A Comparative analysis of ‘Control’ under the

takeover regime

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 CHAPTER I – INTRODUCTION TO THE CONCEPT OF
‘CONTROL’

“Growth through merger and acquisition has been a critical part of the success of many
companies operating in the new economy. The plain fact is that acquiring is much faster than
building. And speed-speed to market, speed to positioning and speed to becoming a viable
company – is absolutely essential in the new economy.” - Alex Mandal1

1.1 OVERVIEW OF THE MEANING OF CONTROL

The extant Takeover Regulation in India is mired in ambiguity and indeterminacy with regard to
the acquisition of control in a target company, which has led to scholars debating on various
conflicting approaches to determining ‘control’. What amounts to ‘control’ is far from clear;
some jurisdictions follow a quantitative approach based on a specific shareholding threshold
such as 25% voting rights, while others follow a qualitative approach through a subjective
determination based on several factors, such as the specific rights available to an acquirer under a
shareholders’ agreement or the constitutional documents of a target.2

Apart from triggering an open offer, a determination of having acquired control has
important implications under other laws as well, such as the Companies Act, 2013 and the FDI
rules. For instance, under the Companies Act, 2013, a person in control of a company is deemed
to be a promoter, and is ascribed certain specific and rather onerous responsibilities. Similarly,
under the FDI rules, control is a determining factor for applicability of various sectoral
compliances such as those in respect of civil aviation and insurance. 3 While some regulators
have been successful in bringing uniformity to the definition of control under various laws, the

1
Alex Mandal, Chairman and Chief Executive of Teligent, Commented this in 2000 Edition of Harvard Business
Review, as quoted in Rachna Jawa, Mergers, Acquisitions and Corporate Restructuring in India: Procedure and Case
Studies, New Century Publications, New Delhi, 2009, p. 29
2
Nikhil Mansukhani v. SEBI, SAT Order dated 11 May, 2012; Daiichi Sankyo Company Limited v Jayaram
Chigurupati& Ors., AIR 2010 SC 3089.
3
Consolidated FDI Policy Circular 2015; Section 7A, Insurance Act, 1938 as substituted by the Insurance Laws
(Amendment) Act, 2015.

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scope and meaning of the term has remained ambiguous. However, the authors will be restricting
the scope of this paper to only control under the Companies Act, 2013 and SEBI Takeover Code,
2011.

This paper aims to consider the merits and demerits of the quantitative and qualitative
approaches by examining various models adopted in jurisdictions for pegging ‘control’ so as to
trigger open offer requirements. It will additionally argue for definitional clarity vis-à-vis
‘control’ and the need to re-introduce the whitewash provisions in the Takeover Regulations,
specifically in the backdrop of SEBI scrapping the idea of a brightline test. This framework
could achieve definitional clarity by harmonizing Regulations 2(e), 3 and 4 of the Takeover
Regulations and reintroducing the whitewash provisions, present in the former (although in a
different form) Takeover Regulations. Introducing a brightline test might require a selective
reading of control and would ignore the textual interplay between Regulation 2 (e), 3 and 4.

The authors will also analyze the feasibility of reintroducing the whitewash provisions,
which are consistent with the democratic principles that allow the shareholders to decide their
fate and working of their organization. Often, major transactions may involve the acquisition of
large amount of shares, usually not through the shares held by existing shareholders but through
the issue of new shares, when the intention of the acquirer might not be to gain control. In such
circumstances, the obligation to make an open offer could be waived through the approval of the
existing shareholders. This exemption, referred to as a ‘whitewash’ is based on the rationale of
the primacy of shareholder’s interest to decide whether to take the benefit of the exit opportunity
provided or to consciously renounce it. Whitewash, however is outside the purview of the
Takeover Regulations, 2011. The provision to allow a whitewash existed in the erstwhile regime
of the Takeover Regulations, 1997 under Reg. 12 wherein the rule of open offer could be
dispensed if a ‘special resolution is passed by the general meeting’.

It will also cover various judicial and statutory interpretations of the term control across
other jurisdictions, and a comparison of the same with India will be made. Internationally, there
is no consensus on the definition and tests for determining the acquisition of control. In the
United Kingdom, Australia and Germany the change of control is deemed to be identical to the
acquisition of voting rights in excess of a specific threshold, regardless of such rights bestow the
holder with de facto control. Other jurisdictions such as France and Canada define control as the

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capability to determine the composition of a majority of members of the Board of the company.
Alternatively, these jurisdictions confer 'control' upon entities who exercise control over a
majority of voting rights at the general meetings of the concerned company. The Indian
definition of control, that is, an amalgamation of de facto and de jure control is reflected in the
legislations of Brazil and China. This divergence in the definition of control, even internationally
prompted the SEBI to promulgate the idea of a brightline test. The authors will be analyzing the
different domestic market factors that play a huge rule in shaping the regulations in each country
(United States of America, Canada, Hong Kong, Brazil and Singapore). The authors will then
finally deduce whether the approach adopted by India is at the optimal best considering Indian
market determinants such the capital structure and shareholding patterns of most Indian
companies.

1.2. STATEMENT OF PROBLEM

The definition of control is one that has plagued law makers for several years as the concept of
takeovers began playing a substantial role in the world of corporate law. It is still mired in
ambiguity as what amounts to gaining “control” over a company differs per situation and
formulating a uniform law may not be fully efficient in accomplishing the goal of a free and
transparent takeover process. The concept of a “brightline test” and whitewash provisions where
shareholders consensually abort the open offer/mandatory process has been subject of several
debates and many authorss are of mixed opinion about its efficacy. It is through this paper that
the authorss aims to bring some clarity to this concept while analyzing the different tenets of
control across jurisdictions like Brazil, Singapore and Hong Kong among others. Subsequently,
the authors also aims at weighing out the merits and demerits of introducing these whitewash
provisions in light of the concept of control in India.

1.3. RESEARCH QUESTIONS

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On the basis of the literature reviewed, the following questions shall be dealt with through the
course of this paper:

1) What are the various methods to determine control over a target company during a takeover?

2) Why has India adopted of a mix of both qualitative and quantitative factors of control in the
Takeover Code of 2011?

3) What is the rationale behind the adoption of the qualitative and quantitative approach in
different jurisdictions?

1.4. OBJECTIVES

The objectives of this paper are two-fold

Firstly, to analyze the different approaches to determine control across the Indian landscape and
other jurisdictions such as Singapore, Brazil and Canada. It is through this paper that the authors
seeks to provide some clarity in the meaning of control during a takeover and whether the current
regime is at its efficient best considering the capital structure and shareholding patterns of most
Indian companies.

Secondly, to analyze the efficiency of “brightline test of control” and whether whitewash
provisions should be reintroduced in India, wherein shareholders can opt out a mandatory bid by
the acquirer. This will also be judged in the light of the concept of “negative control” or veto
power and “positive control” or affirmative control.

1.5. RESEARCH METHODOLOGY

In order to satisfy the objectives of this paper, doctrinal method of research has been adopted. In
pursuance of this, the authors adopts a descriptive approach to lay out the nature, scope and
various judicial interpretations of the term “control” during in the takeover codes of different
countries. Additionally, the authorss seeks to critically analyze whether introduction of

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whitewash provisions in India is a feasible option given the shareholding patterns of Indian
companies and the extant regulatory regime. Further, the authors explores the scope of “control”
in other jurisdictions including Singapore and Brazil and compares them with the position in
India.

CHAPTERISATION

Sl No./Chapter No. Title

I. Introduction to the concept of ‘control’

II. Literature review

III. Analysis of ‘control’ under Takeover Code, 2011

IV. Quantitative & Qualitative control

V. Conclusions and Recommendations

Overview on the meaning of ‘Control’

At the crux of the takeover regulations in India lies the mandatory bid rule, or the onus that lies
upon the acquirer who gains ‘control’ over the target company, to make an ‘open offer’ to the
minority shareholders to buy out their minority stake.4The basis of this requirement lies on the
principles of ‘equal opportunity to shareholders’, which is to safeguard the rights of shareholders
who may later not be able to exit the target company after from possible infringement on their
interests on part of the acquirer.5 However, the Indian takeover code contains certain thresholds
which need to be crossed in order to trigger an open offer, but these thresholds have been subject
to several changes, due to staggering developments in the corporate market, and due to the

4
Edmund-Phillip Schuster, The Mandatory Bid Rule:Efficient,after All?, 76 MOD. LAW REV.3, 529, (May 2013).
5
Dr. Ruth Luttmann, Changes of Corporate Control and Mandatory Bids, 12 INT REV OF LAW AND ECO, 498
(1992).

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versatile nature of the concept of ‘control’. This versatility ought to be tackled by a laying down
the broad contours of what constitutes ‘control’ over a target company, which is possible only
through a case by case analysis of control.6 This would also help build a more robust takeover
regime which in turn would inspire confidence in investors. 7

Takeover agreements in the securities markets, including cross-border acquisitions, have to get
approved by a number of regulatory bodies before their execution. In such a framework, it
becomes essential for the investors to be informed of their obligations post the acquisition of
control in a company. However, the open-ended definition of control1 adopted by the capital
market regulator, i.e., the Securities Exchange Board of India (‘SEBI’), has made the investors
edgy because of the unforeseen possibility of the trigger of a mandatory takeover bid (‘MTB’)
(also referred to as ‘mandatory open offers’).

A MTB necessitates an acquirer, under the SEBI (Substantial Acquisition of Shares and
Takeovers) Regulations, 2011 (‘Takeover Regulations, 2011’), who acquires ‘control’ over a
company, to give an option to the minority shareholders to sell their shares to the acquirer, as an
exit option. 8 However, the domestic as well as the foreign investors have been relentlessly
expressing their apprehension with respect to the unsettled definition of control that may create
financial uncertainties for them.3 Certain set of shareholders may be extant who invest in a
company without any intention to acquire any control but may still be compelled to release an
open offer in view of their indirect acquisition of control. The average holdings of these
shareholders may not cross the numerical threshold of MTBs but the conferment of either
affirmative, negative or management rights allows them to exercise a certain degree of influence
over the decisions. SEBI and the Securities Appellate Tribunal (‘SAT’) have often taken
antithetical approaches to determine if these rights constitute control or not. 9

6
UmakanthVarottil, Comparative takeover regulation and the concept of control, SJLS, 210 (2015). [hereinafter
COMPARATIVE TAKEOVER REGULATION]
7
For the principle of equality of opportunity See generally V. Brudney, Equal Treatment of Shareholders in
Corporate Distributions and Reorganizations, 71 CAL. L. REV. 4 (1983); W. D. Andrews, The Stockholder’s
Right to Equal Opportunity in the Sale of Shares, 78 HARV. L. REV. 3 (1965); G. B. Jawaras, Equal Opportunity
in the Sale of Controlling Shares: A Reply to Professor Andrews, 32 U. CHI. L. REV. (1964-1965); S, Maul & A.
Kouloridas, The Takeover Bids Directive, 5 GERMAN LAW JOURNAL 4 (2004)
8
Jesper Lau Hansen, The Mandatory Bid Rule: The Rise to Prominence of a Misconception, 45 SCANDINAVIAN
STUDIES IN LAW 173 (2003), 181.
9
g., McNally Bharat Engineering Company Limited, Articles of Association, Art. 43C(2), available at
http://www.mcnallybharat.com/assets/pdf/investor/MBE-annexure-june2015.pdf (Last visited on March 30, 2018)

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 The most noteworthy attempt to streamline the definition of ‘control’ was the Securities
Exchange Board of India’s (“SEBI”) proposal of a brightline test for determining acquisition of
control.10 Generally speaking, a brightline test or a brightline rule (in American parlance) refers
to a ‘clearly defined rule or standard, composed of objective factors, which leaves little or no
room for varying interpretation’, thereby ensuring objectivity and regularity in application.
When utilized in the control regime, a brightline test seeks to develop a framework based on set
numerical thresholds, thereby keeping ambiguity in interpretation at bay. SEBI however
dismissed the said proposal, stating that a brightline test could be ‘prone to misuse’.11 One of the
questions this paper seeks to answer is whether the SEBI was correct in dismissing the idea of a
brightline test, one that would add a great degree of consistency in the determination of control.12

Tracing the History of ‘Control’ in India

In the 1980s, the listing agreement between the stock exchanges and the listed companies was
the primary governing document that laid down the conditions which would give rise to a
mandatory open offer.13 However, in 1992, the inception of the Securities and Exchange Board
of India (SEBI), the primary watchdog of the securities market, heralded in a new era of
regulation of takeovers. 14 Subsequently, in 1994, the Substantial Acquisition of Shares and
Takeover Regulations (hereinafter referred to as the 1994 Takeover Code) was promulgated by
the SEBI. Under Regulation 9 of the 1994 Takeover Code, the acquirer had to compulsorily
make an open offer to the shareholders after an acquisition of 10% or more of the shares or
voting rights in the target company. However, due to changing phases in the financial market and

(While each and every company has the discretion to bargain the rights, the general practice is to not discriminate
between the same class of shareholders)
10
Securities and Exchange Board of India, Discussion Paper on “Brightline Tests for Acquisition of ‘Control’ under
SEBI Takeover Regulations”, SEBI, (December 17, 2018, 8:14 pm),
http://www.sebi.gov.in/cms/sebi_data/attachdocs/1457945258522.pdf. [hereinafter DISCUSSION PAPER]
11
PTI, Acquisition of control: SEBI to continue with existing norms, HINDUSTAN TIMES (Sept. 12, 2017, 8:28
pm), https://www.hindustantimes.com/business-news/acquisition-of-control-sebi-to-continue-with-existing-
norms/story-5Y3XCm6qk48xkH8RjxzNGO.html.
12
Bright-line rule, https://www.revolvy.com/main/index.php?s=Bright-line%20rule.
13
JAYATI SARKAR & SUBRATA SARKAR, CORPORATE GOVERNANCE IN INDIA, 423 (SAGE
Publications) (2012).
14
. Sabarinathan, Securities and Exchange Board of India and the Regulation of the Indian Securities Market, IIM
BANGALORE RESEARCH PAPER NO. 309, (December 14, 2018, 4:00
pm),,https://www.iimb.ernet.in/research/sites/default/files/WP%20No.%20309.pdf.

