The term 'control' does not have a singular definition under different laws. Given the broad interpretation of 'control' and lack of formal guidance, one is frequently faced with queries pertaining to what may constitute 'control' for a particular regulator. There are a number of statutes which entail enquiry into the domain of 'control'1. However, the definition of 'control' codified under different laws are very broad, and are either identical to or similar to the definition of control as provided under the extant FDI Policy:
"Control shall include the right to appoint a majority of the directors or to control the management or policy decisions including by virtue of their shareholding or management rights or shareholders agreements or voting agreements."
Competition Act: Definition of Control
The term 'control' is defined in explanation to Section 5 of the Competition Act, 2002 (Competition Act). The acquisition of control of an enterprise (which meets the thresholds of turnover / asset size as prescribed in the Competition Act) is understood as a 'combination' for purposes of the Competition Act. Such 'combinations' are regulated under the Competition Act and are required to comply with certain tests such as the proposed combination will not adversely affect combination in the relevant market in India.2 It is in this background that the aforesaid explanation defines 'control' as: "control includes controlling the affairs or management by one or more enterprises, either jointly or singly, over another group or enterprise...."
Affirmative and negative rights
In the early years, the jurisprudence developed under the Competition Act confirms that control not only includes positive or proactive control within its ambit, but also extends to affirmative and negative rights and has, in certain cases, interpreted the following reserved matters granted to an investor as amounting to an acquisition of control:3
- approval of the business plan / annual operating plan / budget;
- commencing a new line of business or setting up operations in new cities, discontinuing an existing business;
- appointment of key managerial personnel including key terms of employment and compensation;
- material terms of employee benefit plans, as resulting in acquisition of control; and
- strategic business decisions would constitute control.
The Competition Commission of India (CCI) observed that careful scrutiny needs to be undertaken to differentiate between mere investor protection rights and those resulting in acquisition of control and has concluded that the aforesaid rights could not be considered as mere investor protection rights.
While the list of rights set out above have been definitively determined to be control conferring, in a subsequent case4 CCI's approach has been rather vague. CCI has effectively reproduced the entire list of reserved matters agreed in the transaction document, which includes inter alia standard investment protection rights such as: (i) changes / amendments to the Memorandum and/or Articles; (ii) changes in the capital structure, including through new issues of equity or equity linked securities, buy back, rights issue, bonus issue, stock / share split, sweat equity shares, redemption of securities, capital reductions etc.; (iii) changes to the dividend policy; and (iv) appointment or change of auditors,5 and concluded that on the basis of the aforesaid, there is a situation of joint control. As a result, it was unclear as to whether the CCI's view is that any of these more innocuous investment protection rights are control conferring by themselves, or in any combination thereof.
A cue regarding CCI's concept of control may also be taken from the exemption contained in the current form of Item 1 of Schedule I to the Competition Commission of India (Procedure in Regard to the Transaction of Business Relating to Combinations) Regulations, 2011 (Combination Regulations).6 These items essentially contain list of exemptions from notification requirements. Item 1 provides for the 'investment only' exemption in the following terms. A transaction will be eligible for this exemption if :
- the acquirer does not hold a total of 25% of the company's shareholding or voting rights; and
- the acquirer does not possess any special rights; and
- is not a member on the Board of directors, and/or does not have authority to nominate a director; and
- the acquirer does not intend to participate in the affairs and management of the enterprise whose shares or voting rights are being acquired.
However, this appears to place a blanket restriction on the possession of affirmative/veto rights and may not gel with the CCI's earlier decisions which state that 'mere investor protection rights' are permissible. If permissible, there is still no clarity on which rights would fall under this permissible carve out.
25 per cent shareholding
A shareholding of more than 25% also confers control, since such shareholding is sufficient to block / veto any action that requires special resolution under the provisions of the Companies Act. However, it also appears that CCI takes into account the joint initiatives, exclusive arrangements, non-compete arrangements, etc. between parties to determine acquisition of control. In the Jet – Etihad case7, the CCI drastically lowered the control acquisition thresholds. It was held that the joint initiative of the parties to enter into an investment agreement, shareholders' agreement and commercial cooperation agreement, as amounting to establishment of Etihad's control over Jet. This appears to be a case where the thresholds were lowered by the CCI, as only 24% of stake was being acquired by Etihad without any veto or quorum rights, however, Etihad was given the right to appoint 2 out of the 12 directors present on the Board.8 This case exemplifies how in certain circumstances, the CCI analyzes the effects of a combination on the basis of the market realities and dynamics between the parties, and not merely on the post-transaction structure. Such varying thresholds have created significant confusion and has somewhat jeopardized the interests of genuine minority investors. As a consequence, a range of pure financial investment and private equity transactions, otherwise not falling within the review of jurisdiction of the CCI (on the basis of thresholds), have become reviewable. Therefore, it is necessary to extensively review these thresholds and formulate a clear and precise definition as to what may amount to control.
