TMI Blog2010 (1) TMI 1260X X X X Extracts X X X X X X X X Extracts X X X X ..... lities 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uding premium of ₹ 74 per share) aggregating to ₹ 37,38,00,000/-. The appellant was allotted 40,00,000 shares representing 17.90 per cent of the post preferential issue of equity capital. This allotment was made after the shareholders of the target company pass ed a special resolution under Section 81(1A) of the Companies Act, 1956 in the extra-ordinary general meeting held on August 27, 2007. A share subscription and shareholders agreement was executed on October 20, 2007 between the appellant, the existing promoters of the target company and the target company and this agreement governs the investment made by the appellant. It will be referred to hereinafter as the agreement . There is a recital in the agreement that the appellant is only a financial investor in the target company and shall not be considered to be a promoter of that company and that the control and management of the target company shall continue to vest in the promoters and that the appellant shall not acquire control and management of that company for any reason whatsoever. 4. Since the acquisition of the appellant along with its existing shareholding and that of the persons acting in concert wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion Finance Department, Division of Corporation Restructuring of the respondent Board by his letter dated April 28, 2008 conveyed the comments of the Board under Regulation 18(2) of the takeover code. Besides general comments which are not in issue before us, the Board directed that the offer document be revised to reflect that the open offer was being made under Regulations 10 and 12 (change in control) instead of Regulation 10 only. It appears that after the filing of the draft letter of offer, the merchant banker was holding meetings with the officers of the Board from time to time trying to emphasize upon them that there was no question of making an offer under Regulation 12 of the takeover code as there was no4 change in control envisaged and it was reiterated that the appellant was merely a financial investor and cannot be termed as a promoter of the target company. In one of the meetings of the representative s of the parties, clauses 5 and 9 of the agreement came to be discussed and the Board seemed to be of the view that these two clauses give ample powers to the appellant by virtue of which it could exercise control over the target company. The appellant claims and, whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Regulation 12 also got triggered when the appellant acquire d 24.26 per cent equity shares of the target company pursuant to the agreement. At this stage, it would be relevant to refer to the provisions of Regulations 10 and 12 of the takeover code which are reproduced hereunder for facility of reference: Acquisition of fifteen per cent or more of the shares or voting rights of any company. 10. No acquirer shall acquire shares or voting rights which (taken together with shares or voting right s, if any, held by him or by persons acting in concert with him), entitle such acquirer to exercise fifteen per cent or more of the voting rights in a company, unless such acquirer makes a public announcement to acquire shares of such company in accordance with the regulations. Acquisition of control over a company. 12. Irrespective of whether or not there has been any acquisition of shares or voting rights in a company, no acquirer shall acquire control over the target company, unless such person makes a public announcement to acquire shares and acquires such shares in accordance with the regulations. Regulation 10 applies where the acquirer by virtue of his acquisition exer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the only way to be in control. If an acquirer were to control the management or policy decisions of a company, he would be in control. This could happen by virtue of his shareholding or management rights or by reason of shareholders agreements or voting agreements or in any other manner. The test really is whether the acquirer is in the driving seat. To extend the metaphor further, the question would be whether he controls the steering, accelerator, the gears and the brakes . If the answer to these questions is in the affirmative, then alone would he be in control of the company. In other words, the question to be asked in each case would be whether the acquirer is the driving force behind the company and whether he is the one providing motion to the organization. If yes, he is in control but not otherwise. In short control means effective control. 7. In the backdrop of what we have said above, let us now examine whether the appellant, in the facts and circumstances of the present case, acquired control over the target company so as to trigger Regulation 12. The Deputy General Manager of the respondent Board in the impugned communication has referred to various clauses of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment of funds into the target company, the latter shall not deviate from the basis on which the decisions to invest have been made. If there were to be any material change during this period, the appellant could treat it as a breach of the agreement and terminate the same. It is, indeed, a transitional provision which would expire upon the investment being made by the appellant. How can such a clause demonstrate acquisition of control upon making the investment? Since this clause ceases to operate from the date of allotment of shares to the appellant, it cannot be regarded as conferring control on it. Reference has then been made to clause 7.2 of the agreement by which the appellant has power to appoint it s nominee on the board of directors of the target company. We have already discussed this aspect while dealing with clause 3.2(c) and are of the view that these provisions do not confer any control. They only give a right to the appellant to participate in the governance of the target company which is quite different from control. Again, clause 7.3 of the agreement which gives a right to the investor director to be a member of any committee of the board and to vote at all meeting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and/or Articles of the Company; (b) any consolidation, subdivision or alteration of any rights attached to any share capital of the Company or any of its subsidiaries, any capital calls on shareholders; (c) any redemption, retirement, purchase or other acquisition by the Company of any Shares of the Company; (d) approval of the Annual Business Plan and any deviation, revisions therefrom; (e) the sale or disposition by the Company of any its assets, except for sales of assets: (i) which are in the ordinary course of business; or (ii) if outside the ordinary course of business, which, during any Fiscal year of the Company, have a fair market value of less than Rupees One Crore only; (f) the making of any loan or advance by the Company to any Shareholder or any third party, or the entry by the Company into any guaranty, indemnity, or surety contract or any contract of a similar nature in favour of or for the benefit of any Shareholder or any third party outside the ordinary course of business, of a value in excess of Rupees Two Crores; (g) the acquisition by the Company through subscription, purchase or otherwise, of the securities of any other body corporate; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lause of clause 9, we are of the view that it means what it says. The various sub- clauses are meant only to protect the interest of the acquirer (appellant) and the investment made by it. When we look to the affirmative voting rights of the appellant as ensured by this clause, it becomes more than clear that it does not want the target comp any to undergo any paradigm shift from its present position without the appellant s knowledge and approval. We are in agreement with the learned counsel for the appellant that the protective provisions under clause 9 are meant to ensure standards of good corporate governance and to protect the interests of the shareholders including that of the appellant from the whims and fancies of the promoters of the target company. Th e list of matters provided in clauses 9(a) to 9(o) are not in the nature of day to day operational control over the business of the target company. So also, they are not in the nature of control over either the management or policy decisions of the target company. These provisions merely enable the acquirer to oppose a proposal and not carry any proposal on its bi dding. For instance, if the appellant desires that a particula ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ffirmative vote confer control over the day to day working of the company. Sh. Kumar Desai learned counsel laid great emphasis on sub-clause (n) to contend that no key officer of the target company like Chief Executive Officer, Chief Finance Officer, Company Secretary or of equivalent designation could be appointed without the affirmative vote of the appellant and this, according to him, vests significant control in the appellant. Here again, we are unable to agree with Sh. Desai. It is true that the affirmative vote of the appellant is required for the appointment of any of these key officers but even this provision does not mean that the appellant can get its candidate appointed. Affirmative vote of the investor in these matters is necessary for protecting its investment. We cannot infer from this provision that the appellant has gained control over the target company. 9. 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 shor ..... X X X X Extracts X X X X X X X X Extracts X X X X
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