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a large number of difficulties in enforcing this Code15, the Justice Bhagwati Committee was
established to look into the same. Consequently, upon the proposals of the Committee, the
Substantial Acquisition of Shares and Takeover Regulations, 1997 was promulgated (hereinafter
referred to as the 1997 Takeover Code).

The Bhagwati Committee importantly noted that while control could be acquired through
acquisition of a particular percentage of shares/voting rights, control could also manifest itself
through the command over the board of directors of a company. Thus, the Report suggested a
wholesome understanding of the term control to ensure the operation of the open offer mandate
by the very fact there was control exercised over the board of directors, despite there being no
acquisition of shares. This dualistic approach was resonated in Regulations 10 and 12 of the 1997
Takeover Code. Regulation 10, amended in 1998, stated that an open offer would be triggered
upon acquisition of 15% of voting rights. Meanwhile, Regulation 12 ignores voting rights
altogether, and mandates the requirement of an open offer on part of the acquirer upon the
acquirer’s ability to exercise de facto control, or control over the management of the company
and its policies.16

Due to rapid developments in the market, the 1997 Code was also subject to numerous
modifications and had to be amended 23 times. This ultimately led to the appointment of the
Takeover Regulation Appointments Committee (hereinafter TRAC) in 2009 to review the 1997
Takeover Code. The TRAC Committee highlighted the importance of both de facto, as well as de
jure control to trigger an open offer. It was further stated that the question of control was either a
question of fact, or of fact and law together, and had to be decided on a case-by-case basis as .
Ultimately, the Committee pronounced that the acquisition of 25% of shares/voting rights would
empower the acquirer to exercise de facto control and thus should entail obligations of an open
offer.17

15
UmakanthVarottil, The Nature of the Market for Corporate Control in India, SSRN, , (Dec. 2, 2018, 3:15 pm),
http://ssrn.com/abstract=2698474, [hereinafter CORPORATE CONTROL IN INDIA]
16
For the principle of equality of opportunity See generally V. Brudney, Equal Treatment of Shareholders in
Corporate Distributions and Reorganizations, 71 CAL. L. REV. 4 (1983); W. D. Andrews, The Stockholder’s Right
to Equal Opportunity in the Sale of Shares, 78 HARV. L. REV. 3 (1965); G. B. Jawaras, Equal Opportunity in the
Sale of Controlling Shares: A Reply to Professor Andrews, 32 U. CHI. L. REV. (1964-1965); S, Maul & A.
Kouloridas, The Takeover Bids Directive, 5 GERMAN LAW JOURNAL 4 (2004).
17
17 Securities and Exchange Board of India, Report of the Takeover Regulations Advisory Committee Under the
Chairmanship of Mr. C. Achuthan, SEBI, (Aug. 19, 2017, 2:14 pm),

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 These recommendations were weaved in to the Substantial Acquisition of Shares and
Takeover Regulations, 2011 (hereinafter Takeover Regulations) and consequently an
amalgamation of objective and subjective approaches to control have been adopted by India.
While Regulation 3 of the Takeover Regulations fixes open offer obligations at acquisition of
25% of voting rights 18, Regulation 419, similar to Regulation 12 of the 1997 Takeover Code
focuses on open offer obligations with relation to the ability to exercise de facto control over the
target company.20

On a global scenrario, there is no concurrence on the definition of and methods for

determining the acquisition of control. In the United Kingdom, Australia and Germany, which
seem to have adopted the quantitative method, control is deemed to have been acquired on the
acquisition of voting rights exceeding certain threshold, regardless of the methods in which these
rights are conferred on the holder with de facto control. The regulatory regime in other
jurisdictions like France and Canada take a stance that control is the capability to appoint
majority of members of the Board of the company. Alternatively, these jurisdictions confer
control entities who exercise control over a majority of voting rights at the general meetings of
the concerned company. The Indian definition of control, that is, an combination of de facto and
de jure control finds control in the legislations of Brazil and China. This divergence in the
definition of control, even internationally prompted the SEBI to promulgate the idea of a
brightline test.21

Judicial Response to the Concept of Control: Shrouded in Inconsistency

It is a common practice for investors, while purchasing shares in a particular company, to

demand certain rights to veto decisions taken by the company to safeguard their own interest.
These rights may be reflected in the shareholders agreement, or the charter documents of the

http://www.sebi.gov.in/commreport/tracreport.pdf., [hereinafter ‘TRAC REPORT’]..

18
Regulation 3: Substantial acquisition of shares or voting rights, Securities and Exchange Board of India
(Substantial Acquisition of Shares and Takeovers) Regulations, 2011.
19
Regulation 4: Acquisition of Control, Securities and Exchange Board of India (Substantial Acquisition of Shares
and Takeovers) Regulations, 2011.
20
Regulation 12: Acquisition of Control, Securities and Exchange Board of India (Substantial Acquisition of Shares
and Takeovers) Regulations, 1997.
21
DISCUSSION PAPER, supra note 4.

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company being invested in. Regardless of the method of granting of these veto rights, the bone of
contention in such issues faced by the SEBI, Securities Appellate Tribunal (SAT) and the Courts
is whether ‘negative control’ conferred by these rights could amount to control within the
meaning of Regulation 2(1)(c) of the Takeover Code.22

In Subhkam Ventures Pvt Ltd v. SEBI23, a case decided which was decided under the erstwhile
1997 Takeover Code, the SEBI had ruled that the certain affirmative voting rights or veto rights
granted to the acquirer by the shareholder agreement were paramount to acquiring control over
the target company. While the SEBI equated negative control with control, the Securities
Appellate Tribunal disagreed with the view expressed by the SEBI and stated that control was a
‘proactive and not a reactive power.’ According to the SAT, control could include in its ambit
only positive control and was exclusive of veto rights that would amount to negative control.
Thus, it was only when the acquirer had the power to mandate the target company to perform a
certain action, could it be said that the acquired had gained control over the target.

However, prior to this decision, in RhodiaSA v. SEBI 24 , the SAT concluded that the
acquirer had attained control over the target company owing to the fact that acquirer had veto
rights on ‘major decisions on structural and strategic changes’. Some of these rights related to
dividends and other distributions, entry to or withdrawal from key markets, issuance of
securities, major and strategic investment programmes and so on. The order of the SAT, when
harmoniously read with the list of veto rights, also points to the conclusion that it was not
imperative for the veto rights to be in the ambit of day-to-day functioning of the company.25

Later, famously, in the Jet-Etihad case, the SEBI held that the right conferred upon
Etihad, viz., the right to appoint only two directors, out of twelve, was not sufficient to constitute
control since all crucial decisions would be continue to be subject to oversight by both Jet
Airways as well as Etihad. Further, the position of power and superiority enjoyed by the board of
Jet Airways was untouched. Most importantly, Etihad did not possess crucial veto rights and thus
it was not required to make a mandatory open offer. However, the judgment in this matter was

22
SHISHIR VAYTTADEN, SEBI’S TAKEOVER REGULATIONS: BEING A COMMENTARY ON THE SEBI
(SUBSTANTIAL ACQUISITION OF SHARES AND TAKEOVERS) REGULATIONS 1997, 23 (Lexis Nexis
Butterworths Wadhwa) (2010).
23
Subhkam Ventures Private Limited v. SEBI, SAT Order dated January 15, 2010, Appeal No. 8 of 2009.
24
Rhodia SA v. SEBI, SAT Order dated November 7, 2001, Appeal No. 36/2001.
25
Id

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based primarily on the specific facts of the case at hand, thus precluding the SEBI from inquiring
into the jurisprudence of control and negative control. As a result, the controversy surrounding
the question of control post the Subhkam Ventures order was not resolved by the SEBI ruling in
the Jet-Etihad case either. 26

Similarly, in the Kamat Hotels case, the agreement between the acquirer, Clearwater
Capital Partners and the target company, Kamat Hotels, provided to the acquirer certain veto
rights, especially over the corporate restructuring, policy making and decisions of the target
along with its share capital. Here, SEBI, in its interim order was of the opinion that these rights
conferred upon the acquirer negative control, which could be equated with control and thus
Clearwater was required to make an open offer in accordance with the regulations. However, in
its final order in March, 2017 the SEBI, seemingly softening its earlier rigid stance, noted that
‘the scope of the covenants in general is to enable the noticees to exercise certain checks and
controls on the existing management for the purpose of protecting their interest as investors
rather than formulating policies to run the Target Company.’ However, though SEBI ruled that
the protective clauses in the agreement did not amount to 'control', a prudent approach must be
adopted while reading this order, given that the ruling was extremely fact-centric. Further, a
mere single statement, without elaborate reasoning (as was done in Subhkam) should not be
taken as constituting a radical alteration of SEBI's earlier stance.

With the Supreme Court stating that the decision of the SAT in the Subhkam case would
not be treated as precedent, the question on control in the Takeover Code was once again
shrouded in controversy and ambiguity. . The clash between the stand long held by the SEBI that
affirmative veto rights enjoyed by the acquirer would entitle it to control over the company and
the persuasive value created by the Subhkam judgment invalidating the existence of negative
control has only exacerbated the controversy.27

The SEBI “Discussion Paper on Brightline Tests for Acquisition of ‘Control’ under SEBI
Takeover Regulations” seeking to put an end to this ongoing controversy was a welcome step in

26
Id
27
SARKAR, supra note 181, 259; Apu Manna, Tarak Nath Sahu & Arindam Gupta, Impact of Ownership Structure
and Board Composition on Corporate Performance in Indian Companies, 9 INDIAN JOURNAL OF CORPORATE
GOVERNANCE 1 (2016), available at http://journals.sagepub.com/doi/pdf/10.1177/0974686216635787 (Last
visited on February 21, 2019).

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the takeover regime in India. It was thought that a brightline test, objective and clear, would
assist the judiciary in developing a consistent response to litigation surrounding ‘control’. The
following part of this paper analyses the (in)efficiency of the brightline test, to understand the
rationale behind SEBI’s recent dismissal of the test.28

CHAPTER II - LITERATURE REVIEW

A. Articles

28
DISCUSSION PAPER, supra note 4.

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Article 1:UmakanthVarottil, Comparative takeover regulation and the concept of control, SJLS,
210 (2015).

UmakanthVarottil has carefully analysed the two pronged option to determine whether control
has been acquired in a target – i.e., the quantitative approach and the qualitative approach. Since
the Mandatory Bid Rule (“MBR”) is based on acquiring ‘control’ in the target, its trigger can be
associated with a number of factors that vary by jurisdiction. It can be premised either on a (i)
bright-line test based on a specific shareholding threshold such as 30% voting rights (the
quantitative approach) which is adopted in jurisdictions such as European Union, Singapore and
Hong Kong or (ii) subjective determination of control based on the shareholding pattern of the
target, specific rights available to the acquirer under a shareholders’ agreement or the
constitutional documents of the target and other relevant factors (the qualitative approach) and is
adopted in jurisdictions such as Brazil, Indonesia and Spain. This would ensure that persons
acquiring shares are unable to circumvent the MBR by structuring their transactions through
ingenious methods to stay outside the purview of the rule. The authors examines the advantages
and pitfalls of each method and postulates that the quantitative approach can be beneficial as it
provides some degree of certainty. The availability of a bright-line rule enables parties (ably
advised by lawyers and investment bankers) to structure their affairs so as to work around those
rules. He additionally says that the controller of mergers must be equipped with discretionary
power where the law of that particular country sets the trigger point too low or too high. For
instance, if the threshold is found to be too low in the context of a target with concentrated
shareholding, then the regulator may be conferred the discretion to grant an exemption to an
acquisition that exceeds the MBR threshold but does not surpass the shareholding of the
incumbent controller. On the other hand, the qualitative approach comes with a variety of
benefits such as balancing the interests of both minority shareholders as well as acquirers who
wish to take over equity stakes that may be beneficial to the target as well as its shareholders as a
whole. As the financial market and requirement of each country varies, the authors finally
concludes with a set of uniform common principles that should be adopted by each jurisdiction
to domestic circumstances.

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The authors will be relying on the Author’s analysis of de facto and de jure control and the
analysis of the Mandatory Bid Rule in India to bolster the introductory aspect on what the
different kinds of control are.

Article 2 :LanLuhLuh; Ho Yew Kee; Ng See Leng, Mandatory Bid Rule: Impact of Control
Threshold on Take-over Premiums, 2001 Sing. J. Legal Stud.

