(This is a continuation of a post contributed by Avirup Bose)
In
an earlier
post I discussed the importance of understanding the concept of ‘control’
while analyzing the probable anti-competitive effects of a merger especially in
a partial stock ownership context. The discussion was in the background of an
order of the CCI dated May 17, 2012, which basically held that if a company has
a convertible security holder who can convert its convertible securities into
almost 100 per cent of the firm’s share capital anytime, it cannot but be
deferential to such security holders views about the affairs and management of
the company and this amounts to control by such security holder for the
purposes of the Act. Let us examine below how certain other jurisdictions deal
with such situations.
an earlier
post I discussed the importance of understanding the concept of ‘control’
while analyzing the probable anti-competitive effects of a merger especially in
a partial stock ownership context. The discussion was in the background of an
order of the CCI dated May 17, 2012, which basically held that if a company has
a convertible security holder who can convert its convertible securities into
almost 100 per cent of the firm’s share capital anytime, it cannot but be
deferential to such security holders views about the affairs and management of
the company and this amounts to control by such security holder for the
purposes of the Act. Let us examine below how certain other jurisdictions deal
with such situations.
The
aforesaid position was the basis of the conclusion of an order of the erstwhile
U.K. Monopolies and Mergers Commission (the “MMC”) (the predecessor to the U.K.
Competition Commission) relating to the leveraged buy-out of the consumer
products division of Stora (which included the Wilkinson Sword wet shaving
business) by a number of Swedish investors, banks and financial houses along
with the Gillette Company (“Gillette”, the world’s leading supplier of wet
shaving products)[i].
The MMC had to decide if the holding by Gillette of a number of rights and
interests in Swedish Match NV, the buyout vehicle for the Wilkinson Sword
division (“Wilkinson”), including 22 per cent of non voting convertible loan
stock amounted to control or material influence[ii] over the affairs of
Wilkinson. The MMC in its analysis of the main components of the possible
influence of Gillette on Wilkinson included the facts that the non-voting loan
stock could convert to ordinary shares in the event of a stock exchange
listing, a sale of equity in certain circumstances, possible winding up of the
company, certain pre-emption rights over the sale of equity or assets of the
company[iii]. Although the MMC
accepted Gillette’s arguments that it had no voting rights or board
representation and no right to attend shareholders meetings or receive internal
information it concluded that a “prudent Wilkinson board would be bound
constantly to take into account the fact that Gillette was a major shareholder
of its parent, the Swedish Match NV (holding 22 percent non-voting convertible
loan stock), was its largest creditor and had important rights in relation to
significant decisions affecting the future of the company, notwithstanding the
limits to Gillette’s rights.”[iv] Given the abovementioned
perceived influence Gillette had over the business of its leading competitor,
Wilkinson, the MMC concluded that the transaction would be anti-competitive and
against public interest. The MMC’s conclusion that the mere existence of
certain non-voting rights of an investor can give rise to the ability to influence
corporate policy and decisions resonates with the conclusion of the CCI in the
order referred above.
aforesaid position was the basis of the conclusion of an order of the erstwhile
U.K. Monopolies and Mergers Commission (the “MMC”) (the predecessor to the U.K.
Competition Commission) relating to the leveraged buy-out of the consumer
products division of Stora (which included the Wilkinson Sword wet shaving
business) by a number of Swedish investors, banks and financial houses along
with the Gillette Company (“Gillette”, the world’s leading supplier of wet
shaving products)[i].
The MMC had to decide if the holding by Gillette of a number of rights and
interests in Swedish Match NV, the buyout vehicle for the Wilkinson Sword
division (“Wilkinson”), including 22 per cent of non voting convertible loan
stock amounted to control or material influence[ii] over the affairs of
Wilkinson. The MMC in its analysis of the main components of the possible
influence of Gillette on Wilkinson included the facts that the non-voting loan
stock could convert to ordinary shares in the event of a stock exchange
listing, a sale of equity in certain circumstances, possible winding up of the
company, certain pre-emption rights over the sale of equity or assets of the
company[iii]. Although the MMC
accepted Gillette’s arguments that it had no voting rights or board
representation and no right to attend shareholders meetings or receive internal
information it concluded that a “prudent Wilkinson board would be bound
constantly to take into account the fact that Gillette was a major shareholder
of its parent, the Swedish Match NV (holding 22 percent non-voting convertible
loan stock), was its largest creditor and had important rights in relation to
significant decisions affecting the future of the company, notwithstanding the
limits to Gillette’s rights.”[iv] Given the abovementioned
perceived influence Gillette had over the business of its leading competitor,
Wilkinson, the MMC concluded that the transaction would be anti-competitive and
against public interest. The MMC’s conclusion that the mere existence of
certain non-voting rights of an investor can give rise to the ability to influence
corporate policy and decisions resonates with the conclusion of the CCI in the
order referred above.
