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July 13 To July 19, 2019 u Taxmann’s Corporate Professionals Today u Vol. 45 u 44Do protective clauses under financial
transaction amount to control?
5.Decision of SAT in case of Subhkam Ven-
tures (I) (P.) Ltd. v. SEBI [2010] 99 SCL 159.
The recital of the agreement entered into
with MSK Projects (India) Limited and its
promoters, provided that Subhkam was only
a financial investor and would neither be
regarded as the promoter nor acquire control
and management of the target company for
any reason. Subhkam argued that open offer
was made under Regulation 10 of SAST Reg-
ulation, while SEBI insisted on that control
was acquired and, therefore, Regulation 12
was also required to be disclosed to enable
shareholders to make an informed decision.
SAT held that the difference in case of proactive
and reactive power and clarified that control,
means creating or controlling a situation by
taking the initiative and not reacting. It is
a positive power and not a negative power.
The intent behind incorporating protective
clauses in the shareholder’s agreement was
to ensure that the target company does not
undergo any paradigm shift from its present
position without Subhkam’s knowledge and
approval. Such provisions did not grant control
but enabled Subhkam to oppose a proposal,
provided fetters to protect the investment
made. SAT allowed the appeal by inferring
that none of the clauses of the agreement,
individually or collectively demonstrated
control in the hands of the appellant.
Hence, from the above it can be said that the
protective clause in the VCPL loan agreement
was to protect the lender’s interest against
the borrower and its assets. Hence, it should
not construe as exercising control.Does Mandatory presence of director
while constituting quorum amount to
control?
6.This is the common practice in loan agree-
ment or shareholding agreement that theparties insist on to have presence of nominee
director for forming quorum. Those rights
are protective rights, protective in nature and
should not be construed as a participative in
nature. In case of Subhkam Ventures (I) (P.)
Ltd. (supra), it was clarified that presence of
one nominee director out of 3 directors for
forming quorum where he does not have
any veto power shall not be construed as
exercising control.
From the above it can be said that the right
of VCPL for appointing One director out of
Three on the Board of RRPR, whose pres-
ence is mandatory to constitute the quorum
for any meeting of the Board shall not be
construed as control.Vito Rights/protective rights not
amounting to exercise of control- Broadly rights are divided in Three cat-
egories which are protective/reactive rights,
dominative rights and participative/proactive
rights. If the conferred rights are protective/
reactive in nature then it would not amount
to exercising control, whereas if the conferred
rights are dominative then it would amount
to exercising control but if the conferred
rights are participative then it is presumed
that it tantamounts to exercising control and
it requires detailed investigation and analysis
of transaction for justifying that the protec-
tive/reactive amount to exercising control.
All veto rights do not amount to exercis-
ing control; if they are protective rights or
negative rights then it does not amount to
excursion control but if they are conferring
positive rights or if they are participative
or dominative in nature then it amounts to
exercising control.
Under the Bright line Tests for Acquisition of
‘Control’ under SEBI Takeover Regulations,
it is provided that the veto rights in matters
which are not part of the ordinary course
of business or involve governance issues it
would be considered as protective in nature
SEBI V. NDTV - DOES FINANCING ARRANGEMENTS AMOUNTS TO EXERCISING ‘CONTROL’