Brightline Test for Acquisition of Control

following guest post is contributed by Supreme Waskar, who is a corporate lawyer]
In the backdrop of ambiguity and concerns in
relation to acquisition of ‘control’ of a listed target company, the Securities
and Exchange Board of India (“SEBI”)
has initiated a consultation process by way of its discussion
dated March 14, 2016 (“Discussion
The term control as defined in regulation
2(1)(e) of the SEBI (Substantial Acquisition and Takeovers) Regulations, 2011
(“Takeover Regulations”) provides
for broad set of circumstances which would constitute control and at the same
time it has left the scope open to include factors to be covered within the
ambit of the definition. The existing definition of control under regulation
2(1)(e) of the Takeover Regulations requires consideration of facts and
circumstances of each case, and as a result there have been multiple
inconsistent views. Control is based on certain defined principles rather
than on rules and there have been cases when a multitude of opinions gives rise
to different assessments of what amounts to control over a listed company and
have led to significant litigation in the past. In view of this, the Indian
capital market regulator, SEBI, has proposed a bright line test for acquisition
of control. 
SEBI in its discussion paper has broadly suggested
a list of two options: (1) adopting a numerical threshold of 25 per cent voting
rights; or (2) putting in place a framework for protective rights.
(1) Adopting a numerical
threshold of 25% voting rights
In the first
SEBI has proposed a 25% voting right threshold or the right to
appoint majority of non-independent directors as determining factors to
identify control. Since the Companies Act recognizes any holding in excess
of 25% as the threshold at which special resolutions can be blocked, it would be
appropriate that 25% may also signify the threshold level for trigger of
control in India.
(2) Framework for protective
In the second
, SEBI has proposed an illustrative list of protective rights that
will not amount to acquisition of control subject to satisfaction of certain
conditions. Under the protective rights, SEBI has proposed instances which will
not amount to exercise of control in any manner.
(i)        Appointment
of chairman/vice chairman
: May be a nominee of an investor, provided the
person does not hold any executive position and does not have a casting vote.
(ii)       Appointment
of observer
: Shall not have
any voting or participation rights.
(iii)      Customary
lender covenants
: Banks/non-banking finance companies (NBFCs) may have
customary covenants specified by lenders.
(iv)      Commercial
: Rights conferred on the parties to a commercial agreement
would not amount to control, provided it is for mutual commercial benefit and the
board of the target company shall have approved, has the right to terminate and
have the right to enter into similar arrangement with any other party.
(v)       Veto/Affirmative
: SEBI has provided illustrative list of veto/affirmative rights
in matters that are not part of the ordinary course of business or involve
governance issues and would be considered as protective in nature and would not
amount to exercise of control over the target company.
(vi)      Quorum
: For meetings involving the illustrative list of
veto/affirmative rights: If 2 meetings are not quorate, the next meeting would
be deemed to have quorum despite the absence of the investor nominees.  
above-mentioned protective rights shall be subject to several conditions, such
(i)        Min
10% investment
: The respective investors must invest at least 10% in the target company;
(ii)       Public
shareholders approval
: The grant of such rights will be mandated to required
public shareholders’ approval
(majority of minority);
(iii)      Incorporation
in articles of association
: The aforementioned protective rights shall
also be incorporated in articles of
of the company;
(iv)      IPO:
In case of an iniital public offering (IPO), the existing agreement needs to be
modified or cancelled until the approval of public shareholder is taken after
the listing.

– Supreme Waskar

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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