Other
jurisdictions may disagree. Under U.S. antitrust law the HSR Regulations
requires that only parties to acquisitions of any voting securities or assets would be required to file appropriate
notification under the U.S. pre-merger notification program and it exempts from
such notification process any acquisitions of convertible securities, but
requires reporting in advance of their conversion.[v] The Statement of Basis and
Purpose of the HSR Regulations discusses the antitrust significance of
convertible securities:
jurisdictions may disagree. Under U.S. antitrust law the HSR Regulations
requires that only parties to acquisitions of any voting securities or assets would be required to file appropriate
notification under the U.S. pre-merger notification program and it exempts from
such notification process any acquisitions of convertible securities, but
requires reporting in advance of their conversion.[v] The Statement of Basis and
Purpose of the HSR Regulations discusses the antitrust significance of
convertible securities:
“From an antitrust standpoint, reporting at
conversion is more useful. It is true that
before conversion, convertible voting securities may confer upon their holder the
power to influence, either directly or
indirectly, the management of the issuer. But the conversion price
attached to convertibles may make conversion economically unattractive. And the
measurement of the potential voting power conferred by convertibles is highly
speculative, since conversions by other holders may dilute the potential voting
power of the person holding the convertibles. So although a substantial holding of convertible voting securities may
give the holder some power to influence management, this power is far less
significant than the ability actually to vote securities. At conversion a
more accurate picture of voting power in the hands of the owner or holder of
those securities can be calculated.[vi]” (Emphasis added)
conversion is more useful. It is true that
before conversion, convertible voting securities may confer upon their holder the
power to influence, either directly or
indirectly, the management of the issuer. But the conversion price
attached to convertibles may make conversion economically unattractive. And the
measurement of the potential voting power conferred by convertibles is highly
speculative, since conversions by other holders may dilute the potential voting
power of the person holding the convertibles. So although a substantial holding of convertible voting securities may
give the holder some power to influence management, this power is far less
significant than the ability actually to vote securities. At conversion a
more accurate picture of voting power in the hands of the owner or holder of
those securities can be calculated.[vi]” (Emphasis added)
However,
under Indian competition law an analysis of what amounts to control in the
merger analysis context is perhaps of less significance than in other
jurisdictions. As Prof. Umakanth had rightly pointed out that the CCI’s analysis
as to what amounts to ‘control’ under the facts of the transaction between the
Reliance Industries and the TV18 Group of companies seemed unnecessary since
the CCI ultimately derived jurisdiction through section 5(a) of the Act which
applies when there is an acquisition of
control, shares, voting rights or assets of an enterprise by another.
Hence, the mere acquisition of shares (which includes in its definition
convertible securities) or assets (which may or may not vest control upon the
acquirer) could trigger a merger analysis under section 5 of the Act. However
an instance where an analysis to what amounts to control over the acquired
entity is important is where control over the acquired entity is being derived
without any share or asset acquisition, such as through a contract. Some of
such instances have been summarized by the U.K. Office of Fair Trading (OFT) in
its Substantive Assessment Guidance:
under Indian competition law an analysis of what amounts to control in the
merger analysis context is perhaps of less significance than in other
jurisdictions. As Prof. Umakanth had rightly pointed out that the CCI’s analysis
as to what amounts to ‘control’ under the facts of the transaction between the
Reliance Industries and the TV18 Group of companies seemed unnecessary since
the CCI ultimately derived jurisdiction through section 5(a) of the Act which
applies when there is an acquisition of
control, shares, voting rights or assets of an enterprise by another.
