Out of Control?

Definition of ‘Control’ has come in the limelight yet again. This time it is ‘control’ under the Takeover Code, wherein SEBI proposes to amend the ‘control’ definition by introducing a bright line test for acquisition of ‘control’. Click here to read SEBI’s Discussion Paper.

As per extant provisions of the Takeover Code, an acquirer acquiring substantial shares or voting rights i.e., 25% or more, has to make an open offer to the public shareholders of the target company. Irrespective of shares or voting rights acquired, the acquirer also has to make an open offer upon acquiring control of the target company.

In the Discussion Paper, SEBI studied and analysed the 'control' definition in Cos. Act, 2013, Insurance Laws (Amendment) Act, 2015 and FDI Policy, Competition Act, International Financial Reporting Standard (IFRS), and observed that multiple regulators may be applying the test of control from different perspectives and arriving at differing results leading to ambiguity and confusion in the market. With respect to the amendment of definition of ‘control’, SEBI has proposed 2 options: (i) Framework for Protective Rights & (ii) Adoption of numerical methods.

Under the 1st option, SEBI proposes that following rights will not amount to exercise of ‘control’ (subject to further riders):

• Appointment of Chairman/ Vice Chairman,
• Appointment of Observer,
• Covenants specified by Lenders provided these rights are customary to the lending business and the lender has granted loan strictly on commercial basis,
• Commercial Agreements,
• Veto/Affirmative Rights: (Veto rights in matters that are not part of the ordinary course of business or involve governance issues would be considered as protective in nature and would not amount to exercise of control over the target company),
• Quorum rights for meetings involving the matters listed above.

Under the 2nd option relating to adoption of numerical threshold, SEBI proposes to amend the definition of ‘control’ by introducing the following:

• Right or entitlement to exercise at least 25% of voting rights of a company (irrespective of whether such holdings gives de facto control) and/or
• Right to appoint majority of the non-independent directors of a company.

Retro Rewind: In the November 2012 issue of FOCUS (Monthly Journal of WIRC, ICSI), I had written an article titled as “Out of Control”, which contained an compilation and analysis of ‘control’ definition Black’s Law Dictionary, Cos. Act, 1956, Takeover Code, 2011, AS – 18, AS – 23, AS – 27 and Income tax Act, 1961. Had noted that there are many definitions of “Control” in the various legislations, and questioned that: “Has ‘control’ definition become out of control and unmanageable? Why can’t the all the laws in a country have the one single definition for a legal concept?” For the final view / opinion, click here to read more.