The NDTV Ruling: Clarity On ‘Control’?
The concept of 'control' is a key element to structuring and implementing public M&A deals in India. Broadly, ‘control’ can be categorised into two parts—an objective part which covers the right to appoint majority directors of a company, and a subjective part which covers the right to control management or policy decisions (including through contractual arrangements). In the absence of a clear litmus test for the subjective part of control, the nature of contractual rights negotiated between parties determines whether an acquirer ‘in fact’ has control over the target.
In the case of Subhkam Ventures (I) Private Limited v SEBI (“Subhkam Ventures”), the Securities Appellate Tribunal (“SAT”) delved into the nature of contractual rights that would amount to ‘control’ and consequently trigger a mandatory tender offer under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011 (“Takeover Regulations”). On considering the extensive list of veto rights granted to an investor, the SAT made a distinction between participative (or positive) rights and protective (or negative) rights. In brief, it clarified that rights granted merely for protecting an investor’s interests in the company (negative rights) which do not allow for active participation in the affairs of the company (positive rights) do not amount to ‘control’ under the Takeover Regulations. The ruling provided vital insight into the rights package that could be sought by an investor without triggering the ‘control’ threshold. However, this clarity was short-lived. In appeal, the Supreme Court of India, without setting aside the SAT ruling, refuted its designation as a legal precedent on the subject. This set the clock back to ambiguity in understanding the rights package that could be availed by an investor without the risk of triggering a mandatory tender offer.
In a recent order passed in the case of Vishvapradhan Commercial Private Limited (“VCPL”) v SEBI (“NDTV Case”), the SAT appears to have brought back some clarity on the concept of ‘control’.
The Rights Package Amounting To ‘Control’
In the NDTV Case, the promoters of New Delhi Television Ltd., an Indian listed company (“NDTV”) executed two agreements with VPCL and its subsidiaries—(i) an interest-free loan agreement (with convertible warrants as collateral) under which the prior approval of VPCL was required for certain actions to be undertaken by NDTV and its promoter; and (ii) call option agreements. Pursuant to such agreements, VCPL would be entitled to indirectly acquire more than 25% stake in NDTV. The Securities and Exchange Board of India (“SEBI”) held that the loan agreement was a garb to allow VCPL to purchase the company’s stock. This, coupled with the loan being interest-free and granting veto powers to VCPL, amounted to ceding control to VCPL. The SAT rejected these arguments and invoked the position in Subhkam Ventures—in the process clarifying that ‘control’ under the regulations necessarily means positive and effective control.
A Comprehensive Iteration Of Precedents
Although the SAT could have arrived at the above ruling through an independent assessment of the facts of the case, it is interesting to note that it chose to do so in a more elaborate manner—First, it rejects SEBI’s claim that SAT’s ruling in Subhkam Ventures cannot be relied on since it had been set aside in appeal by the Supreme Court. It does so by relying on subsequent reliance placed by the Supreme Court on SAT’s ruling in Subhkam Ventures in the case of ArcelorMittal Indian Private Limited v Satish Kumar Gupta to determine whether negative rights constituted ‘control’ under the Insolvency and Bankruptcy Code. Thus, it restored Subhkam Ventures as a precedent on the definition of ‘control’, across legislations.
In doing so, despite factual differences, the SAT ruling furthers the principle of positive rights as a prerequisite for control; Second, it elaborated on ‘control’ having to be effective by referring to the ruling in Victor Fernandes v SEBI to show that convertible instruments and potential stake in the company cannot amount to ‘control’ until such option is exercised.
Thus, the SAT ruling substantially clarifies our understanding of ‘control’ under the Takeover Regulations while reviving the precedent set by Subhkam Ventures.
Commercial Impact Of Ruling
In practice, Public M&A deals commonly include negative rights as a vital protection to an investor’s interests. These could be in the form of long-term veto matters, or short-term standstill obligation between execution and completion of a deal. However, the degree of such negative rights often varies—for instance, certain investors may opt to seek very limited negative rights on account of regulatory uncertainties while others may seek a wider spread of rights at the risk of potential regulatory ire. The NDTV ruling provides substantial comfort to existing investors who have sought negative rights in their deals, and also stands to embolden future deals by mitigating the uncertainty around negative rights triggering control provisions under the Takeover Regulations.
In Subhkam Ventures, the SAT had helpfully concluded that protective (or negative) rights do not amount to ‘control’. However, this position has been in a state of flux over the years due to differing rulings and the absence of an authoritative precedent. While the SAT’s ruling in the NDTV case could well be awaiting an appeal, in the interim it can be said to have secured the legacy of Subhkam Ventures as our definitive understanding of ‘control’ and the clarity it provides is surely a step in the right direction.
Abhishek Dadoo is a partner, and Shruti Kunisetty is an associate at Khaitan & Co.
The views expressed here are those of the author’s and do not necessarily represent the views of BQ Prime or its editorial team.
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