“Control” under The Takeover Code May 27, 2016 Lalit Kumar, Partner J. Sagar Associates advocates & solicitors Ahmedabad | Bengaluru | Chennai | Gurgaon | Hyderabad | Mumbai | New Delhi

Takeover Code, 2011  SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (“Takeover Code”) aims at protecting interest of the investors in securities of a listed company  Provides an opportunity for the public shareholders to exit where there is a substantial acquisition of shares or voting rights or control over a listed company including the consolidation of holdings by existing shareholders  Requires an acquirer to make an offer to shareholders of the target company prior to acquiring shares exceeding stipulated thresholds  Contains provisions relating to open offer size and price, time bound process for making an open offer, exemption from making an open offer etc. 2

Concept of “Control”  Subjective and inclusive definition of control to include de-facto and de- jure control. Defines “control” as follows: “control” includes the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner: Provided that a director or officer of a target company shall not be considered to be in control over such target company, merely by virtue of holding such position  Control has two distinct and separate features, namely: The right to appoint majority of directors (factual part) The ability to control the management or policy decisions (subjective part) 3

Concept of “Control”  The right to control can accrue in any of the following manner:  Through Shareholding  Through Management Rights  Through Investment / Shareholders’ Agreement  Voting Agreements  In other manner  Regulation 4 (Acquisition of Control) of Takeover Code provides: Irrespective of acquisition or holding of shares or voting rights in a target company, no acquirer shall acquire, directly or indirectly, control over such target company unless the acquirer makes a public announcement of an open offer for acquiring shares of such target company in accordance with these regulations 4

SEBI v. Subhkam Ventures (I) Private Limited  The point of law that was being disputed: whether the rights such as the right to nominate a director on the board of the company, the right to be present to constitute quorum and the affirmative voting rights all of which is essentially “negative control rights” constituted “control” for the purposes of the takeover code  SEBI‟s position: the definition of “control” would include veto rights since such negative control would effectively control the management and policy decisions of a company  Differing from the SEBI’s position, Securities Appellate Tribunal (SAT) in order dated January 15, 2010 held: “control” meant positive control, that is, the ability to cause a company to perform certain actions, and that it did not cover rights constituting “negative control”, i.e. the right to prevent the company from doing certain actions. The SEBI had appealed the aforesaid decision of SAT before the Supreme Court.  Both SEBI and Subhkam Ventures reached an out of court settlement in the matter and the Supreme Court passed an order disposing off the appeal. The Supreme Court’s order dated November 16, 2011 accepting the out of court settlement between SEBI and the respondents, specifically states that the question of law (i.e., whether negative control is control) remains open and that the SAT decision would not be treated as precedent. This observation has far reaching ramifications 5

SEBI’s discussion Paper on Brightline Tests for Acquisition of Control  SEBI desires to provide for bright lines for control  SEBI has studied the position on “control” in various countries – some countries have the test based on actual voting rights and while some other have similar test as in India  Two Options are suggested in the discussion paper:  Framework for Protective Rights -basic principle should be that veto rights should be protective in nature rather than participative in nature -List of Protective Rights has been provided – only an indicative list -The investor bestowed with the protective rights must investor at least 10% -Investor with such rights will continue to be a public shareholder -The protective rights are granted subject to approval of the shareholders (majority or minority shareholders) -Rights have to be incorporated in the articles of association 6

SEBI’s discussion Paper on Brightline Tests for Acquisition of Control  Adopting a numerical threshold -Excess of 25% as the threshold level for triggering of control irrespective of whether such holding gives de facto control -Right to appoint majority of “non-independent” directors may be considers to be in control of the company 7

Thank You Disclaimer: This presentation has been compiled for general information and does not constitute professional guidance or legal opinion. Readers should obtain appropriate professional advice.