Hence, the mere acquisition of shares (which includes in its definition
convertible securities) or assets (which may or may not vest control upon the
acquirer) could trigger a merger analysis under section 5 of the Act. However
an instance where an analysis to what amounts to control over the acquired
entity is important is where control over the acquired entity is being derived
without any share or asset acquisition, such as through a contract. Some of
such instances have been summarized by the U.K. Office of Fair Trading (OFT) in
its Substantive Assessment Guidance:
“The OFT may also consider whether any additional
agreements with the company enable the holder to influence policy. These might
include the provision of consultancy services to the target or might, in
certain circumstances, include agreements between firms that one will cease
production and source all its requirements from the other. Financial arrangements
may confer material influence where the conditions are such that one party
becomes so dependent on the other that it gains material influence over the company’s
commercial policy (for example, where a lender could threaten to withdraw loan
facilities if a particular policy is not pursued, or where the loan conditions
confer on the lender an ability to exercise rights over and above those
necessary to protect its investment, say, by options to take control of the
company or veto rights over certain strategic decisions).” (para 2.10)
agreements with the company enable the holder to influence policy. These might
include the provision of consultancy services to the target or might, in
certain circumstances, include agreements between firms that one will cease
production and source all its requirements from the other. Financial arrangements
may confer material influence where the conditions are such that one party
becomes so dependent on the other that it gains material influence over the company’s
commercial policy (for example, where a lender could threaten to withdraw loan
facilities if a particular policy is not pursued, or where the loan conditions
confer on the lender an ability to exercise rights over and above those
necessary to protect its investment, say, by options to take control of the
company or veto rights over certain strategic decisions).” (para 2.10)
Finally,
the CCI’s interpretation of what amounts to ‘control’ under the Act has been
described to be at odds to the interpretation of the term ‘control’ under the
[Indian] Takeover Code[vii]. As per the CCI the mere
acquisition of convertible instruments would trigger a merger analysis under
section 5 of the Act while obligations under the Takeover Code arises only when
such convertible instruments are actually converted to voting rights beyond the
prescribed thresholds. In my opinion the purpose of the Takeover Code and the
Act are different and that may be a key in understanding the conceptual
differences in the acquisition of shares and control under the Act on one hand
and the Takeover Code on the other. The primary aim of the Takeover Code is
fair and equal treatment to all shareholders in an acquisition or merger
scenario[viii]. The triggering of the
obligations under the Takeover Code is dependent on the acquisition of voting
rights because the basis of these obligations is to provide the minority
shareholder with a quantifiable exit option. This exit price can be more
precisely calculated at the time of conversion of the convertible instruments
into shares carrying voting rights. On the other, as explained above,
completion law has to account for the imprecise ways in which an acquirer can
influence and control the management decisions of its rival and cause
appreciable anti-competitive effect on the markets to the detriment of the
common public. What matters under the Takeover Code is if the acquirer has
actual control over the company and hence the stress on voting rights so that a
quantifiable exit price can be determined for the minority shareholders while
what matters under competition law is the acquirer’s mere ability to control
rather than the actual exercise (or the intended exercise) of control.
the CCI’s interpretation of what amounts to ‘control’ under the Act has been
described to be at odds to the interpretation of the term ‘control’ under the
[Indian] Takeover Code[vii]. As per the CCI the mere
acquisition of convertible instruments would trigger a merger analysis under
section 5 of the Act while obligations under the Takeover Code arises only when
such convertible instruments are actually converted to voting rights beyond the
prescribed thresholds. In my opinion the purpose of the Takeover Code and the
Act are different and that may be a key in understanding the conceptual
differences in the acquisition of shares and control under the Act on one hand
and the Takeover Code on the other. The primary aim of the Takeover Code is
fair and equal treatment to all shareholders in an acquisition or merger
scenario[viii]. The triggering of the
obligations under the Takeover Code is dependent on the acquisition of voting
rights because the basis of these obligations is to provide the minority
shareholder with a quantifiable exit option. This exit price can be more
precisely calculated at the time of conversion of the convertible instruments
into shares carrying voting rights. On the other, as explained above,
completion law has to account for the imprecise ways in which an acquirer can
influence and control the management decisions of its rival and cause
appreciable anti-competitive effect on the markets to the detriment of the
common public. What matters under the Takeover Code is if the acquirer has
actual control over the company and hence the stress on voting rights so that a
quantifiable exit price can be determined for the minority shareholders while
what matters under competition law is the acquirer’s mere ability to control
rather than the actual exercise (or the intended exercise) of control.