In their article, the authorshave carefully juxtaposed the position of control between the
Singapore and Hong Kong Takeover Codes and have analyzed the impact of factors such as
business environment and conditions on setting thresholds under each regime. Despite the
change in the City Code in 1972, the drafters of the Hong Kong Code chose to retain the non-
numerical based control threshold when the Code was drafted in 1975. Hong Kong only changed
its control threshold to 35% in 1981, after six years of controversy surrounding the interpretation
of the non-numerical control threshold. On the other hand, the Australian Code and the
Singapore Code adopted the definite control threshold right from the enactment of the Codes and
the threshold for both Codes was fixed at 20%. In Singapore, the control threshold was
revisedonce in 1985 from 20% to the present 25%. Under the proposed revised Code issued by
the SIC in May 2001, the threshold is altered upwards to 30%. The direct legal implication of
this upward shift is that a shareholder who can amass more than 25% voting rights (but below
the new control threshold) in a company need no longer be forced by law to make a bid for the
entire shareholding. Under most common law jurisdictions, including Singapore, a block of 25%
or above voting rights is sufficient to prevent the passing of a special resolution in the company.
In Singapore, where public companies are tightly controlled, although it is true that a
shareholding below 30% may not confer effective control, it certainly constitutes negative
control.

The authors will be relying on the rationale adopted by the two authors in their analysis of
quantitative control in both Singapore and Hong Kong considering shareholding patterns of
companies in these two jurisdictions and comparing the same with the position in India.

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Article 3 :Edmund-Philipp Schuster, The Mandatory Bid Rule: Efficient, after All, 76 Mod. L.
Rev. 529 (2013)

The Mandatory Bid Rule purports that an acquirer of a controlling stake in a listed company has
to offer to the remaining shareholders a buy-out of their minority stakes at a price equal to the
consideration received by the incumbent controller. There are two fundamentally different
approaches in regulating private sale-of-control transactions. First, they can be treated like most
other sales of private property, with the seller keeping all of the consideration paid by the
acquirer.The former approach is sometimes referred to as “market rule”, emphasizing its
deregulatory nature. The “sharing rule”, on the other hand, is most relevant in the form of the so-
called mandatory bid rule (MBR). While the rule warrants that no value-destroying control
transfers take place, it is often criticized for preventing value-increasing transactions. If the MBR
was not in place, the acquirer can exploit minority shareholders by siphoning-off assets and
engaging in self-dealing to the detriment of minority shareholders. The authors is of the opinion
that the MBR is accompanied by several benefits like increase of synergies in private benefits
and has been shown that the mandatory bid rule prevents some inefficient transactions from
happening, where the bidder clearly is not a “looter”. Furthermore, mandatory bids help facilitate
transfers to the most efficient bidders in multi-bidder settings.

The authors will be relying on the Author’s analysis of de facto and de jure control and the
analysis of the Mandatory Bid Rule in India to bolster the introductory aspect on what the
different kinds of control are.

Article 4 :Adolf A. Berle, Control in Corporate Law, Columbia Law Review, Vol. 58, No. 8,
Columbia University School of Law

Adolf Berle has classified the concept of control under American jurisprudence as absolute
control and working control. “Absolute control” exists when a majority of such stock is held by a
single owner or by a few stockholders who by agreement or tacit consent act together. The same
situation in fact exists where a very large minority is so held, while ownership of the majority is
dispersed among many small holders. On the other hand, “working control” refers to the capacity
to mobilize other shareholders. Commonly, working control exists where a stockholder, or small

16 | P a g e
group of stockholders, have a substantial minority interest, but also have a readily available
method of inducing sufficient additional stockholders to vote with them so that in combination
they can elect directors. The authors speaks about the doctrine of “Dominant stakeholder”
imposes a responsibility on controlling stockholders that they may not take advantage of this
influence to induce the management to act not for the benefit of the corporation, but for the
benefit of the control-holders. He moves on to analyze the same in light of several United States
Supreme Court decisions where damages were awarded by the dominant stakeholder for acts that
were not for the benefit of the corporation. Thus, the authors is of the opinion that
conceptualization of control is of vital importance to peg responsibilities in such acts of abuse of
power in a corporation.

The authors will be relying on the jurisprudence laid down by the author regarding the working
control and absolute control aspect and will subsequently analyse the same in light of the
position in India.

Article 5:Gerald Heckman, Ownership and Control in the Canadian Telecommunications

Industry: The Case of Strategic Alliances, 29 Can. Bus. L.J. 97 (1998)

This article written by Gerald Heckman focuses on the regime of control in Canadian law. He
identifies two important forms of control: those founded on legally enforceable rights and
obligations (legal means of control) and forms of control without this basis (de facto control).
Control with a legal basis is obtained by the acquisition of a majority of the voting rights which
may be exercised in a general meeting.Stating that a comprehensive definition of de facto control
is impossible, the authors nevertheless lays out three general forms of de facto control: the
informal agreement, minority control and personal influence. Informal agreement is where the
shareholders decide to vote in similar lines. In large companies, minority control occurs when
many shareholders are either indifferent or are unable to attend shareholder meetings, allowing
shareholders who hold a minority block of shares to obtain working control of the corporation.
The third form of defacto control is control through personal influence. Talent, business acumen
and skill, and powers of persuasion, may accord to some members of a company an influence far
greater in its affairs than that proportionate to their stake in its capital.He defines de jure control

17 | P a g e
as the right to control and de facto control as "actual control irrespective of whether or not there
is a right to control.”

The authors will be relying on the rationale adopted by the two authors in their analysis of
quantitative control in Canada considering shareholding patterns of companies in the Canadian
jurisdictions and comparing the same with the position in India.

6 Discussion Paper on “Brightline Tests for Acquisition of ‘Control’ under SEBI Takeover
Regulations

The Securities and Exchange Board of India, in March 2016, issued a ‘Discussion paper on
Control’, wherein it proposed two ‘bright-line tests’ as possible alternatives to the current
regime. The discussion paper emphasised the principle that affirmative rights which do not
amount to the acquisition of control, are protective rather than participative and proceeded to lay
down a list of affirmative rights which would not amount to control. The alternative option
proposed, was setting an objective numerical threshold of 25% of voting rights to determine the
acquisition of control. The discussion paper noted that while certain jurisdictions like the UK,
Singapore and Australia define control as acquisition of voting rights above specified thresholds,
other jurisdictions such as Canada, France, and Spain, define it to mean the right over the
majority of voting rights or the ability to appoint a majority of the board members. Other
countries, such as Brazil, China, and Italy, have a broad definition similar to that in India.
However, the committee subsequently dropped the idea of having having test It is felt that any
change or dilution in the definition of control would have far-reaching consequences since a
similar definition of ‘control’ is used in the Companies Act 2013 and other laws.

The authors will delve into detailed analysis of the SEBI Discussion paper and will deduce
whether the rationale used by the SEBI in rejecting such a proposal was the most effective
solution for the Indian Takeover market in 2018.

Article 7 : Akil Hirani, India’s Takeover Code – How to Define Change in Control, 31
International Business Law, 141.

18 | P a g e
The Article discusses in great detail the position and interpretation of control under the Takeover
Code of 2011. The Author is of strong view that for the interpretation of the word 'control', the
SEBI could consider prescribing a threshold limit for change in 'control', as is done in the
takeover codes of various other countries, including the United Kingdom. As per the UK City
Code on Takeovers and Mergers, 'control' means holding of shares carrying 50 per cent or more
voting rights of a company irrespective of whether the holding gives defacto control. Although
holders of less than 30 per cent voting rights may exercise de facto control, a public offer is
mandatory only on the acquisition of shares conferring voting rights of 50 per cent or more of a
'company. The Author also goes on to analyse the lacuna in Indian law by reflecting on the
Grasim case. The Author is of strong view that for the interpretation of the word 'control', the
SEBI could consider prescribing a threshold limit for change in 'control', as is done in the
takeover codes of various other countries, including the United Kingdom. As per the UK City
Code on Takeovers and Mergers, 'control' means holding of shares carrying 50 per cent or more
voting rights of a company irrespective of whether the holding gives defacto control

The Authors will utilize the portion of the Author’s article which deals with the comparison
between the Indian portion and the position in the United Kingdom and whether this position is
efficient in the Indian markets.

Article 8 : Karan Talwar & Nivedita Saksena, ANTI-ACQUIRER AND PROSHAREHOLDER?

AN ANALYSIS OF THE SEBI (SUBSTANTIAL ACQUISITION OF SHARES AND
TAKEOVERS) REGULATIONS, 2011, 5 NUJS L.Rev. 129 (2012)

The Article analyses the changes introduced in the 2011 SEBI regulations that were based
substantially on the recommendations of a committee that it had set up to review the working of
the 1997 Regulations. This paper analyses the effect of these amendments to the Takeover Code
on the acquirers and shareholders of target companies. The author seeks to utilize the reasoned
assessment of the effect of these amendments on the Indian capital market, provided in the paper.

Article 9 : Bhavya Nahar, REVIEWING THE AMBIT OF ‘CONTROL’ APROPOS TO THE

OBJECTIVE OF ‘MANDATORY BIDS’: AN ANALYSIS UNDER THE TAKEOVER
REGULATIONS, 11 NUJS L. Rev. 2 (2018)

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This paper delves into the changes of control that mandates a takeover bid, following which the
Author argues that partial equity ownerships below the numerical threshold may at times
constitute control even if any additional right may only be reactive. The author argues that a
quantitative test to determine control may be easy to circumvent, the regulator has adopted the
use of a qualitative test, along with the quantitative test, to determine the acquirers who may said
to be in control of the company. However, this approach towards the interpretation of control has
raised many issues, with the adjudicators failing to conclusively determine what constitutes
control. This has subsequently led to the regulator necessitating or exempting the investors from
coming out with an open offer in an incoherent way, injuring the interests of the investors or the
minority shareholders, respectively. The author then critiques the approach taken by the advisory
committees in suggesting the numerical threshold for triggering an open offer. The Authors will
be analyzing the proposal with respect to the interpretation of control and the release of takeover
bids, hypothesising an increased numerical threshold.

Article 10 : Rabi Narayan Kar, Mergers and Acquisitions of Enterprises, New Century
Publications, New Delhi, 2006.

The Author examines the issues and trends of mergers and acquisitions of business enterprises in
India in the post-1991 period. For this purpose, it also draws upon the experience of selected
developed countries in this regard. It tries to identify the trends of mergers and acquisitions for
different sectors of the Indian industry and the reasons thereof. This book also investigates
empirically the impact of mergers and acquisitions on performance of corporate entities. For this
purpose, micro level analysis for the selected companies has been carried out to investigate the
impact of mergers and acquisition on the basis of financial variables. This book also tries to
empirically probe the impact of mergers and acquisitions on share price behaviour of selected
Indian companies. Lastly, a detailed study of the merger and acquisition process of one selected
company i.e. Ranbaxy has been carried out to understand the process of integration and its
success. But this book, does not carry any legal aspects of mergers and acquisitions and is better
suited to the requirements of students of business economics.

Article 11 : Shubham Khare and Niharika Maske, SEBI and Corporate Laws, 8-14 February
2010, Vol. 97, pp. 58- 75.

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The Authors touch on a very important issue of mergers, amalgamations and acquisitions under
the Competition Act, 2002. The author is of the view that combinations whether in the form of
merger/ amalgamation or acquisition are very important for a developing economy like India as
they provide a number of advantages from financial growth of the corporations to market
extension to diversification of business, to improve profitability and to achieve economics of
scale. The article elaborates on the purpose of Competition Act.

It also makes an effort to analyse the provisions of Competition Act, 2002 that govern the
regulation of combinations (mergers, acquisitions and amalgamation of enterprises) and the
potential conflict that would result by the proposed notification of the substantive provisions of
the Act with respect to mergers, acquisition and amalgamations, with other Indian laws and
regulations especially the Companies Act 1956 and the Securities and Exchanges Board of India
(Substantial Acquisition of Shares and Takeovers) Regulation 1997.

Article 12 : Vikas Varma, Company Law Issues in Mergers, Chartered Secretary, March 2016,
pp. 270-278.

The Author seeks to raise certain legal issues involved in the whole process of
mergers/amalgamation in India. The mergers and amalgamations in India are effected under the
provisions of the sections 390 to 396A of the Companies Act, 1956. The author highlights the
companies that are eligible for merger in India, the position of foreign companies and
unregistered companies, the need of approval to a scheme of amalgamation form the
shareholders, creditors and financial institutions. The authors also emphasises in brief the duties
of court in sanctioning a scheme of amalgamation and effect of the sanctioning of the scheme.
The author also highlights through various judicial pronouncements, the persons entitled to raise
objection to scheme of amalgamation. Various provisions of company law as well as certain
judicial pronouncement has been highlighted at various places in the article. The authors says
that court has not only the power to sanction the scheme but also to supervise it and make
necessary modifications to it under section 392 of the Companies Act.

Article 13 : Bhagwan Jagwani, Rising Trend of Cross-border Mergers and Acquisitions in Global
Corporate Restructuring, Chartered Secretary, October 2018, pp. 1373-1377.

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The Author in his article focuses on the prominence of crossborder mergers and acquisitions as a
form of global corporate restructuring. The article highlights the rising trend of cross-border
M&A activity, its preference by companies across the globe and in India. The article also shows
the rising trend of contribution of cross-border M&A in the total FDI inflows in our country. It
also focuses on the impact of cross-border M&A on firm’s performance and future prospects of
cross-border M&As as a corporate restructuring strategy.

B. Books

1. Patrick A. Gaughan, Mergers, Acquisitions and Corporate Restructurings, 205-222 (3rd ed.
Wiley Corporate F&A,2018)

This book discusses all the recent corporate restructuring case studies focusing on developing
jurisprudence across the world, with a substantial segment dealing with the concept of ‘Control’
over a company. It also talks about the various strategies that are used by companies to boost
their financial growth.

