The question of what constitutes “control” under the SEBI
Takeover Regulations of 2011 is a vexed one. This is because an acquirer could
acquire less than the mandatory offer threshold of 25% and still be required to
make an offer if it is said to be in control of the target company. Control is
defined in an inclusive manner and could result in some amount of subjectivity
in its determination. The issue has been surfacing again and again in a few
cases, where it is primarily the contractual arrangements between the parties
that are under scrutiny, and specifically in terms of the rights conferred upon
the investor/acquirer.
Takeover Regulations of 2011 is a vexed one. This is because an acquirer could
acquire less than the mandatory offer threshold of 25% and still be required to
make an offer if it is said to be in control of the target company. Control is
defined in an inclusive manner and could result in some amount of subjectivity
in its determination. The issue has been surfacing again and again in a few
cases, where it is primarily the contractual arrangements between the parties
that are under scrutiny, and specifically in terms of the rights conferred upon
the investor/acquirer.
In an interesting column
last week in the Financial Express, Menaka Doshi points to the background
regarding the concept of “control” in the Takeover Regulations and stresses the
paradoxical results it can lead to. She also sets out the background to the
definition of “control” and the failed opportunity to receive an interpretation
from the Supreme Court in the Subhkam
case.
last week in the Financial Express, Menaka Doshi points to the background
regarding the concept of “control” in the Takeover Regulations and stresses the
paradoxical results it can lead to. She also sets out the background to the
definition of “control” and the failed opportunity to receive an interpretation
from the Supreme Court in the Subhkam
case.
While the Takeover Regulations Advisory Committee (TRAC)
that recommended the 2011 Regulations reemphasized the need for mandatory
offers to be triggered by de facto
control situations in addition to de jure
control situations, the Committee refrained from making specific recommendations
on type of exercise of the control (including the power of the
investor/acquirer to say “no” to proposals of target companies). This was
because the Subhkam case was pending before the Supreme Court at that stage
with a ruling anticipated to clear the air.
that recommended the 2011 Regulations reemphasized the need for mandatory
offers to be triggered by de facto
control situations in addition to de jure
control situations, the Committee refrained from making specific recommendations
on type of exercise of the control (including the power of the
investor/acquirer to say “no” to proposals of target companies). This was
because the Subhkam case was pending before the Supreme Court at that stage
with a ruling anticipated to clear the air.
The reason why I was drawn to this issue again now is
because I was researching in a different context on the question of mandatory
offers being triggered by a change in control, and was examining the position
internationally. In a handful of jurisdictions that I examined, none of them
had a subjective definition of control. All of them had a specific percentage
threshold for defining control, similar to the 25% threshold in India. Examples
are UK (30%), Singapore (20%), Hong Kong (30%), Malaysia (33%) and European
Union (30%). Of course, the US takeover regime does not carry a mandatory offer
obligation. India was the only jurisdiction I came across that has a subjective
definition of control in addition to a percentage threshold, a point that
Menaka too notes. While this will certainly benefit minority shareholders by
providing them with an equal exit opportunity through mandatory offers during a
change in control, it could also cause uncertainties as we have seen in the few
Indian cases.
because I was researching in a different context on the question of mandatory
offers being triggered by a change in control, and was examining the position
internationally. In a handful of jurisdictions that I examined, none of them
had a subjective definition of control. All of them had a specific percentage
threshold for defining control, similar to the 25% threshold in India. Examples
are UK (30%), Singapore (20%), Hong Kong (30%), Malaysia (33%) and European
Union (30%). Of course, the US takeover regime does not carry a mandatory offer
obligation. India was the only jurisdiction I came across that has a subjective
definition of control in addition to a percentage threshold, a point that
Menaka too notes. While this will certainly benefit minority shareholders by
providing them with an equal exit opportunity through mandatory offers during a
change in control, it could also cause uncertainties as we have seen in the few
Indian cases.
Interestingly, some other jurisdictions carried a subjective
definition of control in their early years and, since it did not work well,
migrated to a regime where control is defined through a specific percentage
threshold. It would be useful to consider the merits and demerits of both approaches.
definition of control in their early years and, since it did not work well,
migrated to a regime where control is defined through a specific percentage
threshold. It would be useful to consider the merits and demerits of both approaches.
