What the top court's ruling in ArcelorMittal case means for PE firms in 'control' deals

What the top court's ruling in ArcelorMittal case means for PE firms in 'control' deals
Tanushree Bhuwalka and Srikanth Mantravadi

The definition of “control” of a listed company under the Securities and Exchange Board of India's (SEBI) Takeover Code has for long been a bone of contention for private equity investors seeking to acquire minority stakes, for promoters and even for other minority and public shareholders.

After several orders from the securities regulator SEBI, and its appellate tribunal, which clarified with varying degrees as to what constitutes “control”, a recent Supreme Court (SC) order provides crucial insights in the context of the Insolvency and Bankruptcy Code (IBC).

Implications of control


The definition of “control” assumes significance due to the onerous consequences it entails. The Takeover Code holds that, irrespective of acquisition of shares or voting rights in a listed company, an acquirer is required to initiate a mandatory tender offer (MTO) process to acquire further shares if it acquires control of a listed company.

The MTO process is designed to concentrate shareholding and, consequently, entrench control in the hands of an incoming acquirer by mandating the acquirer to purchase further shares from the public shareholders. This is clear in that the trigger for an MTO is acquisition of 25% of shareholding or voting rights and the minimum offer size for an MTO is 26%, potentially taking the acquirer’s shareholding to 51%.

The MTO process also simultaneously provides an exit option to public shareholders. The acquisition of “control” would result in the acquirer being treated as a “promoter” of the listed company and would subject it to several obligations under various listing and securities regulations of SEBI.


In this context, the definition of “control” becomes critical for PE investors, whose investment thesis is premised on pure-play financial returns. Such investors would want to ascertain, without a modicum of uncertainty, that their investment rights package, especially their affirmative voting rights (AVRs), do not inadvertently trigger an MTO on account of acquisition of “control”.

What the law says

The definition of “control” under the Takeover Code eschews a purely objective approach. It has three facets: (1) right to appoint a majority of directors, (2) right to control the management, and (3) right to control policy decisions. These rights can broadly be exercised by a person holding shares or having contractual rights under a shareholders’ or voting agreement.


While the right to appoint a majority of directors (through ownership of shares or contract) can be mathematically ascertained, the rights to control management or policy decisions are mired in ambiguity. By SEBI’s own admission, the definition of “control” under the Takeover Code provides broad contours and does not offer objective criteria for its determination.

This is further complicated by the fact that the Takeover Code initially laid down the marker for “control” and several subsequent legislations including the Companies Act, Competition Act, insurance regulations and Foreign Direct Investment (FDI) Policy have followed suit and borrowed the definition from the Takeover Code, with minor variations. This has created a suite of laws that leave the definition of “control” open to interpretation.

SEBI orders and the persisting ambiguity


In a landmark ruling in 2009, the Securities Appellate Tribunal (SAT) in a case involving Subhkam Ventures held that AVRs could be compatible with a non-control stake acquisition in a listed company. It clarified that an assessment of control needs to consider if: (1) the AVR confers a proactive or reactive power on the acquirer; and (2) the AVR is necessary for protecting the acquirer’s investment in the listed company as a financial investor.

If the rights conferred are merely reactive (i.e., in the nature of a veto right) and not proactive (i.e., decision making powers or the ability to carry a proposal) and are tailored to protect a minority or financial investment, they would not amount to “control”.

However, while an appeal against the SAT ruling was pending before the SC, the matter became infructuous. Consequently, the SC held that the question of law remains open and the SAT order should not be treated as precedent.


The view on AVRs taken in Subhkam Ventures was reiterated by SEBI in 2017 in the case of Kamat Hotels, although the order stopped short of being a binding precedent as the shareholders’ agreement in question was already terminated.

In 2016, SEBI issued a consultative paper on adopting a ‘bright line’ or objective test for defining “control”. However, this too proved elusive and after an extensive public consultation process, the idea was scotched and status quo prevailed.

Clarification in the context of IBC

In an order dated 4 October 2018, the SC examined the ingredients of control albeit in the context of eligibility of a resolution applicant – Arcelormittal India Pvt. Ltd (AMIPL) – in Essar Steel’s insolvency proceedings.

Section 29-A of the IBC contains eligibility criteria for resolution applicants. It states that a resolution applicant will stand disqualified from submitting a resolution plan if it is a promoter of or in the management or control of an entity whose account has been classified as a non-performing asset for a period of one year before the commencement of insolvency proceedings. Further, the disqualification applies even if the resolution applicant has a connected person who is struck by such disqualification.

In the Arcelormittal case, the resolution professional ascertained that ArcelorMittal Netherlands BV, a connected person of AMIPL, was the promoter of KSS Petron Ltd and Uttam Galva Steels Ltd when their accounts were classified as non-performing assets for more than one year before the commencement of insolvency proceedings of Essar Steel. In this context, the SC delved into the ingredients of control.

In its order, the SC referred to the definition of “control” under the Companies Act (which is identical to the definition of control under the Takeover Code and, therefore, one may rely on this order to interpret the definition of control under the Takeover Code). The SC delineated it into two parts: (1) de jure control or the right to appoint a majority of the directors of a company; and (2) de facto control or the power of a person to, directly or indirectly, positively influence management or policy decisions.

Importantly, the SC cited and affirmed the reasoning of SAT in the Subhkam Ventures case and held that “control” denotes only positive control and the power to block special resolutions cannot amount to control. Accordingly, this reasoning ring-fences AVRs, if designed appropriately, from being construed as conferring “control” rights. PE investors and minority shareholders equipping themselves with AVRs under shareholders’ agreements can derive substantial comfort from this.

Delving further into the question of de facto control, the SC opined that a “management decision” is a decision taken with regard to a company’s day-to-day affairs and operations, while a policy decision pertains to long-term decisions.

This observation provides guidance on the more ambiguous and contentious portions of the definition, i.e., the right to control the management or policy decisions and clarifies how minority investors can approach AVRs in shareholders’ agreements.

Most PE investors holding minority stakes tend to take up oversight positions through directorships or observer positions and steer clear of day-to-day management. This effectively rules out control in the context of management decisions.

Based on the SC ruling in the Arcelormittal case, the risk for such minority shareholders is that of being able to positively or proactively control policy decisions. The ruling’s repeated emphasis on “proactive” and “positive” control indicates that “control” will be inferred to exist if the person or persons acting in concert with him are able to carry out or adopt a policy decision. In effect, this ring-fences not just consultative or participative rights in policy matters but also, to a limited extent, veto rights that have a valid nexus to minority / investor protection.

The facts in the Arcelormittal case, of course, did not warrant a thorough examination of AVRs in the context of policy decisions and the SC understandably stops short of spelling out its views on this interplay. However, the ruling is a definitive step forward and indicates that the SC is likely to take an interpretation that favours AVRs even in policy matters.

Tanushree Bhuwalka is principal associate and Srikanth Mantravadi is senior associate at law firm Khaitan & Co. Views are personal.

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