2010 (1) TMI 1260 - AT - Companies Law

Whether the share subscription and shareholders agreement executed by and between Subhkam Holding Private Ltd. (now taken over by the appellant) MSK Projects (India) Ltd. (target company) and its promoters in Schedule I to the agreement gives to the appellant control over the target company - The case of the appellant is that by virtue of the agreement it did not acquire control over the target company and therefore Regulation 12 of the takeover code did not get triggered and that it rightly made the open offer only under Regulation 10. The Board on the other hand refers to the various clauses of the agreement and insists that the appellant acquired control over the target company and that it should mention Regulation 12 also in the letter of offer so that proper disclosures are made to the shareholders to enable them to take an informed decision. Control carries with it certain responsibilities and obligations which the appellant does not want to be burdened with Provisions of clause 9 do impose fetters on the target company for purposes of good governance and it is conventional for financial investors to protect their investment and indeed the target company itself from the whims and fancies of the promoters who manage the target company. Such fetters fall far short of the existence of control over the target company. It must be remembered that every fetter of any nature in the hands of any person over a listed company cannot result in control of that person over that company. We also cannot lose sight of the fact that in the instant case even if the entire open offer is accepted and 20 per cent shares are tendered the appellant would be far short of a simple majority that is necessary for getting an ordinary resolution passed. In these circumstances we cannot hold that the appellant has gained control over the target company. HELD THAT - Having gone through the agreement carefully with the help of the learned counsel for the parties we are clearly of the view that none of the clauses therein taken individually or collectively demonstrates control in the hands of the appellant. In this view of the matter Regulation 12 does not get triggered and the Board was not justified in making the appellant incorporate this regulation in the letter of offer. The question posed in the opening part of our order is thus answered in the negative. In the result the appeal is allowed and the impugned direction contained in the letter dated December 15 2008 set aside with no order as to costs.

Summary

Issues Involved
1. Whether the share subscription and shareholders agreement gives the appellant control over the target company.
2. Whether Regulation 12 of the takeover code was triggered by the appellant's acquisition of shares.

Detailed Analysis

Issue 1: Control Over the Target Company
The primary issue is whether the share subscription and shareholders agreement executed between the appellant and the target company confers control over the target company to the appellant.

1. Nominee Director: Clause 3.2(c) of the agreement allows the appellant to appoint a nominee on the board of directors of the target company. However, since the board consists of ten directors, the single nominee director cannot exercise control over the board or the company. This clause is primarily to keep the appellant informed and protect its investment.

2. Standstill Provision: Clause 4.1 is a transitional provision ensuring that the target company does not undergo significant changes between the signing of the agreement and the actual investment. This clause expires upon the investment being made and does not confer control.

3. Participation in Governance: Clauses 7.2 and 7.3 allow the appellant to appoint a nominee director and participate in board committees. These clauses do not confer control but ensure the appellant is informed of the company's governance.

4. Quorum Requirements: Clause 7.7 ensures the presence of the investor director for quorum in board meetings. However, in adjourned meetings as per Clause 7.8, the quorum can be constituted without the investor director, except for matters listed in Clause 9. These clauses do not confer control.

5. Protective Provisions: Clause 9 lists matters requiring the affirmative vote of the investor director, such as amendments to the memorandum, significant asset sales, loans, and key appointments. These provisions are meant to protect the appellant's investment and ensure good corporate governance, not to confer control. The appellant cannot unilaterally implement any proposal, indicating a lack of control.

6. Key Appointments: Sub-clause (n) requires the appellant's affirmative vote for appointing key officers. However, this does not mean the appellant can appoint its candidates, only that it can veto unsuitable appointments to protect its investment.

Issue 2: Triggering Regulation 12
The second issue is whether Regulation 12 of the takeover code, concerning the acquisition of control over a company, was triggered by the appellant's acquisition of shares.

1. Regulation 10 vs. Regulation 12: Regulation 10 applies when an acquirer exercises 15% or more of the voting rights in a company. Regulation 12 applies when an acquirer gains control over the target company, irrespective of share acquisition. Both regulations can apply simultaneously but can also operate independently.

2. Definition of Control: Control is defined as the right to appoint the majority of directors or control management or policy decisions by various means, including shareholding or agreements. Control is a proactive power to direct the company's actions, not merely to prevent actions.

3. Board's Conclusion: The Board's Deputy General Manager concluded that the appellant acquired control based on various clauses of the agreement. However, the Tribunal found that none of these clauses, individually or collectively, demonstrated control. The appellant's rights are protective, ensuring good governance and safeguarding its investment, not conferring control.

4. Effective Control: The Tribunal emphasized that control means effective control, where the acquirer is the driving force behind the company. The appellant's rights do not amount to effective control as they do not allow the appellant to direct the company's actions.

Conclusion
The Tribunal concluded that the appellant did not acquire control over the target company under the agreement, and therefore, Regulation 12 was not triggered. The Board's direction to include Regulation 12 in the letter of offer was unjustified. The appeal was allowed, and the impugned direction was set aside with no order as to costs.