2. SheebaKapil, KanwalKapil, Mergers and Acquisitions - From A to Z, 56-72 (1st ed. 2018)

This book discussed the various regulatory aspect of Mergers and Acquisitions in India,
highlighting the important provisions as well as the rationale behind India adopting a mix of both
qualitative and quantitative factors.

3. Shridharan Pandian, Guide to Takeovers and Mergers, 78-95 (4th ed. 2018)

The book incorporates pertinent cases regarding the scope and significance of rulings laid down
by the Courts in relation to mergers, demergers and schemes involving debt and capital
restructuring.

4. Shishir Vayttaden on SEBI's Takeover Regulations: Being a Commentary on the SEBI

(Substantial Acquisition of Shares and Takeovers) Regulations, 2011, 1189-1123 (3rd ed.
2016)

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This book discussed the various regulatory aspect of Mergers and Acquisitions in India,
highlighting the important provisions as well as the rationale behind several developing
jurisdictions adopting a mix of both qualitative and quantitative factors.

C. Cases

 Subhkam Ventures Pvt Ltd v. SEBI (SAT Order dated January 15, 2010, Appeal No. 8 of
2009)

A case decided within the contours of the definition of ‘control’ in the 1997 Takeover Code, the
SEBI had ruled that the certain affirmative voting rights or veto rights granted to the acquirer by
the shareholder agreement were sufficient to effect control over the target company. While the
SEBI equated negative control with control, the Securities Appellate Tribunal disagreed with the
view expressed by the SEBI and stated that control was a ‘proactive and not a reactive power.’

 Rhodia SA v. SEBI (SAT Order dated November 7, 2001, Appeal No. 36/2001)

The SAT concluded that the acquirer had attained control over the target company owing to the
fact that acquirer had veto rights on ‘major decisions on structural and strategic changes’. Some
of these rights related to dividends and other distributions, entry to or withdrawal from key
markets, issuance of securities, major and strategic investment programmes and so on. The order
of the SAT, when read in harmony with the stated list of veto rights, also exhibited that it was
not imperative for the veto rights to be in relation to everyday functioning of the company.

 In the matter of Kamat Hotels (India) Limited, WTM/GM/EFD/DRAIII/20/MAR/2017.

SEBI, seemingly softening its earlier rigid stance, noted that ‘the scope of the covenants in
general is to enable the noticees to exercise certain checks and controls on the existing
management for the purpose of protecting their interest as investors rather than formulating
policies to run the Target Company.’ However, though SEBI ruled that the protective clauses in
the agreement did not amount to control a prudent approach must be adopted while reading this
order, given that the ruling was extremely fact-cent.

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`

CHAPTER III – ANALYSIS OF CONTROL UNDER THE

TAKEOVER CODE, 2011

24 | P a g e
3. 1 REGULATORY FRAMEWORK

Regulation 2(1)© defines ‘control’ as inclusive of

(I) the right to appoint a majority of the directors; and

(II) the right to control the management; and

(III) the right to control policy decisions

It then goes on to clarify that a right mentioned in (I), (II) or (III) above, when possessed, would
be ‘control’ irrespective of

(a) whether the right is exercisable by one person acting individually or by more than one person
acting in concert with each other; and

(b) whether the right is exercisable directly or indirectly; and

© the manner in which that right accrues to a person.

On this last point ( c ), regulation 2(1)© mentions, by way of illustrations, the following foir
ways in which a right mentioned (I), (II) or (III) may accrue :

(i) shareholding

(ii) management rights

(iii) shareholders agreements

(iv) voting agreements

The concept of ‘control’ is central to the improvements which the Bhagwati Committee
recommended over the 1994 regulations. The 1994 Regulations applied only to the acquisition of
shares, whereas the Bhagwati Committee was of the view that control ‘very quintessence’29 of
takeover law. It appears that a definition of ‘control’ was introduced after considerable debate –
the draft report of the Bhagwati Committee had not contained any definition of control because
the Committee felt that attempting a precise definition would be counter-productive and

29
Paragraph 2.2 Justice PN Bhagwati Committee Report on Takeovers 1997.

25 | P a g e
limitative of the scope of the Regulations and that time and practice were required to craft a well-
accepted definition.30 When the draft report was published for comments, this omission seems to
have attracted an overwhelming demand for at least a basic definition of ‘control’. It was thus
that the decision to introduce an inclusive definition was taken.31

3.2. EXPOUNDING THE AMBIT OF CONTROL UNDER THE TAKOEVER CODE

De facto Control

De facto control refers to the state of being in control without there being any legal right to such
state. Regulation 2(1)© is however an inclusive definition and inclusive definitions do not
generally exclude the plain and ordinary meanings of the defined term. The plain and ordinary
meaning of control is the power of exercising restraint or direction over something. Under the
Companies Act, decisions of decisions of an Indian company are generally taken either at
meetings of its shareholders or at those of its directors.32

Therefore, if control under the Takeover Regulations includes the ordinary meaning of
the power to direct a company, then it would follow that control includes the power to determine
the outcomes of a company’s shareholders meeting or those of its board of directors. Sometimes,
such power may be a matter of right, as when an acquire owns more than fifty percent (or, for a
higher degree of control, seventy five percent) of the voting shares of the target or when
shareholders owning such percentages of voting stock in the target are obliged by contract to
vote their shares in accordance with the acquirer’s wishes.33

De facto control in targets with dispersed shareholders

The means by which such powers may come about and be traded are limited only by the bounds
of man’s innovation, but its most frequently cited example is the ownership of less than fifty
percent of the voting stock of a target whose shareholding is widely dispersed. It would be a

30
Paragraph 6.3, Justice PN Bhagwati Committee Report on Takeovers 1997.
31
Paragraph 2.2, Justice PN Bhagwati Committee Report on Takeovers 1997.
32
Anand G. Srinivasan, Law Relating to New Takeover Code 2011, Taxmann Publications (P.) Ltd., New Delhi,
2011.
33
Id

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small leap from this point in the analysis to the conclusion that the fact of holding a large block
of shares in a target with widely dispersed shareholding must trigger the consequences under the
Takeover Regulations of acquiring control.

Control and the target’s board

Since at least two-thirds of a public company’s directors have to be elected at shareholders

meetings, the power to determine the outcome of a listed company’s shareholders meetings will
generally also translate into the power to determine the constitution of its board. The importance
of the composition of the board of directors to control analysis cannot be overemphasized. In
every case where the acquisition of ‘Control’ is in question, SEBI and SAT have looked at the
actual composition of the board, even when there was no allegation that the acquirer had the
right to appoint a majority on the target’s board.34

The First Bhagwati Committee itself admitted that while control may be exercised in
different ways, it would ultimately make itself evident in the manner in which voting rights were
exercised on the board of directors. The requirement of regulation 2(1)( c ) that controls the
majority of the board has withstood suggestions that the right to appoint two directors should be
sufficient indicia of control.35

Veto rights

Sometimes, investors may demand the ability to veto decisions by the company on one or more
matters. Such a right may be sought as part of the charter documents of the target company or of
an agreement with the major shareholders of the target company. Irrespective of the document
under which such rights are conferred, one issue that will confront the practioner in such cases is
whether these veto rights amount to ‘control’ under regulation 2(1)( c ). The two Bhagwati

34
J.C. Verma, Corporate Mergers Amalgamations and Takeovers (Concept, Practice and Procedure), Bharat Law
House, New Delhi, 2009.
35
Id

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Committees did not address this issue. The following sections will analyze whether regulation
2(1)( c ) is capable of veto-rights inclusive meaning. 36

Positive and Negative rights : the first dichotomy

There are, in my view, two broad dichotomies that are relevant to this issue. The first is the
dichotomy between positive rights and negative rights where a positive and negative rights
where a positive right signifies the right to compel the target to act and negative right signifies
the right to compel the target to desist from action. The only example that Regulation 2 (1) ( c)
offers of a control right viz., the right to appoint majority of directors, is of course a positive
right. The question is whether Reg. 2(1) ( c ) contemplates negative rights.37

Since Regulation 2(1)© is an inclusive definition, the plain and ordinary meaning of the
relevant words are the starting point of the analysis. The relevant words in regulation 2(1)( c ) are
‘…to control the management or policy decisions…’ In its plain and ordinary signification,
‘control’ includes the connotation of ‘exercising restraint’, which is precisely what a negative
right entitles its beneficiary to do. 38

It is also relevant that one of the stated reasons for regulating takeovers is to provide an
exit opportunity to public shareholders who do not wish to remain invested in a company after
there has been a change in the control of the company. 39 Public shareholders also invest in a
company not simply on the faith of its promoter’s judgment but also on the ordinary presumption
that the exercise of such judgment is unfettered. A significant fetter on the incumbent promoter’s
ability to exercise his judgment, one might argue, should entitle the public shareholder to an exit
opportunity just as much as any other form of acquisition of control.

36
K.R. Sampath, Law and Procedure for Mergers/Joint Ventures, Amalgamation, Takeovers and Corporate
Restructuring, Snow White Publications, Mumbai, 2008.
37
Id
38
R. Santhanam, A Guide to Amalgamation of Companies with Special Reference to Tax Planning, First Edition,
Sultan Chand and Sons, New Delhi, 1978
39
Id

28 | P a g e
 Viewed from yet another perspective, if it were possible for an acquirer to seize any
degree of negative control with impunity, it would be a small step from preventing the company
from acting in a particular manner to compelling the company to act in a particular manner.

It is also pertinent to refer to the first Bhagwati Principle of ‘Equality of treatment and
opportunity to all shareholders’ Veto rights are generally provided not to all shareholders of a
listed company but to one or select investors who invest in a post-IPO round of funding and who
would (sometimes, but by no means invariably) pay a premium on the ruling market price. The
provision of such rights to one investor to the exclusion of others is difficult to reconcile with the
first Bhagwati Principle.

Participative and protective rights : the second dichotomy

Once it is conceded that negative rights may amount to ‘control’ within the meaning of
Regulation 2(1)©, the question arises of what veto rights would amount to such control. This
brings one to the second dichotomy that is important to the analysis of veto rights viz. the
dichotomy between matters that relate to the ordinary course of the target’s business and matters
that do not relate to the ordinary course of the target’s business.40 Practioners frequently make a
case for excluding specific veto rights from the purview of Regulation 2(1)© on the ground that
they pertain to matters that are not undertaken in the ordinary course of a company’s business. 41
The argument is usually articulated in terms of the difference between ‘participative rights’ and
‘protective rights’ – formulation that draws, no doubt, on accounting vocabulary from the
context of consolidation of an investee’s financial statements with those of a majority
shareholder.42

Some accounting systems require a controlling shareholder of a company to consolidate

the company’s financial statements with those of its own. Some accounting systems (of which
India is not an example) make an exception when a minority investor in the company has what

40
P.L. Beena, “Trends and Perspectives on Corporate Mergers in Contemporary India”, Economic and Political
Weekly, 27 September 2008, pp. 48-56.
41
Id
42
Reeti Sonchhatra, “Regulation of Mergers under Indian Competition Law”, Madras Law Journal, 2009, Vol. 5, pp.
13-19.

29 | P a g e
are called ‘participative rights’ as opposed to ‘protective rights’.43 A participative right has been
described as a subset of protective rights which differs from the latter in that a participate right
‘…enables a minority shareholder participate in determining certain financial and operating
decisions of the investee that are made in the ordinary course of business.’

As the following formulation from the Emerging Issues Task Force of the Financial
Accounting Standards Board demonstrates, the rationale of why participative rights overcome
the presumption of consolidation by the controlling shareholders could well serve as an
explanation of why certain veto rights may trigger an open offer : ‘In some instances, the powers
of a shareholder with a majority voting interest to control the operations or assets of the investee
are restricted in certain respects by approval or veto rights granted to the minority shareholders.
Those minority rights may have little or no impact on the ability of a shareholder with a majority
voting interest to control the investee’s operations or assets, or alternatively, those rights may be
restrictive as to call into question whether control rests with the majority owner’.44

While it is always a question of fact whether a particular protective right amounts to a

participative right, the following matters have been mentioned by both the EITF and the FASB
as illustrative of matters over which a veto would not amount to participating rights :

(1) Amendments to article of incorporation of the investee company

(2) Pricing on related party transactions

(3) Voluntary liquidation of the investee company

(4) Acquisitions and dispositions of assets that are not expected to be undertaken in the ordinary
course of business

(5) Issuance or repurchase of equity interests

43
SEBI, Discussion Paper on “Brightline Tests for Acquisition of ‘Control’ under SEBI Takeover Regulations”,
March 14, 2016, ¶8, available at http://www.sebi.gov.in/sebi_data/attachdocs/1457945258522.pdf (Last visited on
February 20, 2019).
44
Id

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SEBI and SAT on veto rights

There are conflicting authorities on the relevance of veto rights to the meaning of ‘control’ under
the Takeover Regulations.

In Rhodia SA v. SEBI,45 SAT concluded that the acquirer to have been in joint control of
a foreign body corporate on the basis that the acquirer had a veto right over what had been
described by paries as ‘major decisions on structural and strategic changes’. There were :
dividends and other distributions, acquisitions and disposal of assets representing more than 20%
of the total consolidated assets of the company, issuance of securities, stock splits,
reclassifications, changes in business strategy by terminating or initiating a significant business,
entry into or withdrawal from key markets, major transfers of assets to create joint ventures,
substantial changes in the balance sheet structure, major and strategic plant closures, transfer of
patent rights/licenses which underline a major position of the business, changes of the corporate
form and/or splitting the business into separate companies and the relocation of head quarters to
another country. SAT’s order, when read in light of the list matters before it, would indicate that
for veto rights to amount to ‘control’ under Regulations 2(1)( c), they need not relate to day-to-
day management of the company.

