TaxTMI 
TaxTMI 
TaxTMI 
2010 (1) TMI 1260
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.... the open offer under the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (hereinafter called the takeover code). That entity has merged into the appellant and consequently all the rights and obligations in connection with the open offer now vest in the appellant. The appellant is an "acquirer" within the meaning of the takeover code and belongs to the group "Subhkam Ventures" promoted by Rakesh S. Kathotia and Mrs. Arti R. Kathotia. Mrs. Arti Kathotia and M/s. Subhkam Securities Private Limited belonging to the same group are persons acting in concert with the appellant in the open offer to acquire shares of the target company. 3. The board of directors of the target company in their meeting held on October 20, 2007 issued and allotted 44,50,000 fully paid up equity shares of Rs. 10 each on preferential basis representing 19.91 per cent of the equity share capital of the target company for cash at a price of Rs. 84 per share (including premium of Rs. 74 per share) aggregating to Rs. 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. Thi....
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....s merely a financial investor and this acquisition will not result in a change in control of the Company and therefore, the Acquirer will not be in control of the management of the Target Company." After the filing of the draft letter of offer, the Board sought further information from time to time from the merchant banker which was provided through emails and also orally at the meetings held with the Board. The appellant kept emphasizing that the acquisition by it would not lead to a change in control of the target company. By its letter date d December 5, 2007 sent through the merchant banker, the appellant clarified that it would not acquire control of the target company and further undertook that if at all control were to be acquired by it at any later stage, the appellant would comply with the takeover code and make an offer to the public shareholders under Regulation 12 at that stage. After exchange of some further correspondence between the parties, the Manager, Corporation 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....
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....that by virtue of the agreement it did not acquire control over the target company and, therefor e, 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 ta rget 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 a ppellant does not want to be burdened with. The learned counsel for the appellant contends that the appellant is a financial investor in the target company and only wants to protect its investment through the various clauses in the agreement and has no intention to take over its control. 6. From the rival stands of the parties, what we need to examine is whether 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 Regula....
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....een defined as under: "Control - The direct or indirect power to direct the management and policies of a person or entity, whether through ownership of voting securities, by contract, or otherwise; the power or authority to manage, direct, or oversee." Control, according to the definition, is a proactive and not a reactive power. It is a power by which an acquirer can command the target company to do what he wants it to do. Control really means creating or controlling a situation by taking the initiative. Power by which an acquirer can only prevent a company from doing what the latter wants to do is by itself not control. In that event, the acquirer is only reacting rather than taking the initiative. It is a positive power and not a negative power. In a board managed company, it is the board of directors that is in control. If an acquirer were to have power to appoint majority of directors, it is obvious that he would be in control of the company but that is not 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 ....
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....eement which shall be discussed later. After all, the appellant has made heavy investments in the target company and is interested in ensuring that the objects for which the company has been set up are not deviated from without its knowledge or consent. We are, therefore, satisfied that power with the appellant to nominate its director on the board of directors does not result in giving any control, much less effective control, over the target company. The next provision to which reference has been made by the Deputy General Manager is clause 4.1 of the agreement which deals with covenants. The target company and its promoters agreed that between the signing of the agreement and the allotment of shares to the appellant under the agreement, the target company would not change its basic contours. Clause 4.1 of th e agreement is a conventional 'standstill' provision having a limited purpose of ensuring that between the signing of the agreement and the actual investment 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 ....
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....e definitely confer controlling rights on the appellant. The Deputy General Manager in the impugned communication has also referred to sub-clauses (a) to (o) of this clause to hold that the appellant will be in a position to influence major policy decisions of the target company by virtue of its 'affirmative vote'. She also holds that the appellant would be having veto rights on crucial matters pertaining to policy decisions which would confer control. In order to understand the implication of this clause, it is necessary to refer to its text which reads as under : "9. PROTECTIVE PROVISIONS: The parties hereby agree that until such time as the Investor equity shareholding in the Company does not fall below 10% of the paid equity share capital of the Company, the affirmative vote of the Investor Director shall be required in a meeting of the Board (or any committee thereof) in respect of any of the following matters: (a) any amendment of the Memorandum 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, r....
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....nt; (q) filing of all offering materials to be utilized in connection with any public offering of shares of the Company; (r) any strategic alliance/jo int venture proposal to be entered into by the Company; (s) approval of the annual financial statements, distribution of profits and coverage of losses of the Co mpany and its Subsidiaries; (t) transactions with affiliates; (u) incorporation of subsidiaries, the acquisition of interest s in any company or business or to acquire or sell shares, debentures, bonds or other securities/instruments in any company; (v) to settle, compromise or abandon any legal or arbitration proceedings, claims, actions or suits relating to the Company involving sums exceeding Rupees One Crore in respect of anyone such claim, action or suit or cumulatively exceeding Rupees One Crore in respect of claims, actions and/or suits in a Fiscal Year;" Having carefully gone through each and every sub- clause 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....
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.... minority. This business plan has to be rolled out in the coming fiscal year and its day to day implementation is looked after by the board of directors. If after approving the plan, the target company wants to deviate from it or make any change s therein, the same would require an affirmative vote from the appellant. We do not think that this provision gives any control to the appellant. On the contrary, it only enables the appellant to safeguard its own investment and the interests of the shareholders in general. Amendment of articles and memorandum of association of a company doe s not fall within the scope of its day to day corporate activity. The mere fact that any such amendment requires an affirmative vote from the appellant is again indicative of the fact that it wants to protect its investment and that the basic structure of the company is not altered without its knowledge and approval. By no stretch of logic, can such an affirmative 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, Com....