Regulators fog up definition of 'control over target firm'

In August 2014, following the Jet-Etihad deal, the market regulator decided to review the definition of control of a target company to bring greater regulatory clarity in mergers and acquisitions (M&As). This includes adopting the 'bright-line' rule - a test to determine change of control after an M&A deal. The regulator hopes this will put to rest ambiguity around control-related issues faced by small investors.

The Merriam-Webster dictionary describes a bright-line test as something "not subject to misinterpretation or more than one interpretation".

The market regulator's takeover code defines control over a target company as the right to appoint majority of directors, or to control the management or policy decisions, by shareholding or management rights or shareholders' agreements or voting agreements. The 'control' definition does not lay down any threshold for shareholding. It also does not lay down any tests to determine 'control' of management or policy decisions.

"Any clarity is welcome," says Suhail Nathani, partner, Economic Laws Practice. "However it remains to be seen how much of its discretion the regulator is willing to give up," he adds.

Another fear among small investors has been the lack of consistency in definition of 'control' among various regulators. For instance, by the Competition Act, 2002, the definition of 'control' is wide and includes 'decisive control over the management or affairs of the enterprise'. The Competition Act takes into consideration aspects like distribution, trading, services, and production to define 'control'. In contrast, the market regulator's definition focuses on control over management, board and policy decisions. In the case of Jet-Etihad, the regulator ruled that the deal did not attract the provisions of the takeover code. However, the Competition Commission of India had a different view.

Legal experts are also divided over the issue of whether affirmative voting rights or veto power that some shareholders enjoy result in 'control'. Investors typically enjoy such rights to protect their investments. A one-size-fits-all approach to defining 'control' may not work, say many legal experts.

COMPETING VIEWS
Differences in definition of control between Competition Act and Sebi (market regulator)

COMPETITION ACT, 2002

• 25% acquisition doesn't neccesarily lead to control
• Decisive control over management of utmost importance
• Having veto right leads to control
• Distribution, trading, services, and production assume importance in defining control

SEBI

• 25% of share aquisition leads to compulsory open offer
• Control over management and policy decisions are the key focus areas
• Veto rights don't lead to control
• Definition of control mainly focuses on control over management, board, and policy decisions