Re NRB Bearings46 was a Regulation 4 matter in which the question before SEBI was
whether the acquisition of a French entity that held 26% of an Indian listed company would
trigger regulation 12. Under a shareholders agreement with Indian promoters of the listed
company, the French shareholder had veto rights over some matters of which the following are
mentioned in SEBI’s order : amendments to the organizational documents, declaration of
dividends, alteration in share capital of the target company and entry into any joint venture,
technology transfer or technical collaboration. Pursuant to the shareholders agreement, the
French company had only two directors on the target’s board against the Indian promoter’s six
directors. Based on the composition of the target’s board, SEBI concluded that the French
company was not in control of the target. At first blush, this ruling may appear to depart from the
veto-rights-inclusive meaning of ‘control’ in Regulation 2(1)( c).47

45
AT Order Dated 7 November 2001, Appeal No. 36/2001
46
SAT Order Dated 27 November 2002.
47
Id

31 | P a g e
Lenders and veto rights

SEBI had argued before SAT in Sandip Save that all Indian financial institutions received veto
rights as a condition for granting financial assistance. However, there does not appear to have
been a single case where SEBI has alleged that veto rights, when enjoyed by lenders of the target
company, are constitutive of ‘control’.

The most important reason why equity investors with veto rights may be treated
differently from lenders with the same rights may have to do with the first Bhagwati Principle of
treating all shareholders equally.48 Investors who seek veto rights are presumably by the same
concern with protecting their interest in the target as the typical lender.49 However, while the
interest of an equity investor who seeks veto rights is not any different from that of the small
public shareholder who is denied such veto rights, the lender’s interest in the target is legally and
commercially different from that of such a shareholder so that when the lender is given veto
rights that are denied to other shareholders, there is no breach of the equality principle. 50

Another reason may that the lender gets veto rights in exchange for lending to the
company , which is a consideration whose benefits are enjoyed by all public shareholders
equally. On the other hand, in the case of an equity investor who seeks veto rights, it is possible
that the benefits in consideration of which these rights are sought may or may not accrue to all
the shareholders equally.51

Yet another reason for differentially treating lenders and equity investors may be that the
shareholder, for whose benefit open offers are meant, is deemed to be aware, when he invests in
a target, that borrowing is part of the ordinary course of a target’s business and that it is
customary for lenders to place certain fetters on the fetters on the management’s discretion so

48
The Takeover Regulations, 2011, is formulated on equitable principles to look after the interests of the minority
shareholders in case of any change in control in the company. See SEBI, Report of the Takeover Regulations
Advisory Committee dated July 19, 2010, 1, available at
http://www.sebi.gov.in/sebi_data/attachdocs/1287826537018.pdf (Last visited on February 21, 2019)
49
Id
50
Id
51
V. Brudney, Equal Treatment of Shareholders in Corporate Distributions and Reorganizations, 71 CAL. L. REV.
4 (1983); W. D. Andrews, The Stockholder’s Right to Equal Opportunity in the Sale of Shares, 78 HARV. L. REV.
3 (1965); G. B. Jawaras, Equal Opportunity in the Sale of Controlling Shares: A Reply to Professor Andrews, 32 U.
CHI. L. REV. (1964-1965); S, Maul & A. Kouloridas, The Takeover Bids Directive, 5 GERMAN LAW JOURNAL
4 (2004).

32 | P a g e
that when such fetters are placed by a lender, there is no breach of a social contract that would
entitle the public shareholder to an exit opportunity. On the other hand, while it is conceivable
that a target company may need further equity investment even after an IPO, the prospect of such
post-listing capital raising is probably not considered so inextricably linked to the ordinary
business of the company or to the practice of giving veto rights, that it is perhaps not considered
appropriate to impute to the ordinary public investor’s contemplation that select equity investors
may be given veto rights.

3.3 A BRIGHTLINE TEST FOR CONTROL: A STATIC SOLUTION TO A DYNAMIC

PROBLEM

One of the options suggested by SEBI in its Discussion Paper on Control proposed to define
‘control’ as: 52’ India and demonstrates how the understanding of ‘control’ differs in each of
these laws thereby leading to different conclusions and ambiguities thereto while looking at the
same fact scenario making the adoption of an objective standard contextually apposite. While the
above approach to control may indeed bring a great degree of clarity through a significant
reduction in the ambiguities involved in the assessment of whether control over the target has
been acquired or not, it is not without its own grave shortcomings.53

In the first place, it is crucial to note that the threshold of 25% as proposed by the SEBI
should not be seen as absolute figure, but should consider the pattern of shareholding in the
Indian jurisdiction. The threshold should be rationally related to such pattern. Thus, in
jurisdictions wherein there exists a dispersed shareholding, the corresponding quantitative trigger
for ‘control’ should be pegged at a low level as opposed to the high numerical trigger in
concentrated shareholdings. Thus, the 25% trigger proposed by the SEBI itself seems

52
Marco Ventoruzzo, Europe’s Thirteenth Directive and U.S. Takeover Regulation: Regulatory
Means and Political and Economic Ends, 41 TEX. INT’L LJ 171, 197 (2006).
53
Most of the countries require the release of an open offer on a change of control in the company. This has been
discussed in the discussion paper of SEBI on the brightline tests. See SEBI, Discussion Paper on “Brightline Tests
for Acquisition of ‘Control’ under SEBI Takeover Regulations”, March 14, 2016, available at
http://www.sebi.gov.in/sebi_data/attachdocs/1457945258522.pdf (Last visited on December 20, 2017).

33 | P a g e
problematic since it may prove to be illogical and “counterintuitive” since shareholdings in India
are largely concentrated.54

The primary shortcoming of the 25% brightline test for control lies in its own certainty.
This fixed numerical threshold would allow investors, assisted by their lawyers and bankers to
evade the brightline rule. Consequently, this would preclude them from making a mandatory
open offer, thus damaging the interests of the minority shareholders who may seek a favorable
exit opportunity to no avail.

The brightline test proposed in the Discussion Paper also disconnects the threshold
required to launch a mandatory open offer from de facto control. The underlying rationale of the
threshold required to make an open offer, viz., the equality of opportunity to the minority
shareholders would thus suffer irreparable damage due to such disconnection. 55 Hence, a
situation wherein an acquirer attains 24.9% of the voting rights in the target company (with no
other similar shareholder), but still retains de facto control over the target due to the pattern of
shareholding of the target cannot be disregarded.

In fact, economically it would be beneficial and prudent for the acquirer to stay below the
open offer trigger, if he is in a position to exercise de facto control regardless, at the level lower
than the trigger. The acquirer would not be required to make a mandatory open offer since he is
below the brightline, but yet could exercise a great degree of influence over the target company’s
management and policies. Once again, this work around of the mandatory open offer would
violate the basic aim of the Takeover Regulations (of furnishing an opportunity of exit to
minority shareholders, in case of displeasure with the acquirer and his policies).56

With regard to a numerical brightline test, India could learn a lesson from the experience
in the United Kingdom, wherein there is a noticeable trend of acquirers avoiding the open offer
regulations by not only remaining under the brightline trigger of 30% but also through the usage
of investment instruments of a complex nature, or of dexterous structuring strategies; a feature

54
See Umakanth Varottil, “Relief for Investor Community on ‘Control’ Debate” IndiaCorpLaw Blog (17 January
2010), online: IndiaCorpLaw .
55
42 PrarthnaBaranwal, SEBI's Bright Line Tests for 'Control'- An Analysis,
LAKSHMIKUMARAN & SRIDHARAN
ATTORNEYS (Dec 1, 2018, 10:30 am), http://www.lakshmisri.com/News-and-
Publications/Publications/articles/Corporate/sebi-bright-line-tests-for-control-an-analysis.
56
Id

34 | P a g e
also seen in other jurisdictions. For instance, it would not be altogether unrealistic to envisage a
situation where the acquirer invest in a percentage of shares, a shade below the open offer
requirement and then through the adoption of positions in derivative instruments, use swaps and
options to fulfill the deficit in percentage. Subsequently, the acquirer is also empowered to skirt
disclosure requirements by discreetly obtaining positions and then launching a surprise voluntary
offer on the target company's board.57

Further, the numerical brightline proposed by the SEBI could also impede the interests of
not only promoters, but also companies/firms managed professionally existing in sectors highly
dependent on capital. In such capital intensive segments of the market, the investors, although
exceeding the threshold, would not desire to undertake the responsibilities associated with
acquisition of control over a company.58

The SEBI’s proposal of fixing the brightline for open offer obligations at 25% cannot
possibly be enforced as a universal rule, in every circumstance due to the complicated nature of
facts which may arise in the future, and would not exclude the possibility of future uncertainties
arising. The decoupling of the open offer trigger with de factocontrol endangers the underlying
philosophy of the Takeover Code – equality of opportunity to the minority. However, while it is
undoubted that a greater degree of certainty would be infused in the Indian takeover regime, the
opportunity cost of doing so is forsaking the exit rights of the minority stakeholders. Coupled
with the capability of the acquirers to evade the open offer obligation by staying below the
prescribed threshold and so on, as seen abroad, the consequences of a brightline test are highly
problematic. In a brightline test, equity is sacrificed at the altar of certainty and predictability.59

Thus it would seem that the SEBI averted a great corporate disaster by dismissing the
notion of a brightline test. However, what is the way forward with regard to the concept of
control in India? Is there any way to reduce the inconsistencies and ambiguities in determining
whether control has been acquired or not? Can we refine the legal imagination of control in
India? Or do we retain the extant notion?

57
John D Hogboom, “Private Investment in Public Equity: An Overview” New Jersey Law Journal (16 August
2004), online: Securities and Exchange Commission ; Robert B Thompson & Donald C Langevoort, “Redrawing the
Public-Private Boundaries in Entrepreneurial Capital Raising” (2013) 98 Cornell L Rev 1573 at 1598-1604.
58
Id
59
Id

35 | P a g e
3.4. ENGAGING WITH THE PROBLEMATICS OF ‘CONTROL’: A POSSIBLE WAY
FORWARD

3.4.1 Resolving the Need for Definitional Clarity: Harmonizing Regulations 2(E), 3 & 4

In proposing a brightline test, SEBI attempted to clear the definitional uncertainty. At this
point, the engagement with the brightline test is only on the basis of definitional ambiguity as
opposed to the broader discussion on its viability that has already been done in the above section.
The Discussion Paper proposed an ‘either/or’ test wherein fulfillment of either criterion of
breaching the threshold of 25% voting rights or possessing the right to appoint majority of
independent directors would determine control over a company. However, the objective nature of
the test discards the clear linkage the definition of ‘control’ has with Reg. 4 of the Takeover
Regulations, 2011. 60

The Takeover Regulations makes it mandatory for the acquirer to make an open offer
when it acquires 25% of the shares under Regulation 3. However, the brightline test created a
clear overlap between Reg. 3 and the concept of control by suggesting that the shareholding of
25% would also amount to control.61 Such an understanding of control would result in absurd
62
conclusions when the other large shareholder holds 74% of total shares. The other
shareholderwould clearly have a decisive role to play in ‘[controlling] the management or policy
decisions’while the owner of 26% would not even be a joint owner. Therefore, such acquisition
of shares would not make confer ‘control’ upon the shareholder, despite breaching the limit that
the brightline test lays down. By isolating the subjective nuances of the meaning of control and
laying down a strictly objective brightline test, the discussion paper proposed a test that is
inconsistent with the intention of the framers of the Takeover Regulations.63

60
SEBI Regulations 2011, supra note 71, regulation 4 – “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 publi announcement of an open offer for acquiring shares of such target company in
accordance with these regulations.”
61
SEBI Regulations 2011, supra note 71, regulation 3(1) “No acquirer shall acquire shares or voting rights in a
target company which taken together with shares or voting rights, if any, held by him and by persons acting in
concert with him in such target company, entitle them to exercise twenty-five per cent or more of the voting rights in
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.”
62
Id
63
Id

36 | P a g e
 The proposal for the brightline test has been scrapped after extended consultations and
the definition as provided under the Takeover Regulations still holds. Hence, the ambiguity that
was perpetuated by the Supreme Court decision inSubhkam Ventures (and a prudent reading of
the later Kamat Hotels case)still persists. 64 Now if SEBI decides to resolve the ambiguity
surrounding the meaning of control, it should keep into consideration the interplay between
Reg.3, Reg.4 and the broader definition as provided under Reg. 2 (e) of the Takeover
Regulations. The presumption of control should not exist against the shareholder merely because
the threshold provided under Reg. 3 is triggered.65

The idea of active/positive control is implicit within the definition of control under Reg. 2
(e) thereby only including such rights that require a proactive action on the part of the acquirer to
constitute control. Therefore, merely breaching the threshold without holding any right to
influence the management or policy decisions and holding only certain rights for protection of
one’s own interest should not confer control upon the acquiring shareholder. The trigger under
Reg. 4, which specifically applies in the case of control, should not be conflated with the general
rule of an open offer by breaching the numerical threshold of 25% shareholding under Reg. 3.
Such an approach will help reap the benefits of a flexible approach of a qualitative idea of
control while significantly reducing uncertainty among the shareholders.66

3.4.2 RE-INTRODUCING THE WHITEWASH PROVISION

The Takeover Regulations of 1997 provided for whitewash in case of change in control
of the target company i.e. an open offer would not be required if the shareholders of the target
company were to pass a special resolution waiving the open offer in case of change in control.
The TRAC Committee observed that providing for whitewash only for change in control and not
for substantial acquisition of shares or voting rights (without change in control) apparently is an
unintended anomaly. The Committee examined the possibility of introducing a whitewash
provision in the Takeover Regulations on the lines of international practice i.e. an open offer

