Sebi has decided to continue ascertaining acquisition of ‘control’ as per the current definition of ‘control’ provided in the Takeover Regulations. Readers may recall that last year in March Sebi had floated a discussion paper for public consultation intending to comprehensively change the concept of control in a listed company. The paper provided for the bright line tests for acquisition of control. It was observed that given the same meaning of control in different statutes, different regulators that interpret those statutes may apply different tests of control and arrive at different results in a similar situation. This could have led to ambiguity and confusion in the market. So, a need was felt to have a clear understanding of the concept of control. Sebi, then strongly advocating the need to have bright line tests for control, had suggested that most countries have the concept of control linked to specified voting rights irrespective of the de facto control. For the bright line tests, the paper had suggested two options. One, purely based on the level of shareholding acquired in the target listed company. If the acquisition crossed that level, it will trigger control. The paper pegged the shareholding at 25% or more. Two, when an acquirer acquired rights in the target listed company which purely by their nature were participatory and not protective rights. To put it differently, that meant ‘veto rights’ which by their nature provided protection to the investors didn’t lead to acquiring control, while any right beyond that did lead to the control being acquired.
Sebi has now decided not go further with its proposal of the bright line tests, citing reasons that mixed response were received from various stakeholders and therefore no particular option was preferred or got overwhelming support. As a consequence, the test to determine whether or not control is acquired will remain a question of fact to be tested on a case-by-case basis.
To be sure, there is no denying the fact that a critical concept like control should pass the test of regulatory scrutiny (based on the facts of that case) so that correct conclusion is arrived at. It shouldn’t be a case of painting all cases—irrespective of their facts—with the same brush. To that extent, Sebi is on the right path by leaving the concept of control unaltered. But at the same time, there is a flip side to it. Now it seems more distant than before to have any clear understanding of control in the case of veto rights. This is because the discussion paper which provided clarity on this is not going to be pursued any further. In the absence of any clarity now, reliance will have to be placed on a few and far-fetched precedents which are ironically unclear themselves.
In the Subhkam Ventures case (disclaimer: the author’s firm handled this case), Sebi viewed that veto rights led to control over the target company. On appeal, the Securities Appellate Tribunal (SAT) disagreed with Sebi’s decision and found that veto rights are ‘protective’ rights and should not result in acquisition of ‘control’ by the acquirer. Aggrieved by this order, Sebi appealed in the Supreme Court. Unfortunately, this interesting question of law remained undecided since the apex court did not decide on it. This is because by the time the appeal came up for final hearing before the court, the facts of the case had substantially changed and the court decided not to pass any order on merit; thus leaving the question open. Interestingly, the court ordered that SAT’s order will not be treated as a precedent. As a result, the issue remained unresolved. Till date, there seems to be no clarity regarding the impact of veto rights in an agreement on the control over a company.
More recently, in March 2017, Sebi, in the Clearwater Capital Partners case (disclaimer: the author’s firm handled this case as well), observed on review of veto rights clauses in the agreement that the covenants appeared to enable exercising of certain checks and controls on the existing management for the purpose of protecting their interest as investors rather than formulating policies to run the target company. Although because of certain facts of this case Sebi did not completely decide the question of control at that point of time, nonetheless this case gives some guidance as to how the regulator looks at the issue now. There is nothing wrong in determining acquisition of control pursuant to veto rights on a case-by-case basis, but when there is a growth spurt in acquisition deals and deal-making seems to get complex, it is a good idea to have some clear guiding principles from the regulator on this commonly seen right—the so-called veto rights.
Author is Partner, J Sagar Associates. Views are personal.