Sebi Holds That Change From Joint To Sole Control Does Not Trigger Open Offer Requirements

The Securities and Exchange Board of India (‘SEBI’) held on September 6, 2018 that a change from joint to sole control does not trigger open offer requirements. In a case where one of the two promoters renounces his control over the target company such that the entire control of the company vests in the hands of the continuing promoter, it cannot be said to be a “change in control”, as the public shareholders are familiar with both the promoters being in control of the company and have accepted the same.


SEBI also examined the concept of veto rights constituting “control” and held that veto rights which are merely for protection of the rights of a shareholder do not constitute control. To satisfy the test of control, the veto rights must be sufficient to govern the decision making process of a company’s management, either by being capable of influencing or stalling management/ shareholder decisions.


Key Highlights

v  Diageo plc and its related entities (‘Acquirers’) acquired shares in United Spirits Limited (‘USL’), a company originally owned by United Breweries Holding Limited (‘UBHL’) and its related entities (collectively referred to as ‘UB Group’). The acquisition was completed in May 2013 and a public announcement for the same was made (‘First Open Offer’).


v  Subsequently, additional shares were acquired by the Acquirers through a voluntary open offer in July, 2014 which increased their shareholding from 25.02% to 54.78% (‘Second Open Offer’).


v  The shareholders agreement between the Acquirers and the UB Group provided for certain veto rights to the UB Group. These rights would cease to exist if the UB Group failed to comply with the instructions given by the Acquirers and did not vote in favour of the director nominated by them.


v  On November 25, 2015, the UB Group violated the aforementioned condition and hence their veto rights ceased to exist.


v  SEBI alleged in a show cause notice that on November 25, 2015 the joint control of USL transferred from the UB Group and the Acquirers to sole control by the Acquirers. This amounted to a change in control and, hence, triggered open offer requirements. SEBI’s allegation was based on facts such as disclosure of the UB Group as promoters of USL, veto rights given to the UB Group and voting arrangements between the UB Group and the Acquirers.


v  The Acquirers argued that the control had transitioned to them pursuant to the Second Open Offer and, hence, a separate open offer at this stage was not required.


v  SEBI examined the exact time when control transferred from joint to sole by examining the consequences of the First Open Offer and the Second Open Offer.


SEBI Order
v  On the aspect of change in control from joint to sole, SEBI examined Regulation 12 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997, which clearly stated that a transition from joint to sole control would not amount to a change in control. It opined that despite this clarification not being present in the current Takeover Code, it can be implicitly read into it as the legislative intention is the same.


v  Since the acquisition of control, details of voting arrangements and veto rights had been disclosed at the time of the First Open Offer itself, the cessation of joint control would not trigger an open offer.


v  SEBI held that being named as a promoter in the prospectus does not imply that the entity is in control. While a person who is in control would necessarily have to be qualified as promoter, the converse is not automatically implied.


v  On the issue of nomination of directors, SEBI held that since the UB Group was not entitled to appoint majority of the directors on the board of USL it cannot be said that UB Group were in control post the First Open Offer.


v  With regard to the voting arrangements, SEBI noted that though the UB Group was acting under the instructions of the Acquirers while voting, the latter were dependent on the former to achieve the desired result and this might lead to attribution of control to the UB Group. However, this voting arrangement was dependent on the Acquirers acquiring not less than 50.8% of the shares. Post the Second Open Offer, the Acquirers held more than 50.8% of shares and hence the voting arrangements ceased to exist. This implies that the sole control lay with the Acquirers post the Second Open Offer.


v  SEBI further rejected the allegation that mere cessation of veto rights would imply a transfer from joint to sole control. It observed that the veto rights[1] were limited and protective in nature. They did not provide control and hence their cessation was immaterial and did not constitute a change in control.


v  It reiterated that veto rights which are protective of shareholder rights and do not govern the decision making process of the management do not constitute control.


v  SEBI finally held that no open offer requirements shall be triggered on the change from joint to sole control.


Brief Analysis
v  The ruling by SEBI that joint to sole control does not constitute a change in control was given independently of the facts in this case because in this case, SEBI held that there was anyway no joint control at the time that the veto rights fell away (the joint control had changed to sole control pursuant to the Second Open Offer).


v  SEBI seems to have relied strongly on the fact that the circumstances that caused the change from joint to sole control were notified upfront in the First Open Offer. Therefore, going forward, it would be useful to consider disclosing future fall-away of joint control rights, where appropriate.


Another interesting takeaway is the SEBI view that a promoter just by virtue of being named as promoter would not be said to be in control. As per SEBI, the criteria mentioned under the definition of control: a) appointment of majority of directors, or b) control over management or policy decisions, also must be satisfied in order to attribute control.

[1]       Pre-emptive issue of shares over a certain discount to the volume weighted average price, change to the terms of the shares held by UB Group, voluntary winding-up, voluntary delisting, any amendment to the articles of association of USL which materially prejudice UB Group’s rights under the shareholders’ agreement.

Date: October 1, 2018