64
Vinod Kothari, Choosing between a blurred line and a bright line: SEBI proposes an objective test for “control”,
INDIACORPLAW, https://indiacorplaw.in/2016/03/choosin g-between-blurred-line-and.html.
65
Id
66
SEBI Regulations 2011, supra note 56

37 | P a g e
would not be required if a material majority of the shareholders of the target company were to
pass a resolution waiving the open offer. The rationale for such a framework is that an open offer
is ultimately made for the benefit of the shareholders and it is well within the shareholders‘ rights
to renounce such a benefit if they so desire.67

Whitewash provisions may be required in situations where:

(i) the transaction is triggered by an asset or share acquisition by the target company, where
consideration was paid by issuing shares of the target company;

(ii) the transaction is a preferential allotment or other primary infusion which breaches the
relevant thresholds;

(iii) the transaction is a bail-out takeover;

(iv) acquirer‘s acquisition of voting rights is due to receipt of shares/ voting rights as gift; or

(v) acquisition is made in an environment where the liquidity is scarce.68

In such circumstances, it is possible that a transaction that a majority of shareholders

desire and support may be rendered infeasible due to the need to make an open offer. In such
cases, whitewash provisions may provide the Securities and Exchange Board of India Report of
the Takeover Regulations Advisory Committee dated July 19, 2010 Page 62 of 138 acquirer an
opportunity to take control of the target company or to cross the relevant substantial acquisition
or creeping acquisition limits, with the approval of shareholders of the target company who
repose their faith and confidence in the acquirer.69

The Committee considered imposing strict conditions such as a high positive waiver vote
requirement (say, 90 %) and a minimum voter participation threshold. 70Some members felt that
the absence of such a framework would make the Takeover Regulations onerous with no room to
exempt from an open offer even where the shareholders themselves do not desire it. It was
however observed that in the absence of robust regulations on proxy solicitation, and given the

67
TRAC REPORT, supra note 17 at ¶12.16.
68
Id at ¶12.17.
69
Id at ¶12.19.
70
Id at ¶12.21.

38 | P a g e
realities of the Indian market, any provision for shareholder waiver for an open offer may not be
in the best interests of investors at large. Moreover, some members of the Committee felt
strongly against a majority of the shareholders exercising the power to waive an open offer
imposing their will on an out-voted minority.71

The Committee observed that SEBI is taking certain steps to promote institutional voting,
and that it is also pursuing means to operationalise electronic-voting. It was therefore felt that the
market is not yet ready for a whitewash mechanism for automatic exemptions from open offers.
In any case, as observed, the shareholders always have option not to tender their shares if they so
desire. While SEBI does have discretionary powers to grant exemptions from open offers, it
would be open to SEBI to take into account whether a significant majority has waived the right
to an open offer, when considering an application for exemption.72

Often, major transactions may involve the acquisition of large amount of shares, usually
not through the shares held by existing shareholders but through the issue of new shares, when
the intention of the acquirer might not be to gain control. In such circumstances, the obligation to
make an open offer could be waived through the approval of the existing shareholders. This
exemption, referred to as a ‘whitewash’ is based on the rationale of the primacy of shareholder’s
interest to decide whether to take the benefit of the exit opportunity provided or to consciously
renounce it.73

Whitewash, however is outside the purview of the Takeover Regulations, 2011. The
provision to allow a whitewash existed in the erstwhile regime of the Takeover Regulations,
1997 under Reg. 12 wherein the rule of open offer could be dispensed if a ‘special resolution is
passed by the general meeting’.74 But the provision applied specifically to exempt triggering of
mandatory open offer in case large number of shareholders acquiesced such change. The TRAC
committee viewed such a selective application of the provision only to situations wherein there
was a change in control but not to situations of acquisition of substantial shares as an anomaly.
After exploring several possibilities of retaining the provision of a whitewash in the new

71
TRAC Report, supra note 70 at ¶12.16.
72
SUBHASH CHANDRA DAS, CORPORATE GOVERNANCE IN INDIA: AN EVALUATION 97 (Phi
Learning, 2012)
73
Id
74
The City Code on Takeovers and Mergers, F22 (June 23, 2018), available at http://ww
w.thetakeoverpanel.org.uk/wpcontent/uploads/2008/11/code.pdf?v=8Jan2018.

39 | P a g e
Takeover Regulation by internalizing international practices, the Committee concluded it would
be wise to dismiss the thought on account of absence of ‘robust regulations on proxy
solicitation’.75

Proxy solicitation is often considered to be problematic as it is perceived to be a mode of

stifling dissident shareholders by using company funds. The large shareholding pattern by
promoters in India is seen with suspicion as they allow the misuse of proxy solicitation.
However, instead of looking at the possibility to encourage diversified shareholding, scrapping
the whitewash mechanism altogether in order to wait for the Indian market to ripen is similar to
misplaced notions of hoping that the problem would get solved automatically.76

The introduction of whitewash provisions could facilitate additional clarity on the

contours of‘control’. Further, the shareholders would be empowered to differentiate between the
triggering of an open offer under Reg. 3 by allowing the shareholders, or if it is a change of
‘control’ mandating an open offer under Reg.4. The additional regulatory burden on the SEBI
would also thereby be reduced through such clarity. Even in a scenario wherein ‘control’ has
changed hands, the mechanism would allow the shareholders to decide whether they would like
to continue under the changed circumstances. This could also contribute towards the aversion of
a chilling effect on transactions that are purely geared towards extending support in times of
financial distress, and in scenarios where the investment is being provided by the party that has
limited funds and cannot bear the onerous burden of acquiring additional shares in fulfillment of
the obligation of open offer. Therefore, a need to reintroduce whitewash provisions are manifest,
of course, with additional policy measures to ensure that the provision is not misused to defeat
the interests of minority shareholders.77

The lacunae present in the contemporary legal regime, owing to the dismissal of the
proposed brightline test has sought to be addressed in this paper.This paper seeks to assist in the
development of a broader framework that the SEBI should keep in mind while determining the
acquisition of control on a (necessarily) case-by-case basis. This framework could achieve
definitional clarity by harmonizing Regulations 2(e), 3 and 4 of the Takeover Regulations and re-

75
TRAC Report, supra note 70 at ¶12.21.
76
Id
77
Vinod Kothari, Choosing between a blurred line and a bright line: SEBI proposes an objective test for “control”,
INDIACORPLAW, (Sept. 3, 2017), https://indiacorplaw.in/2016/03/choosin g-between-blurred-line-and.html.

40 | P a g e
introducing the whitewash provisions, present in the former (although in a different form)
Takeover Regulations. Introducing abrightline test would require a selective reading of control
and would ignore the textual interplay between Regulation 2 (e), 3 and 4. Further, the regulators
should consider reintroducing the whitewash provisions, which are consistent with the
democratic principles that allow the shareholders to decide their fate and working of their
organization.78

A rigid and objective standard of the brightline would increase the scope of unwarranted
interference in the internal working of the organization and subvert the idea of shareholder
primacy. However, the measures proposed above are by no means exhaustive and must be
supplemented by additional policy measures to ensure a robust takeover regime in India,
conducive to acquisitions. Control, by its very nature is a dynamic concept, and an objective test
would not suffice therein. Only by developing a broader framework of principles, can
consistency and clarity emerge in the interaction of the regulator and the stakeholders with the
Takeover Regulations.79

78
N. Sundaresha Subramanian, M&A lawyers see red in SEBI's control test, BUSINESS STANDARD,
http://smartinvestor.business-standard.com/market/ Marke tnews-381460-
MarketnewsdetMA_lawyers_see_red_in_Sebis_control_test.htm#.WpRfz WaB3q
79
Id

41 | P a g e
 CHAPTER IV – QUALITATIVE AND QUANTITATIVE
CONTROL
COMPARISON BETWEEN QUANTITATIVE (DE FACTO) AND QUALITATIVE
APPROACH (DE JURE) :

As discussed earlier, since the MBR is based on acquiring ‘control’ in the target, its
trigger can be associated with a number of factors that vary by jurisdiction. It can be premised
either on a (i) bright-line test based on a specific shareholding threshold such as 30% voting
rights (the quantitative approach) or (ii) subjective determination of control based on the
shareholding pattern of the target, specific rights available to the acquirer under a shareholders’
agreement or the constitutional documents of the target and other relevant factors (the qualitative
approach). While the quantitative approach operates in pursuit of de jure control (or at least a
proxy thereof) as a matter of legal principle, the qualitative approach aims at de facto control that
is a fact-based determination (or at least a mixed question of law and fact).80

Most jurisdictions (eg the European Union (EU), Singapore and Hong Kong) have opted
for the quantitative approach, which not only introduces certainty, but also the required ease of
81
interpretation and implementation both for regulators and market participants. Other
jurisdictions (principally Brazil, India, Indonesia and Spain) have instead opted for the
qualitative approach that enables the courts and regulators to make a determination on the basis
of the facts and circumstances of individual cases. This would ensure that persons acquiring
shares are unable to circumvent the MBR by structuring their transactions through ingenious
methods to stay outside the purview of the rule.82

Table 1.

Types of control Controller’s Shareholding Rights of Controller

80
PAUL L. DAVIES, GOWER AND DAVIES “PRINCIPLES OF MODERN COMPANY LAW 1061 (Sweet &
Maxwell, 2012).
81
Id
82
Grant, Kirchmaier & Kirshner, supra note 97 at 238-47

42 | P a g e
Absolute or total 100% voting rights Flexibility to manage the
company in any manner the
controller deems fit

Special or 75% or two-thirds voting Ensure passage of

super-majority rights significant decisions that
require a special resolution

Legal or statutory More than 50% voting De jure control, that enables
rights the appointment and
removal of directors

De facto Less than 50% voting The ability to control the

rights composition of the board
due to the diffused nature of
the remaining shareholding
in the target resulting in
apathy and collective action
problems among minority
shareholders

Negative More than 25% or one-third The ability to block special

voting rights resolutions proposed by a
controller

Management No controlling shareholding Control vests with the

management in the absence
of a significant shareholder

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1. Quantitative control :

The quantitative approach utilises a specific numerical percentage threshold of voting

rights in a target as the determining factor for whether an acquirer has obtained control over the
target. To be sure, the quantitative approach was not the preferred regulatory strategy to begin
with. The MBR was first introduced in the UK utilising a broader conception of control without
specifying any numerical percentage. A mandatory offer was required when a target came under
the de facto control of an acquirer as determined by the Takeover Panel. However, within the
first few years, difficulties became evident in the implementation of the MBR using this concept
of ‘control’.83

The Panel had to decide cases based on their individual facts, thereby giving it a
substantial amount of discretion. Due to the severe concerns raised regarding the ambiguity of a
subjective definition of control, the City Code in the UK was amended to introduce a numerical
formula that continues to hold good to this day. Several other countries, both in the common law
and civil law worlds have undergone a similar experience. These include Hong Kong, Austria,
Belgium and Italy, all of whom began with a qualitative definition of the control trigger for the
MBR, but subsequently converted their takeover regimes that are now guided by the quantitative
approach.84

Interestingly, on a comparison between the Singapore and Hong Kong Takeover Codes, it
can be seen that both jurisdictions adopted different thresholds to determine control, which may
still be subject to change. Despite the change in the City Code in 1972, the drafters of the Hong
Kong Code chose to retain the non-numerical based control threshold when the Code was drafted
in 1975. Hong Kong subsequently increased its threshold to 35% only in 1981, after six years of
debate and dispute regarding the interpretation of the non-numerical control threshold.85

On the other hand, the Australian Code and the Singapore Code adopted the definite
control threshold right from the inception of the Codes which were both fixed at 20%. In

83
MEG POLLARD, SHERRY T. MILLS, WALTER T. HARRISON, PRINCIPLES OF ACCOUNTING 79
(Pearson, 1st ed. 2007)
84
Id
85
Nishith Desai Associates, Public M&As in India: Takeover Code Dissected, NISHITH DESAI ASSOCIATES
(September 1, 2017), http://www.nishit hdesai.com/fileadmin/ userupload/pdfs
/Ma%20Lab/Takeover%20Code%20Dissected.pdf

44 | P a g e
Singapore, the control threshold was amended in 1985 and increased to 25% from 20%. In 2001,
there was a proposal to revise the SIC to increase threshold limited to 30%. The direct
consequence of this increment is that a shareholder who can acquire more than 25% voting rights
but below the revised limit, a company need no longer be forced by law to make a bid for the
entire shareholding. Several common law jurisdictions, including Singapore, a block of 25% or
above voting rights is sufficient to block the passing of a special resolution in the company. In
Singapore, where public companies are tightly controlled, although it is correct to say that a
shareholding less than 30% may not confer effective control, it attributes negative control.86

In the Canadian Regime, Gerald Heckman identifies two important forms of control:
those which are based on certain legally enforceable rights and obligations (legal means of
control) and methods of control exclusive of this (de facto control). The first prong is procured
by the acquisition of a majority of the voting rights which may be put to use in a general
meeting. Although a comprehensive definition of de facto control is impossible, three general
forms of de facto control are discernable: the informal agreement, minority control and personal
influence.87

Informal agreement is where the shareholders decide to vote similarly on a certain issue.
In bigger companies, minority control takes place when shareholders are ignorant or cannot
attend the annual general meeting. When this is done, they allow shareholders who possess a
minority block of shares to gain working control over the entity. 88 The third form of defacto
control is control through personal influence. Talent, business acumen and skill, and influence,
may accord to some members of a company an influence impact affairs much more than mere
shareholding in the company.

