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| Web Exclusive: Rhodia to Subhkam -- What indeed is control? |
| Akila Agrawal / New Delhi Jan 26, 2010, 16:42 IST |
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The Securities Appellate Tribunal (“SAT”) has recently ruled in the matter of Subhkam Ventures Pvt. Ltd v. Sebi, that control as defined under the Takeover Regulations does not include negative control. The ruling which is perceived by many as a landmark one is contrary to a previous ruling by SAT in the case of Rhodia S.A. v. Sebi.
Control as defined in the Takeover Regulations essentially states that an ability to appoint the majority of the directors on the board or an ability to control the management or policies of the company amounts to control over a company. Acquisition of 50 per cent voting rights gives a person a clear ability to appoint the majority of the directors on the board and hence there is not much ambiguity in this test of control. The debate revolves around what amounts to an ability to control the management or policies of the company.
The entire discussion on whether control should be positive or negative, proactive or reactive is unnecessary, as the Takeover Regulations are fairly clear that an ability to ‘control’ the management or policies of the company amounts to control and the nature of such control is of no consequence as the definition of control elaborates that it could be obtained in any manner whatsoever.
There is a school of thought that believes that grant of veto rights to an investor amounts to acquisition of control by the said investor. Without going into the facts of the case or examining the scope and extent of the veto rights that are granted, it will be dangerous to set this as a test for control. It is tantamount to saying that mere acquisition of 26 per cent stake in a listed entity amounts to acquisition of control as this shareholder has the ability to block all special resolutions. Whether the veto rights so acquired amounted to acquisition of control will have to be tested on a case-by-case basis and it will be counter-productive if any set of Regulations or judge-made law seeks to lay down a straight jacket test for the same. The Rhodia S.A. case subscribes to this view.
In the case of Rhodia S.A., SAT ruled that Rhodia, albeit not being a shareholder, was in a position to control the affairs of Danube, the step-up parent company of the target in India. From a close reading of the facts of that case it appears that SAT had deduced Rhodia’s ability to control the affairs of Danube not only due to the contractual veto rights vested with Rhodia on all major matters such as payment of dividend, acquisition or disposal of assets and issuance of securities but also due to the other circumstances surrounding the case.
Rhodia in this case not only funded Danube but also completely controlled the bid placed by Danube’s wholly owned subsidiary for the acquisition of the target company in UK. Based on all of the above it is not very difficult to come to the conclusion that Rhodia did have an ability to control the affairs of Danube. It will be misplaced to read the Rhodia S.A. decision to mean ‘a veto right over significant corporate transactions of the company amounts to an ability to control that company’. Clearly, the facts indicate that Rhodia exercised a degree of control over the company well beyond its affirmative veto rights.
The recent SAT judgment on Subhkam Ventures examines whether grant of certain affirmative voting rights to an investor amounts to acquisition of control by the investor. The target company has a promoter in place and the said investor is said to be a financial investor who gets to appoint one nominee director on the board of the company and all committees of the Board. The investor also has certain affirmative voting rights in its favour.
Up until now the transaction has all the trappings of a financial investment or a private equity investment in a listed company. What differentiates this deal from other private equity deals is the long list of affirmative rights that the investor obtains pursuant to its agreement with the company. Further, that the board of the company cannot pass any resolution on such matters without the approval of the investor director and in case such director is not present at that meeting such matters cannot be resolved by the Board due to lack of a valid quorum.
The list of matters which are 22 in number, include not only standard items such as amendment to the charter documents, issue of shares, disposal of assets etc but also items such as approval of the annual business plan and any deviation from the same, appointment of key officials (CEO, COO, CFO and Company Secretary) their remuneration and powers, any joint venture of the company, any investments made by the company, incurrence of any indebtedness beyond a threshold, and settlements of legal claims in excess of Rs one crore.
The list is clearly an over-kill and it is very difficult for one to agree with SAT’s view that these rights have been granted solely in the interests of minority protection and good corporate governance. SAT in its ruling has maintained that these set of rights merely enable Subhkam to oppose a proposal and not carry any proposal on its bidding. It is true that Subhkam cannot ensure that its proposal be implemented by the company but with rights of such nature Subhkam can definitely steer a company in the direction it seeks as the company can pretty much do nothing without the express consent of Subhkam (apart from routine day to day matters which in any event doesn’t call upon the decision making powers of the board). If this is not control over the management or policies of the company then what is?
The author is Partner, Amarchand Mangaldas & Suresh A. Shroff & Co.
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