Oct 15, 2019

Pulling the Veto Pen Out? : Veto rights as a threshold for control under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011

Veto: [Latin: “I forbid”] A power of one government branch to prohibit an action by another branch esp. a chief executive’s refusal to sign into law a bill passed by legislation[1].

Shifting the lens to corporate law, veto rights have been perceived paradoxically in mergers and acquisition transactions. While veto rights are mutually agreed upon in the course of negotiations in an M&A transaction, such rights may be protective or participatory depending on whether the incoming investor is a strategic investor or a pure financial investor.

One of the principles which guided the interpretation and operation of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 in the Bhagwati report[2] was that there should be equality of treatment and opportunity to all shareholders. With this, one could argue that since veto rights are provided to a specific stakeholder (mostly the investor), the mere existence of veto rights does not permit equality amongst shareholders and hence, such rights amount to control in the hands of the investor. If we consider this argument, then, how does an investor put checks and controls in place to protect his investment? Or how does an investor safeguard his investments from any blatant decisions of the majority shareholders? It is for these reasons that whether veto rights amount to “control” is a subjective test. However, to understand at what threshold veto rights amount to “control”, it is imperative to understand the ambit of “control” under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (“Takeover Regulations”).

Analysis of “control” under the Takeover Regulations

Regulation 2(1)(e) of the Takeover Regulations defines “control” as :

“control includes the right to appoint a majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner:

Provided that a director or officer of a target company shall not be considered to be in control over such target company, merely by virtue of holding such position”. (Emphasis Supplied)

The above, when possessed, would be “control” irrespective of whether the right is exercisable by a person acting individually or in concert with each other, whether the right is exercisable directly or indirectly; and how the right accrues to a person. E.g. such rights may accrue on account of shareholding, management rights, shareholders agreements, voting agreements, or in any other manner.

“Control” is the very quintessence of the Takeover Regulations and therefore, the Bhagwati report had initially not defined “control” and decided to leave it to the Securities and Exchange Board of India (“SEBI”) to determine if there was a takeover or not in a given situation, but later, on account of the overwhelming body of public opinion stressing for the need to define control or at least evolve the contours of what constitutes “control”, the committee agreed to adopt an inclusive definition of control.

Across jurisdictions, there can be the following approaches to determine “control”, i.e. (i) a quantitative test – where a threshold is determined, and any acquisition above such threshold would amount to acquisition of control; (ii) a qualitative test – wherein a fact-based careful analysis on a case to case basis is carried out; or (iii) a combined approach – which includes a qualitative and quantitative analysis both. The quantitative test is relatively simple. However, a mere quantitative test for control is easy to circumvent. Therefore, a qualitative test is essential. India follows a combined approach to determine if an acquisition amounts to “control.”

Generally speaking, there cannot be a change in the control of a company simpliciter, unaccompanied by the acquisition of shares, though there have been cases before SEBI where management control has changed from one group of persons to another without any overt acquisition of substantial quantities of shares. It would, therefore, be correct to state that takeover or gaining control over a company, as opposed to pure investment, is the most common leitmotif for the substantial acquisition of shares. There has only been one instance of an open offer trigger purely on account of change in control[3] of the company (Regulation 4 of the Takeover Regulations) under the Takeover Regulations. In that case, the promoter sold all his shares in the company (amounting to 12.2% of the voting equity share capital) post which there was a change in the board of directors of the company in favour of the acquirer resulting in a change in control. This case demonstrates that a combined approach may be beneficial to determine “control” or instead change in control in situations where the promoter holding is below the threshold requirement, but in reality, there could be a change in control when the promoter exits the company.

The broad ambit of the definition of “control” and the assessment of whether an entity is acquiring “control” of a company for the purpose of the Takeover Regulations is subjective and has led to several litigations. One contentious issue is whether affirmative voting/ veto rights in a listed company amounts to “control”. While SEBI takes the view that such rights amount to acquisition of “control”, the courts/appellate tribunals have shown the propensity to take a different view. However, no settled view has emerged in this regard. With a view to bring about more clarity on the definition of “control”, SEBI published a discussion paper[4] setting out specific bright line tests for the interpretation of the term “control”. This discussion paper, inter alia, sets out a set of protective (as opposed to participative) rights that would not be constituted as “control”. However, the regulator later clarified[5] that it does not propose to formalize these rights into the Takeover Regulations and instead, proposes to continue with the subjective definition of “control” and determine what constitutes “control” on a case to case basis.

While the order in the matter of Arcelormittal India Private Limited[6] pertains to the interpretation of specific provisions of Section 29A of the Insolvency and Bankruptcy Code, the Hon’ble Supreme Court of India in that order has helped elucidate the meaning of “control” through the lens of a regulator wherein; the Hon’ble Supreme Court of India reiterated and further clarified the interpretation of control stating that[7]:

“…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 (a positive right signifies the right to compel the target company to act and a negative right signifies the right to compel the target company to desist from action). 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 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.”

The Hon’ble Supreme Court of India further elaborated stating that:

“The expression ‘control’ is defined into two parts. The first part refers to de jure control, which includes the right to appoint a majority of directors of a company. The second part refers to de facto control. So long as a person or persons acting in concert, directly or indirectly, can positively influence, in any manner, management or policy decisions, they could be said to be in ‘control’. A management decision is a decision to be taken as to how the corporate body is to be run in its day to day affairs. A policy decision would be a decision that would be beyond the running day to day affairs, i.e. long term decisions. So long as management or policy decisions can be, or are in fact, taken by virtue of shareholding, management rights, shareholders agreements, voting agreements or otherwise, control can be said to exist[8].”