86
Singapore Code on Takeovers and Mergers, Rule 14.1: Except with the Council’s consent, where:- (a) any person
acquires whether by a series of transactions over a period of time or not, shares which (taken together with shares
held or acquired by persons acting in concert with him) carry 30% or more of the voting rights of a company; or (b)
any person who, together with persons acting in concert with him, holds not less than 30% but not more than 50% of
the voting rights and such person, or any person acting in concert with him, acquires in any period of 6 months
additional shares carrying more than 1% of the voting rights, such person must extend offers immediately, on the
basis set out in this Rule, to the holders of any class of share capital of the company which carries votes and in
which such person, or persons acting in concert with him, hold shares. In addition to such person, each of the
principal members of the group of persons acting in concert with him may, according to the circumstances of the
case, have the obligation to extend an offer.
87
R. Skog, Does Sweden Need a Mandatory Bid Rule? A Critical Analysis, 1997, available at
https://www.suerf.org/docx/o_21be9a4bd4f81549a9d1d241981cec3c_1771_suerf.pdf (Last visited onFebruary 26,
2019).
88
Id

45 | P a g e
 While the quantitative approach is beneficial as it introduces certainty and predictability,
its decoupling from de facto control undermines the rationale for the MBR. However, Often,
such evasion is achieved through clever structuring, the use of complex investment instruments
or by the acquirer simply remaining below the MBR threshold. For example, acquirers invest in
shares of the target up to the MBR threshold and take positions in derivative instruments such as
swaps and options for the remaining stake they are interested in acquiring. This would also
enable acquirers to avoid disclosure obligations by stealthily acquiring positions and thereafter
springing a surprise on targets’ management by launching a voluntary offer. At the same time,
some jurisdictions such as the UK have begun to legislate measures to curb the use of complex
financial instruments such as equity derivatives to skirt the MBR.89

2. Quantitative Control ;

A handful of jurisdictions adopt the qualitative approach, either by itself or in combination with a
numerical test. This approach consciously avoids any correlation with a voting rights threshold,
and therefore makes it much less likely to be capable of circumvention. Based on various
regulatory models observed in these jurisdictions, they can be classified into two broad types: (i)
board control; and (ii) management (or operational) control.90

(i) Board control : First, an acquirer may obtain the right to control the composition of the board.
This right may be obtained in three ways.91

The first and most obvious is through a holding of the majority of voting shares, which
correlates with the quantitative approach. This is uncontroversial as the test is both de jure and
tangible in nature. The second is where an acquirer owning less than a majority of voting rights
enters into a shareholders’ agreement with other shareholders or obtains special rights in the
constitutional documents of the target so as to obtain board control. This too is less contentious

89
William Magnuson, Takeover regulation in the United States and Europe: an institutional approach, 21 PACE
INT'L L. REV. 205 (2009).
90
Id
91
Ionna Balta, Criticizing the mandatory bid rule of the takeover bid Directive (November 29, 2013) (dissertation,
International Hellenic University), available at
https://repository.ihu.edu.gr/xmlui/bitstream/handle/11544/266/Ioanna%20Balta_4059_assignsubmission_file_
Dissertation_ioanna.balta.pdf?sequence=1 (Last visited on February 23, 2019)

46 | P a g e
as a review of the legal rights under the corporate and contractual documentation will reveal the
extent of control an acquirer might possess over the composition of the board.92

Second, and moving away from shareholding or contractual rights, an acquirer may
possess the ability to control the board. Although such language has been used in regulations
governing takeovers and control, the degree of assertiveness is arguably less than that of a right.
For example, a shareholder holding less than a majority of the shares may not have the right to
appoint and remove directors, but may have the ability to do so if it holds sufficient shares to be
in a position to exercise de facto control given the remaining shareholding in the company and
other factors.93

Third, an acquirer may have board control if it in fact appoints and removes directors.
This is purely a factual test that can be determined through previous conduct, and may not
necessarily bear any correlation with voting rights or the legal capability to control the board.
However, it is not possible to contemplate a board being controlled by an acquirer who does not
have at least a minimum shareholding in the company in the form of a ‘toe hold’.94

Due to the many variables at play in the qualitative approach, it is not surprising that
many countries have chosen either to transition away from it into the quantitative approach or
not to adopt it in the first place. The complications surrounding the qualitative approach are
diametrically opposite to that of the quantitative approach; while the rigidity of the quantitative
approach often causes it to fall short of capturing within its scope acquisitions of de facto
control, the corresponding downside of the qualitative approach is that it might bring within its
broad fold several transactions that do not truly constitute a change in control.95

92
Abhinav Harlalka et al, “M&A Lab—Jet-Etihad: Jet Gets a Co-Pilot”. online: Nishith Desai Associates.
93
Id
94
Order in the Matter of Proposed Acquisition of Equity Shares of Daikaffil Chemicals India Limited (5 February
2007), WTM/GA/134/CFD/2/07, online: SEBI
95
Id

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 CHAPTER V – RECOMMENDATIONS AND
CONCLUSIONS
In jurisdictions that follow the quantitative approach, it is important to set the MBR threshold
appropriately taking into account the general shareholding pattern of listed companies in those
jurisdictions. 96 In case of dispersed shareholding, the threshold must be fairly low as the
acquisition of a small percentage of voting rights can put the acquirer in the driver’s seat. On the
other hand, in case of concentrated shareholding, a higher threshold is required to signal a
change in control given the existence of incumbent controlling shareholders who tend to own a
large percentage of shares.97 The percentage threshold must be monitored on a periodic basis as
changes in shareholding structures in a given market over a period of time may make a constant
threshold meaningless.98

The rigidity of the quantitative threshold may be watered down through a set of
supplemental mechanisms. For instance, if the threshold is found to be too low in the context of a
target with concentrated shareholding, then the regulator may be conferred the discretion to grant
an exemption to an acquisition that exceeds the MBR threshold but does not surpass the
shareholding of the incumbent controller.99 Similarly, when the threshold is found to be too high
in the case of a target that is dispersed, then the regulators may have to be conferred some
residual discretion to examine the transaction, but this must be available only in the rarest of
cases. Given the subjectivity in this approach, considerable caution must be exercised in the
grant of power to the regulator and the implementation on its part.100

The ability of partial equity owners to block the special resolutions without having
twenty-five percent of control in a company, i.e., by means of ‘working control’, has been

96
Luca Enriques & Matteo Gatti, Creeping Acquisitions in Europe, November 5, 2014, available at
https://corpgov.law.harvard.edu/2014/11/05/creeping-acquisitions-in-europe/ (Last visited on February 17, 2019).
97
Vassily Rudomino, Russia Takeover Guide 9, INTERNATIONAL BAR ASSOCIATION (2016)
98
Id.
99
Cairnhill CIPEF Limited, Combination Registration No C-2015/05/276, ¶5; Federal Trade Commission, PNO
Informal Interpretation No. 1203011.
100
Adolf A. Berle, "Control" in Coṛporate Law, 58 COLUMBIA LAW REVIEW 8 (1958).

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completely overlooked. 101 This potential ability which may aptly be regarded as ‘significant
influence’ has been erroneously excluded from the ambit of control by the regulators.

When it comes to qualitative control, it is here to stay. Jurisdictions such as Brazil, India and
Indonesia have been dogmatic in its embrace.102 They seem unlikely to part with this approach or
the regulatory discretion that accompanies it. There is no indication that these jurisdictions are
likely to transition to the quantitative approach. However, some of the author’s suggestions are
as follows:

1. Defining ‘control’ strictly :

The prime focus must be on defining ‘control’ with greater clarity and certainty so as to curtail
and cabin the concept. While some amount of discretion is required for the regulators to ensure
protection of the minority shareholders’ interests through the MBR, it must be evenly balanced
with the need to provide comfort to acquirers (especially those intending to obtain a minority
stake without much influence on the target) so as to encourage acquisitions of equity stakes that
may be beneficial to the target as well as its shareholders as a whole. In so defining, greater
emphasis must be placed on board control, such as the right or the ability of the acquirer to
influence the composition of the board of directors of the target.103

The concept of management control (through influence on policy and management of the
target) must be used extremely sparingly as this can be a fairly wide concept. Management
control can be said to occur only when the acquirer can have a say (whether through
shareholding or contract) in the day-to-day affairs or the regular business of the target. It ought
not to be invoked when the acquirer may have some say over crucial matters such as significant
corporate transactions (eg mergers, restructuring, amendment to the constitutional documents,

101
Institutional Investor Advisory Services, Raymond Limited: The Complete Rip-Off, May 24, 2017, available at
https://www.iiasadvisory.com/single-post/2017/05/24/Raymond-Limited-The-Complete-Sale (Last visited on
January 30, 2019).
102
Although these are not developed markets, they not only hold a large part of the world’s population, but their
economies are critical to the cross-border takeover markets, with companies located within these jurisdictions
continuing to be prime targets for takeovers.
103
“The Rise of Emerging Markets in Mergers and Acquisitions” (2008), online: Siemens ; BCG, “As the Pace of
M&A Picks Up, Emerging Markets Stand Out” (Last accessed on 28 th February 2019)

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dissolution of the target, and the like),104 which may directly affect the acquirer’s interests as a
substantial shareholder. A distinction must be drawn between day-to-day management (in which
the acquirer must not have a say) and crucial life-changing corporate transactions that are akin to
investment decisions (in which the acquirer must have a say). While influence in day-to-day
management is an indication of control, in other cases it is not.

2. Positive vs negative control :

As a general rule, control must be said to exist when it is active rather than passive, providing
initiation powers to the holder than veto or blocking powers. If negative rights are said to exist,
usually the presumption would be that the acquirer has sought for and obtained this power in
order to protect its own interest whereby it can prevent another controller from carrying out
actions in the target that may impinge upon the acquirer’s interest. Negative control, therefore, as
a rule, must be kept outside the purview of ‘control’ that operates to trigger the MBR.
Jurisdictions that follow the qualitative approach must expressly clarify this in their definition of
control because situations involving negative control are all too common especially in strategic
or investment transactions where the acquirer takes a substantial, but minority, stake in the
target. Capital raising for the benefit of the company (and in turn its shareholders) must not be
confused with a takeover or acquisition of control that might require exit options to be conferred
upon the minorities. The distinction must be crystal clear.105

3. Other Mechanisms :

Furthermore, the qualitative approach must be accompanied by certain other mechanisms that
constrain its expansive scope. Certain presumptions could operate to indicate the lack of de facto
control on a qualitative basis upon the existence of circumstances. For instance, when the
acquirer is not the single largest shareholder in the target, the presumption ought to be that it is
not in control. The regulator may nonetheless discharge the burden of rebutting the presumption

104
Id
Edward F Greene, Andrew Curran & David A Christman, “Toward a Cohesive International Approach to Cross-
105

Border Takeover Regulation” (1997) 51 U Miami L Rev 823 at 865, 866.

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based on the facts and circumstances of individual cases. The severity of the qualitative approach
must be tempered with the introduction of a wider range of exemptions to acquirers, either
automatic or discretionary.

One of the most significant automatic exemptions would be a ‘whitewash’mechanism,

whereby the change of control may be approved by a resolution of independent shareholders. In
this way, the opinion of the shareholders may be sought on whether they perceive the change of
control to be in their interest or not. Of course, emphasis must also be placed on providing
adequate information to the shareholders before seeking their opinion. This is an important
balancing function that currently does not exist in all the jurisdictions following the qualitative
approach.106 Other exemptions may be based on seeking the specific approval of the securities
regulator, which may be granted on the facts of individual cases. It is hard to constrain the
discretion of the regulator in these circumstances, but such discretion must be exercised keeping
in view the rationale for MBR as well as balancing the interests of the minority shareholders and
the acquirer and a market for acquisition of minority stake in target.

The measures discussed above are not intended to be prescriptive in nature. A suitable
mix of these measures may be incorporated in the takeover regulation of each jurisdiction that is
commensurate with various factors such as shareholding pattern, local institutional and economic
considerations, and the focus and capabilities of the securities regulator. More importantly,
measures or approaches that are appropriate at one time may not hold good in the future in a
dynamic takeover market, and must be subject to review and amendment from time to time.
Finally, the idea of harmonisation discussed in this article is not intended to remain in the realm
of abstract theory. An avenue does exist for these harmonisation measures to be developed into
palpable action. The International Organization of Securities Commissions (IOSCO) is tasked,
among other things, with the achievement of consistency in standards of regulation in the
securities markets. As it is represented by a substantial number of the leading securities
regulators around the world, this body is well placed to develop the harmonised conception of
control advocated herein. The IOSCO has already undertaken comparative studies of takeover
regulation in member jurisdictions. At the same time, harmonisation of takeover regulation
continues to be challenging, as IOSCO’s work has not extended much into takeovers as much as

106

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it has in other areas of securities regulation and capital markets. Nevertheless, coordination
between various countries will enable each jurisdiction to adopt local changes initially in the lead
up to more international guidelines on takeover regulation.