In the case of Ultratech-JAL9, the CCI through its order under Section 44, dwelled into the meaning of control, from the perspective of a 'group', as prescribed under Section 5(b) of the Act. The CCI observed that the first test of the two enterprises belonging to the same group is the ability to exercise 50% or more voting rights; the second test is in terms of ability to control majority of composition of Board of Directors; and the third test is in terms of ability to control or manage the affairs of the other enterprise. The CCI observed that the above three tests were an 'either/or' tests and fulfillment of a single test would confer control. The CCI further stated that in competition law practice, control is considered as a matter of degree, however, all degrees and forms of control nonetheless constitute control. The CCI also discussed the various gradients of control that may be exercised over an entity, ranging from the lowest form of 'material influence' to 'de facto/de jure' control. With respect to the aforementioned third test, it was observed that the ability to manage the affairs of the other enterprise may be inferred from special rights/veto rights, status and expertise of an enterprise or person, Board representation, structural/financial arrangements etc. It was in light of the foregoing factors, that CCI held Ultratech to have control over the affairs and management of Kesoram Industries and Century Textile and Industries. It is pertinent to note that even though Ultratech had satisfied the first and second test, it was found to have control, due to the possible material influence that was exercised by Mr. Kumar Mangalam on the affairs and management of Century and Kesoram by being on their board of directors.
The CCI placed reliance on the United Kingdom CMA's jurisprudence and procedure that states, "merger arrangements may give rise to a position of 'de facto' control...might also involve situations where an investor's industry expertise leads to its advice being followed to a greater extent than its shareholding would seem to warrant." In CCI's opinion, due to Mr. Kumar Mangalam's presence in the market through Ultratech, his influence on the management of Century and Kesoram might be greater than as represented through his shareholding. However, since the matter was with respect to failure of Ultratech to have provided all relevant and necessary information as required under the provisions of the Act, the CCI did not arrive at any determinative finding with respect to the commercial realities vis-à-vis Ultratech's control.
In light of the above, it can be observed that various provisions and statutes provide quantifiable yard-sticks that amount to de jure control. However, in practice not just de jure control, but material influence also amounts to 'control' within the ambit of law. Such determination of material influence cannot be assessed on the basis of 'quantum of shareholding' and 'availability of special/veto rights' but requires a deeper analysis of the market realities and in certain cases 'lifting of the corporate veil'. Assessment of combination cases requires the CCI to focus on the acquirer's ability materially to influence policy relevant to the behavior of the target entity in the market place. The policy of the target in this context means the management of its business, and thus includes the strategic direction of a company and its ability to define and achieve its commercial objectives, and is not limited to its day to day affairs.
Assessment of material influence requires a case-by-case analysis of the overall relationship between the acquirer and the target. A finding of material influence may be based on the acquirer's ability to influence the target's policy through exercising votes at shareholders' meeting. Material influence may also arise as a result of the ability to influence the board of target, and/or through other arrangements. It would be a herculean task for the CCI or for that matter any regulatory authority to lay down all such qualifying factors that amount to control. However, it is the author's belief that by passing such orders, the regulatory authorities such as CCI shall better elucidate what factors amount to control/material influence and provide a better understanding with each case.
* Divye Sharma is a Senior Associate in the Competition Law Practice Group at L&L Partners Law Offices (Formerly Luthra & Luthra Law Offices). He graduated from National Law University, Delhi in 2014 with a degree in B.A., LL.B. (Hons.). At the Firm, he has been engaged in various litigations, leniency matters and high-level combination matters across sectors. He has represented clients engaged in the steel industry, technology markets, agriculture, and pharmaceuticals to name a few, before the Competition Commission of India, National Company Law Appellate Tribunal, High Court of Delhi, and the Supreme Court of India. He can be reached at firstname.lastname@example.org.
1 Other statues including; Companies Act, 2013, Securities and Exchange Board of India (Substantial Acquisitions of shares and Takeover) Regulations, 2011 and Insurance Regulatory and Development Authority.
2 If a proposed acquisition results into formation of a 'combination' under Section 5 of the Competition Act, the same needs to be approved by the CCI as per Section 6 of the Act to determine whether or not such a 'combination' would cause an 'appreciable adverse effect on competition' within the relevant market in India.
4 Caladium-Bandhan (C-2015/01/243, Order dated 5 March 2015).
5 The other Reserved Matters included: (i) significant changes to the incentive structure of the senior management and appointment or removal of any member of the senior management; (ii) reorganization or change in the nature of current business or launch of any new business or businesses; (iii) appointment or removal of any nominee director of the company on the board of its subsidiary and the appointment of every corporate representative of the company for attending meetings of the shareholders/members of its subsidiary.
6 Pursuant to Notification F. No. CCI/CD/Amend/Comb. Regl./2016, dated 7th January 2016.
7 Jet-Etihad (C-2013/05/122, Order dated 19 December 2013).
8 SEBI Order dated 8 May 2014.
9 Ultratech-JAL (C-2015/02/246, Order dated 12 March 2018).
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