Veto rights and the difference between protective and participatory rights

Investors may want the power to veto some or all corporate policies and decisions. For instance, an investor may be willing to invest in a particular kind of business and nothing else, and thus, he may want to be able to veto charter amendments that would authorize the corporation to engage in other activities. On the other hand, a shareholder who puts up the lion’s share of the money for an enterprise may well want a veto over salary increases, dividend payments, the purchase or retirement of the corporation’s capital and creation of indebtedness[9].

The basic principle that can be followed is that veto rights not amounting to the acquisition of control may be protective rather than participative in nature i.e. such rights may be aimed with the purpose of allowing the investor to protect his investment or prevent dilution of his shareholding. At the same time, the investor should neither have the power to exercise control over the day-to-day running of the business nor the policy making process.

Examples of SEBI orders on veto rights

Set out below are the list of veto rights that have been deliberated by SEBI and considered to be protective[10].

1. Pre-emptive rights The SEBI order in the matter of United Spirits Ltd.[11] considers any pre-emptive issue of share(s) to be a protective right, provided that, there is no right of veto or any restriction on any other issue of shares or change in the capital of any member of the company’s group since it merely ensures that there is no diminution in the effective value of the investment against undue or excessive dilution. Primarily, this right prevents active discrimination against shares held by the investor.
2. Rights that affect the tradability of shares

a)      Voluntary solvent winding-up, dissolution of the Company, or if the company takes steps towards bankruptcy, insolvency or reorganization, arrangement, adjustment, winding up, liquidation.

The SEBI orders in the matter of United Spirits Ltd., NDTV Ltd.[12] and Kamath Hotels (India) Ltd.[13] considers this to be a protective right since this would apply only if one party attempts to have the company wound up on voluntarily despite being fully solvent as that would nullify the investor’s shares in the company. This Veto right seeks to prevent voluntary closure of the Company and is not concerning the management or policy decisions or the day to day business of operations of the company. The scope of this right is to exercise checks and control on the existing management for the purpose to protect the investment as well as investors and not to formulate policies to run the company. These are merely investor protection rights to safeguard interests as an investor.

a)      Voluntary delisting of the Company from a Stock Exchange

Order in the matter of United Spirits Ltd. held this to be a protective right since it applies when a party attempts to voluntarily delist the company from a stock exchange as that would take away an available market for the investor’s shares in the company. This veto right is consequential in nature.

3. Amendment to Constitutional documents Order in the matter of United Spirits Ltd. held that amendment(s) to the articles which prejudices any right of the investor in any material respect is a protective right since the investors’ limited rights under the underlying agreement should not be nullified by an amendment to the charter documents. This Veto right is merely consequential in nature.
4. Corporate action events a)      Issue of any equity securities of the company which results in the aggregate valuation of the company reducing below a threshold amount (linked to the valuation at which the investor has put money into the company)


The analysis of veto rights that amount to “control” continues to remain a subjective test. While it will always have an element of subjectivity, some amount of clarity is also important. The existence or non-existence of “control” over a listed company is a question of fact or, at best, a mixed question of fact and law to be answered on a case to case basis and will continue to remain a paradoxical debate.


Vaidhyanadhan Iyer, Senior Partner
Farah Titina, Associate 


[1] Black’s Law Dictionary, 10th Edition
[2] Justice P.N Bhagwati committee report on Takeovers, January 18, 1997
[3] Open offer of Synergy Infrastructures Limited
[4] SEBI discussion paper on Bright line test for control dated March 14, 2016
[5] Press release issued by SEBI dated September 8, 2017
[6] Arcelormittal India Private Limited v. Satish Kumar Gupta & Ors. (Civil Appeal No. 9402-9405 of 2018)
[7] The Securities Appellate Tribunal (“SAT”) order in M/s Subhkam Ventures (I) Private Limited v. SEBI provided a detailed explanation of ‘control’. However, the Hon’ble Supreme Court, in its judgement dated November 16, 2011, stated that the SAT order should not be treated as precedent, and the question of law around control should be kept open. Subsequently, the Hon’ble Supreme Court of India in the matter of Arcelormittal India Private Limited felt that the observation in the SAT order are apposite and, hence, referred to the explanation of ‘control’ mentioned in the SAT order in M/s Subhkam Ventures (I) Private Limited v. SEBI.
[8]    Supra note 6
[9]    Shareholders power to veto corporate decisions: Use of special charter and by-law provisions
[10]   Only cases in the Takeover Regulations (2011) have been covered
[11]  SEBI order in the matter of United Spirits Ltd. (September 6, 2018) held that none of the items listed under ‘veto rights’ indicate that they  form  part of management or policy division. Merely because certain veto rights accrue to a shareholder; it does not tantamount to concluding that such person held control in the target company. Limited protective shareholder rights are not synonymous with control. However, if the veto rights were to traverse beyond the boundaries of being merely protective to demonstrate control over a company’s management or be seen as an influence on its policy decisions, Regulation 4 of the Takeover Regulations would be triggered
[12] SEBI Order in the matter of NDTV Ltd (June 26, 2018) held that although SEBI concludes that in light of the call option and conversion options, which if triggered would give VPCL indirect control over NDTV, and therefore, the issue as to whether the veto rights conferred control was not relevant for consideration. However, some of the Veto rights were analyzed.
[13] SEBI order in the matter of Kamat Hotels (India) Ltd. dated March 31, 2017





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