Possessing working control may be termed as a quasi-political process where the partial equity
owners but not controllers may maintain close relations with their appointed BOD to convince
the proxies to vote in accordance with their votes.107 It is unlikely that the minority shareholders
will not follow them, considering the fact that both of them are noncontrolling shareholders and
have similar interests to a greater extent. The retail shareholders, especially, do not generally
have a thorough knowledge of the internal functioning of the company. Hence, tip-toeing around
the threshold with other tactics is often used to gain control, if one were to go by the
interpretation of SEBI.108

To balance the interests of both the parties, and on the presumption that the acquirers do
not intend to acquire control, if asked for, SEBI can allow for the suspension of their voting
rights from twenty to twenty-five percent. This would serve the interests of all the parties by
erasing any doubts of hidden control. However, this should not be confused with the cases where
the promoters have to consider the interests of the institutional investors. With the rise of
shareholder activism, there are several instances of deliberations between the institutional
investors and the promoters. The promoters cannot ignore their interests to assure capital inflow.
Nonetheless, the institutional investors cannot be assumed to have intentions of ‘strategic
investment’. Hence, they cannot be said to exercise significant influence.

To draw distinctions between such investments, SEBI should carefully scrutinise background of
the company and the promoters, and their possible intentions of investment. Further, to ensure
greater protection of the minority shareholders, the directors should be required to take conscious
efforts to reduce the information gap when required. Such a practice would especially further
their interests in companies having dispersed ownerships. 2. Other instruments of exercising
significant influence Domestic or foreign investors may also hold convertible bonds that the

107
Id
108
Abhijeet Chandra & Ravinder Kumar, Factors Influencing Indian Individual Investor Behaviour: Survey
Evidence, October 17, 2011, available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2029642 (Last visited
on February 11, 2019)

52 | P a g e
holders can convert into equity shares. For instance, in the Kamat Hotels (India) case, 109
Clearwater Capital Partners had subscribed to foreign currency convertible bonds with other
affirmative rights. 110 Since the agreement had been extinguished by the time the matter was
brought before the regulator, the question of control in this case was also left open.111 In any
case, it is important to note that the approach taken by the CCI and SEBI is different in this
regard. On one hand, the CCI has held that the promoters of the company will be bound to take
into account the interests of the owners of the Global Depository Receipts (“GDRs”), as they can
convert them into equity shares whenever they wish to. In the eyes of the competition watchdog,
GDRs allow the holders to exercise sufficient control over the company. On the other hand,
SEBI has held that ownership of convertible GDRs are not equivalent to control, until they are
converted. The difference in the approach is argued to be justified by SEBI in light of the
different objectives of the two statutes. 112

In principal, the objective of the Competition Act is to assess if the combination will have
an appreciable adverse effect on competition or not. However, while determining if the
acquisition by a firm amounts to combination under the Competition Act, the regulators are
required to evaluate if there has been an acquisition of control or not. However, the ratio of the
CCI regarding the possibility of it affecting the business decisions of the company should also
apply to the Takeover Regulations, 2011, as the same may be considered to be control beyond
the consent of the minority shareholders. Even in cases where the companies have issued
GDRs/American Depositary Receipts (“ADRs”) or other similar instruments, the same needs to
be seen along with any other financial interest that the subscriber may have. 113

The percent of equity shares that the subscriber may get on exchange, along with the
other already existing equity shares and contractual rights needs to be viewed cumulatively. This
is because there may be a high possibility of a tacit agreement in such a structure. Despite the
significant influence that may or may not tantamount to control later, the subscriber would enjoy

109
In the matter of Kamat Hotels (India) Limited, WTM/GM/EFD/DRAIII/20/MAR/2017.
110
Id
111
Id
112
The Competition Act, 2002, §5.
113
In respect of Tailwinds Limited, Mr. Naresh Goyal, Ms. Anita Naresh Goyal and Etihad Airways PJSC,
WTM/RKA/CFD-DCR/17/2014

53 | P a g e
enough control that would be against the objective of MTBs. Hence, there should not be an
unconditional rule to overlook such financial instruments while evaluating control.

The ability of partial equity owners to block the special resolutions without having
twenty-five percent of control in a company, i.e., by means of ‘working control’, has been
completely overlooked. This potential ability which may aptly be regarded as ‘significant
influence’ has been erroneously excluded from the ambit of control by the regulators. Possessing
working control may be termed as a quasi-political process where the partial equity owners but
not controllers may maintain close relations with their appointed BOD to convince the proxies to
vote in accordance with their votes.114 It is unlikely that the minority shareholders will not follow
them, considering the fact that both of them are noncontrolling shareholders and have similar
interests to a greater extent. The retail shareholders, especially, do not generally have a thorough
knowledge of the internal functioning of the company. Hence, tip-toeing around the threshold
with other tactics is often used to gain control, if one were to go by the interpretation of SEBI.
To balance the interests of both the parties, and on the presumption that the acquirers do not
intend to acquire control, if asked for, SEBI can allow for the suspension of their voting rights
from twenty to twenty-five percent. This would serve the interests of all the parties by erasing
any doubts of hidden control.115

However, this should not be confused with the cases where the promoters have to
consider the interests of the institutional investors. With the rise of shareholder activism, there
are several instances of deliberations between the institutional investors and the promoters. The
promoters cannot ignore their interests to assure capital inflow. Nonetheless, the institutional
investors cannot be assumed to have intentions of ‘strategic investment’. Hence, they cannot be
said to exercise significant influence.116

To draw distinctions between such investments, SEBI should carefully scrutinise

background of the company and the promoters, and their possible intentions of investment.
Further, to ensure greater protection of the minority shareholders, the directors should be

114
Khusboo Narayan, The advent of shareholder activism in India, LIVEMINT, November 27, 2014, available at
http://www.livemint.com/Companies/hri4Acn53de1Q48RFAcNwJ/The-advent-of-shareholder-activism-inIndia.html
(Last visited on February 21, 2019).
115
Id
116
Umakanth Varottil, Directors’ Duties And Liabilities In The New Era, April, 2014, available at
https://www.nseindia.com/research/content/res_QB5.pdf (Last visited on February 20, 2019).

54 | P a g e
required to take conscious efforts to reduce the information gap when required. Such a practice
would especially further their interests in companies having dispersed ownerships.

2. Other instruments of exercising significant influence

Domestic or foreign investors may also hold convertible bonds that the holders can convert into
equity shares. For instance, in the Kamat Hotels (India) case117, Clearwater Capital Partners had
subscribed to foreign currency convertible bonds with other affirmative rights. Since the
agreement had been extinguished by the time the matter was brought before the regulator, the
question of control in this case was also left open.118 In any case, it is important to note that the
approach taken by the CCI and SEBI is different in this regard.

On one hand, the CCI has held that the promoters of the company will be bound to take
into account the interests of the owners of the Global Depository Receipts (“GDRs”), as they can
convert them into equity shares whenever they wish to. 119 In the eyes of the competition
watchdog, GDRs allow the holders to exercise sufficient control over the company. On the other
hand, SEBI has held that ownership of convertible GDRs are not equivalent to control, until they
are converted. The difference in the approach is argued to be justified by SEBI in light of the
different objectives of the two statutes. In principal, the objective of the Competition Act is to
assess if the combination will have an appreciable adverse effect on competition or not.120

However, while determining if the acquisition by a firm amounts to combination under

the Competition Act, the regulators are required to evaluate if there has been an acquisition of
121
control or not. However, the ratio of the CCI regarding the possibility of it affecting the
business decisions of the company should also apply to the Takeover Regulations, 2011, as the

117
In the matter of Kamat Hotels (India) Limited, WTM/GM/EFD/DRAIII/20/MAR/2017.
118
Id
119
Id
120
Rajas Kelkar & Ratna Bhushan, Nestle SA makes creeping acquisition in Indian arm, ECONOMIC TIMES
(Mumbai/New Delhi) November 24, 2010, available at
http://epaper.timesofindia.com/Repository/getFiles.asp?Style=OliveXLib:LowLevelEntityToPrint_ETNEW&T
ype=text/html&Path=ETD/2010/11/24&ID=Ar00801 (Last visited on February 2, 2019)
121
Id

55 | P a g e
same may be considered to be control beyond the consent of the minority shareholders. 122 Even
in cases where the companies have issued GDRs/American Depositary Receipts or other similar
instruments, the same needs to be seen along with any other financial interest that the subscriber
may have.

The percent of equity shares that the subscriber may get on exchange, along with the
other already existing equity shares and contractual rights needs to be viewed cumulatively. This
is because there may be a high possibility of a tacit agreement in such a structure. Despite the
significant influence that may or may not tantamount to control later, the subscriber would enjoy
enough Hence, there should not be an unconditional rule to overlook such financial instruments
while evaluating control.

Discretionary power of SEBI

SEBI has withheld the wide discretion to determine each case on its facts and circumstances in
order to exempt companies from the open offer requirement, in transactions which it felt did not
intend to transfer the control to the new acquirer. Such an approach requires SEBI to determine
the intentions of the investment of the party, their previous investments, if they are in the same
line of business, if they merely have a financial interest, inter alia. Previously, SEBI had granted
an exemption to IFCI Ltd. (“IFCI”) from coming out with an open offer despite the fact that it
had crossed the numerical threshold, since the rights granted to IFCI were only to protect its
interests. Further, it had held that IFCI did not have any intentions of acquiring control and the
same was visible from previous instances.123

This is slightly problematic as the acquirer, for instance in the above case, would always
have the power to block special resolutions and could do so if its interests were at stake in the
future. Allowing an exemption on something as vague as intention may be misused by the
investors to gain the requisite control over companies that was beyond the consent of the
minority shareholders. While SEBI has done a commendable task by exempting the companies
taking over companies having stressed assets from an open offer, determination of the
acquisitions may benefit the company and the ones that may not is impracticable. Many

122
Request for Interpretative Letter by Bharti Airtel under the SEBI (Informal Guidance) Scheme, 2003, available at
https://www.sebi.gov.in/sebi_data/commondocs/BhartiSEBIJune22_p.pdf (Last visited on February 21. 2019).
123
In the matter Of Proposed Acquisition of Shares of IFCI Ltd., WTM/RKA/CFD/DCR-I/38/2012

56 | P a g e
countries consider suspension of voting rights when an acquirer is trying to tiptoe around the
threshold, or grant exemption when someone else holds a greater shareholding than the acquirer,
or if the acquirer becomes the highest shareholder because of the reduction of shares by another
holder, etc.

Table II. – Country Specific Exemptions

Country Exemptions
Austria - The acquirer does not control majority of votes at general meetings
- Another shareholder acting in concert holds an equal amount
of shares.124
Bosnia and If the acquisition is the outcome of a capital increase with preferential
Herzegovina subscription rights approved by the general meetings of shareholders.
- If another shareholder controls the target company125
Croatia If the acquisition is the outcome of a capital increase approved by the
general meeting of the shareholders.126
Czech Republic If the acquirer acquires shares from a person who has already made a
mandatory offer.127
Germany May grant an exemption taking into consideration the purpose of the
acquisition, the potential exercise of control by the bidder, the target’s
shareholder structure and the sale of shares below the threshold shortly
after their acquisition.128
Italy If another shareholder exists with a greater shareholding and the acquirer
declares the absence of any intentions of joint control.129
Spain If another shareholder exists with a greater shareholding and the acquirer
does not appoint more than half of the directors.130
Turkey - The shares are acquired from a controlling shareholder and the joint

124
The Austrian Takeover Code, §24(2)(1)
125
Gisèle Rosselle, Laurent Verhavert and Jasmine Devenyn, Belgium Takeover Guide 18, INTERNATIONAL
BAR ASSOCIATION (2014)
126
MEYDING & HUBER, supra note 222, 12.
127
Id., 21.
128
Id., 37.
129
Id., 45
130
Spanish Securities Market Act, 1988, Art. 60

57 | P a g e
 control of the target corporation is maintained through an agreement
executed with such controlling shareholder, provided that the acquiring
shareholders holds less than fifty percent of the voting rights after such
acquisition.131
- The control of management held before the transfer of shares is now
shared equally by those who formerly had the control of management in
the corporation.132

4. Whitewash provisions :

Whitewash provisions are certainly not a novel idea. Jurisdictions like Singapore and UK already
have incorporated whitewash provisions in their respective takeover regimes. However, these
provisions cannot be blindly imported to India without customizing them to the ground realities
here. For example, in Singapore, for the whitewash waiver to be valid, the requirement is an up
vote by a simple majority.133

As company shareholding in India is consolidated by promoters, usually members of the

same family, and is not diffused, the minority shareholders are exposed to greater vulnerability if
the requirement is merely a simple majority. Therefore, it is proposed that the threshold be
increased. Further, keeping in mind that protection of the minority shareholders’ interest is at the
core of the Indian takeover regime, a figure as low as say, 10% minority shareholders could
object to the waiver and place an application to SEBI to deny such waiver unless the minority
shareholders’ interests are paid attention.

Such provisions to safeguard minority shareholders‟ interests when the majority

attempts to bulldoze their way through are already in place in the Companies Act, 2013. For
example, even when a special resolution is successfully passed in regards to variation of

131
The Communiqué, Art. 6(2).
132
Id
133
The Singapore Code on Take-Overs and Mergers, 99, available at
http://www.mas.gov.sg/~/media/resource/sic/2015%20Code%20Amendment
s%20Response%20Press%20Release/Annex%202.pdf.

58 | P a g e
shareholders’ rights under Section 48 of the Companies Act, 2013, 10% of the dissenting
shareholders can apply to the Tribunal to have the variation cancelled. This approach strikes a
balance between the autonomy enjoyed by the company in its affairs while keeping the minority
interests safe. The provision from the UK Takeover Code to put forth an independent expert’s
opinion before the voting for waiver takes place could be transplanted to Indian law to reinforce
the safety of shareholders by helping them make an informed decision.

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