is a lack of consistency.
"However, the apprehension in India is the lack of consistency. There should be some amount of certainty in the form of precedence and uniformity of treatment across regulators. Assuming definitions are consistent, companies need comfort that if a case was dealt by one regulator in one manner the same would apply to similar cases across regulators," says Nathani.
Another interesting question that arises on 'control' is: whether affirmative voting rights or veto matters or reserved matters result in control? It is typical for the investors to have such rights in a company when they have invested funds to protect their investment.
There are some judicial precedents under Sebi Takeovers Regulations on the issue. The most recent one in this regard is an order of Securities Appellate Tribunal (SAT) in the matter of Subhkam Ventures. The SAT's order in 2010 made the issue clear by holding that such affirmative votes do not result in control over a company. But a subsequent appeal in the Supreme Court by Sebi held that the order could not hold precedence.
"In view of the Supreme Court's order, the SAT's order cannot be treated as a precedent. Therefore, the settled issue that reserved matters do not lead to control is far from being is a settled issue now," says Kumar.
However, he is quick to add that a view can be taken that affirmative voting rights do not lead to control.
With Sebi undergoing the exercise of redoing the definition of control just four years after the Substantial Acquisition of Shares and Takeovers regulations were revamped, perhaps there is a need for an operational list of cases similar to insider trading rules.
"As in the new insider trading code, there is a list of who is an insider and what price-sensitive information is. Something similar is needed to define that situation that can be construed as control," says a legal advisor.