 "Sebi issues discussion paper on 'control'")
The Securities and Exchange Board of India (Sebi) on Monday spelt out ‘brightline tests’ for acquisition of control in a merger and acquisition (M&A) transaction involving a listed company. In a discussion paper, Sebi proposed exercising 25 per cent of voting rights, irrespective of the actual shareholding, to decide change in control. The regulator also proposed a list of protective rights, which would not amount to acquisition of control. The concept of control holds significance under Sebi’s takeover regulations to undermine whether an entity has to make an open offer to minority shareholders.
Brightline tests are aimed at removing uncertainties and ambiguity in M&A deals.
At present, an open offer is triggered when an entity buys minimum 25 per cent shares in a listed target. However, in some cases, an entity acquires less than the threshold to avoid open offer obligation, yet gains a say in the management of the target company.
The brightline tests proposed by Sebi will be used in such cases by expanding the ambit of the definition of control.
Under the protective rights, Sebi has proposed instances which will not amount to exercise of controlling any manner. These include the appointment of chairman/vice-chairman, observer, covenants specified by lenders, commercial agreements, veto rights, etc. Sebi has also given a list of veto rights where acquisition of control is not applicable.
The grant of the above-mentioned right is the subject of several conditions, such as the respective investor must invest at least 10 per cent in the target company. The grant of such rights will be mandated to have public shareholder approval. While in case of initial public offerings, the existing agreement needs to be modified or cancelled till the approval of public shareholder is taken after the listing.
“Procuring public shareholders’ approval for terming a particular set of protective rights as non-controlling in nature in one case whereas the same set of rights in the absence of an approval being termed as granting control in another situation would be a case-to-case basis mechanism being rightfully considered by Sebi,” said Tejas Chitlang of IC Legal.
The numerical threshold for determining control is a well-accepted norm globally and is a practical criteria along with the other factors that might signify control, he added.
Legal experts have been asking Sebi to provide clarity on the definition of control, especially in the wake of some cases where the issue of 'control' was hotly debated, such as the Jet-Etihad deal.
Sebi also discussed the advantages and disadvantages of the options. In case of protective rights, the said rights would not amount to acquisition of control. Subsequently, in case of numeric threshold, it would not necessitate an open offer requirement under the takeover regulation.