–
Avirup Bose
[i] Stora/Swedish
Match/Gillette, CM. 1473 (March 1991)
Match/Gillette, CM. 1473 (March 1991)
[ii] Section 26(2) to (4)
of the U.K. Enterprise Act, 2002 (the “Enterprise Act”) recognizes three
degrees of control, acquisition of each of which can give rise to a merger
analysis. These three degrees are: (a) de-jure
or legal control (that is a controlling interest), (b) de-facto control (that is, control over commercial policy) and (c)
material influence (that is, ability to materially influence commercial
policy). Although such degrees of control are not provide under the Act yet the
analysis of the CCI of the term control in the order discussed above comes
closest to the concept of what is referred as ‘material influence’ under the
Enterprise Act.
of the U.K. Enterprise Act, 2002 (the “Enterprise Act”) recognizes three
degrees of control, acquisition of each of which can give rise to a merger
analysis. These three degrees are: (a) de-jure
or legal control (that is a controlling interest), (b) de-facto control (that is, control over commercial policy) and (c)
material influence (that is, ability to materially influence commercial
policy). Although such degrees of control are not provide under the Act yet the
analysis of the CCI of the term control in the order discussed above comes
closest to the concept of what is referred as ‘material influence’ under the
Enterprise Act.
[iii] These investor rights
can be typically found under any investment agreement in India and can be
reasonably expected to be present in an agreement relating to a transaction of
the nature between the Reliance Industries and the TV18 group of companies.
can be typically found under any investment agreement in India and can be
reasonably expected to be present in an agreement relating to a transaction of
the nature between the Reliance Industries and the TV18 group of companies.
[iv] Ibid, at para 1.6
[v] 16 C.F.R. §§ 801.32 & 802.31
[vi] Rules, Regulations,
Statements and Interpretations under the Hart-Scott Rodino Antitrust
Improvements Act, 1976, Chapter I, Sub-Chapter H, p. 30.
Statements and Interpretations under the Hart-Scott Rodino Antitrust
Improvements Act, 1976, Chapter I, Sub-Chapter H, p. 30.
[vii] Securities and
Exchange Board of India (Substantial Acquisition of Shares and Takeovers)
Regulations, 2011
Exchange Board of India (Substantial Acquisition of Shares and Takeovers)
Regulations, 2011
[viii] Justice P.N. Bhagwati
Committee Report on Takeovers 1997, Preface, para ix
Committee Report on Takeovers 1997, Preface, para ix
his might be helpful. The main link is here- http://thefirm.moneycontrol.com/story_page.php?more_category=in_focus&autono=689814
and the relevant extract is pasted below.
Doshi: Nischal, why is it then that in the Takeover Code, which I keep referring to as the mother code, convertibles are not counted in when trying to determine control or influence but when it comes to the MII regulation by the very same regulator, when it comes to determining ownership and hence control, convertibles are counted in, what do you make of that?
Joshipura: It doesn�t surprise me because we have to look at the objective of each legislation. The objective of Takeover Code is different from the objective of MII regulations. The objective of Takeover Code is to protect the interest of the public shareholders in case there is a change in control or management of the listed company. How do you exercise control? Obviously through voting share- only if you can vote at the shareholders meeting you can exercise control and that�s the purpose for which the open offer gets triggered only in a situation where there is acquisition of voting shares beyond the threshold limits. The objective of MII regulations on the other hand is completely different. What MII regulation seeks to do is that it does not want any concentration of power in the hand of few persons which means that concentration of power could be voting or economic and if we read the Bimal Jalan committee report based on which SEBI has taken this decision on including the convertibles also in the threshold limits, it clearly states that its very important the stock exchanges being akin to national monopolies, its very important that there is no concentration of power in hands of few and hence diversification is crucial. So if one person is holding 5% equity shares today and lets say 70-80% warrants that person can keep on selling 5% every time and convert the warrants after the sale to again get back to 5% which even from takeover perspective may not be an issue but from an economic interest perspective; yes.