All About Control

“Control” is the ability to exercise a restraining or directing influence over something [1]. In comparison to the Takeover code [2], control has not been as explicitly defined under the Competition Act, 2002 (hereinafter referred to as “Act”).

S. 5 of the Act regulates combinations through acquisitions [3], mergers and amalgamation, here, the term control is used as a precursor to its triggering thresholds. It is important to understand to weigh the impact of S. 5 & 6 of the Act on a particular transaction or to see whether it qualifies for exemption under Schedule-I of the Competition Commission of India (Procedure regarding the transaction of business relating to combinations) Regulations, 2011(hereinafter referred to as “Combination Regulations”). Since Explanation (a) [4] offers only vague parameters, we’ve to resort to interpretation along with CCI’s context regarding the definition and extent of control on a case-to-case basis through its consults or adjudications.

As stated in Ultratech Cement v. CCI [5], the following are three primary degrees of control:

Material Influence: The acquirer can influence the acquired’s affairs and management. It is the primary and lowest level of control.

De facto: Implied level of control wherein the acquirer holds less than the majority of the voting rights but controls > 50% of the casted votes, management of day-to-day with the majority in the board.

De jure: Here, the acquirer has a controlling interest in the acquired with a shareholder that allows them to exercise > 50% of total votes. Only one acquirer can have a controlling interest in the acquired but more than one acquirer could be controlling it, ex-joint ownership. Joint ownership implies where two or more persons can exercise control over the strategic commercial operations of the acquired entity.

Absolute: Shareholding > 75% and exercise of control in the absence of any negative control.

However, there also exists the fifth kind:

“Future/Decisive Control” was seen in Network18 [6] case where optionally convertible securities by way of debentures were issued to the acquirer. The acquirer’s right to convert debentures into shares that carry voting right constitute as control which vests not at the time of conversion but from the time such convertible security is transferred to the acquirer as control is accrued and available but not exercised. Till the time such conversion takes place, the acquirer’s control is indirect.

Another way of acquiring control over a company is by way of the acquirer securing affirmative/special and negative rights via commercial cooperation agreements, agreements of similar nature, or shareholding/share purchase/investment agreements.

In case of de jure control, each joint owner can veto strategic commercial decisions that at least reflect joint control especially if their rights show that they are acting in concert as seen in the case of Grandway & Atlas [7] where under minority shareholder protection rights, they had the rights to nominate two directors on the board and formed 32.39% of the 70% votes required for MSM India to undertake certain actions including but not limited to approvals regarding business plans, starting/discontinuing of a line of business. appointment of key managerial personnel and their compensation and alteration of charter documents. A similar view was taken in Alpha Holdings [8] wherein the acquirers’ consent was required to be taken for certain reserved matters that constituted as joint control.

A cognate order was also passed in a case where, because of a business partnership agreement, the investor’s member was granted an affirmative right of approval for material business decisions that could result in control [9].

CCI widened the definition of control in the Jet-Etihad [10] wherein Etihad had entered in a joint venture with Jet for 24% of Jet’s shares and the right to appoint 2 directors on its board of 12 which were taken as minority shareholder protection rights, but CCI decided that even though Etihad did not have any special/veto/affirmative rights or voting power under the shareholding agreement. This was to be read together with the commercial cooperation agreement. The rights/terms granted to it under the commercial cooperation agreement including but are not limited to the right to govern certain aspects of the joint ventures, the right to recommend senior management, flight pricing, schedules, and routes are sufficient to show control.

Since there are no bright-line tests to classify minority shareholder rights that result in control or are purely granted for investment protection, most transactions may be subject to CCI’s scrutiny unless they meet the qualifications for an exemption under Item 1 of Schedule-I of the Combination Regulations [11].

[1] Black’s Law Dictionary 335 10th edition, 2014.

[2] S. 2 (1) (e) of the SEBI (Substantial Acquisition of Shares & Takeovers) Regulations, 2011.

[3] U/s 2 (a) of the Act, “Acquisition” means the directly or indirectly, acquiring or agreeing to acquire (i) shares, voting rights, or assets of any enterprise; or (ii) control over management or control over assets of any enterprise.

[4] Includes controlling the affairs or management by (i) one or more enterprises, either jointly or singly, over another enterprise or group; (ii) one or more groups, either jointly or singly, over another group or enterprise.

[5] (2018) CCI Combination Registration No. C-2015/02/246 at para 12.10.

[6] Independent Media Trust (2012) CCI Combination No. 2012/03/47 paras-D 14 & 15.

[7] SPE Holdings (2012) CCI Combination No. 2012/06/63 paras 10 a-f.

[8] (2014) CCI Combination No. 2014/07/192.

[9] Century Tokyo Leasing Corporation (2012) CCI Combination No. 2012/09/78 paras 2-4

[10] Jet Airways (2013) CCI Combination No. 2013/05/122

[11] Acquisition < 25% of the shares/voting rights solely for financial investment or in the ordinary course of business with an ordinary shareholder with no board participation or right to nominate or participate in the affairs or management of the company.

Art: "The Judgement of Solomon" by Nicolas Poussin.