The reason for a subjective definition of control is that
there can be various shades of control in a target company. That would depend
not only on the legal rights conferred upon shareholders holding certain number
of shares with voting rights (e.g. 75% to pass a special resolution), but also
upon the distribution of shares among shareholders of the target (in a widely
distributed shareholding, a small holding may be sufficient to gain control).
Therefore, a subjective definition of control would enable SEBI to make a
determination based on the facts and circumstances of individual cases. This
would ensure that acquirers cannot circumvent their mandatory offer obligations
by structuring their transactions through ingenious methods to stay outside the
purview the rule. Although this approach could significantly minimise the
circumvention or abuse of the rule, it is fraught with uncertainty that could
severely impinge upon a free market for acquisition of shares in a listed
company if acquirers are put under a constant fear of having to make an offer
even though they do not fancy a controlling position in the target.
there can be various shades of control in a target company. That would depend
not only on the legal rights conferred upon shareholders holding certain number
of shares with voting rights (e.g. 75% to pass a special resolution), but also
upon the distribution of shares among shareholders of the target (in a widely
distributed shareholding, a small holding may be sufficient to gain control).
Therefore, a subjective definition of control would enable SEBI to make a
determination based on the facts and circumstances of individual cases. This
would ensure that acquirers cannot circumvent their mandatory offer obligations
by structuring their transactions through ingenious methods to stay outside the
purview the rule. Although this approach could significantly minimise the
circumvention or abuse of the rule, it is fraught with uncertainty that could
severely impinge upon a free market for acquisition of shares in a listed
company if acquirers are put under a constant fear of having to make an offer
even though they do not fancy a controlling position in the target.
The element of uncertainty surrounding a subjective
definition of control is removed in a specific numerical percentage threshold.
A bright-line test such as 25% voting rights in a company, which is a proxy for
control, introduces considerable ease in interpretation and implementation both
for the regulators and the participants in the takeover market. However, one of
the key disadvantages of this approach is that it introduces an element of
arbitrariness to the process. While due care may be exercised while fixing the
appropriate limit to determine control, it is always possible for persons
acquiring shares in the targets to acquire such number of shares so that they
stay below the threshold for mandatory offers. Hence, in India, it is possible
for a person to acquire 24% shares with voting rights and avoid making an offer
to acquire the remaining shares even though such level of shareholding may
provide the person with de facto control of the target, especially if the
remaining shareholding in the target is diffused.
definition of control is removed in a specific numerical percentage threshold.
A bright-line test such as 25% voting rights in a company, which is a proxy for
control, introduces considerable ease in interpretation and implementation both
for the regulators and the participants in the takeover market. However, one of
the key disadvantages of this approach is that it introduces an element of
arbitrariness to the process. While due care may be exercised while fixing the
appropriate limit to determine control, it is always possible for persons
acquiring shares in the targets to acquire such number of shares so that they
stay below the threshold for mandatory offers. Hence, in India, it is possible
for a person to acquire 24% shares with voting rights and avoid making an offer
to acquire the remaining shares even though such level of shareholding may
provide the person with de facto control of the target, especially if the
remaining shareholding in the target is diffused.
Given that both the subjective and bright-line approaches
have their disadvantages, neither may be considered optimal on its own. After
having experimented with the subjective approach during their initial years of
takeover regulation, several jurisdictions have reconciled to adopting the
bright-line approach.
have their disadvantages, neither may be considered optimal on its own. After
having experimented with the subjective approach during their initial years of
takeover regulation, several jurisdictions have reconciled to adopting the
bright-line approach.
Only time will tell if India’s approach of combining both a
numeric percentage threshold and subjective determination of control will be
optimal or counterproductive. Even if there is no case yet to eliminate the
subjective concept of control, it would do well for SEBI to delineate its scope
as clearly as possible.
numeric percentage threshold and subjective determination of control will be
optimal or counterproductive. Even if there is no case yet to eliminate the
subjective concept of control, it would do well for SEBI to delineate its scope
as clearly as possible.