ARGUMENTS ADVANCED

It is humbly submitted before the Honorable Supreme Court of Inasia that SEBI takeover
Regulations advisory committee noted that:

given the case-specific nature of control as a concept, the committee decided to refrain from
stipulating whether the power to say no would constitute control for purpose of the takeover
regulations? Whether a person has acquired control by virtue of affirmative rights would
therefore have to be discussed from the facts and circumstances surrounding each case.1

it has been emphasized that not only acquisition of de jure control but also de facto control
would trigger the open offer obligations2. It is so because as control can be exercised in various
ways in a target company as there is no defined way of exercising control over Target Company.
It is the conduct of the party than his status that decides the identity. 3 It is submitted that LML
exercises de facto control over CGL, the target company4. Although, LML does not have the
right to appoint the majority of directors in order to have control but it has the control of
management or policy decisions of the target company5.

I. VETO RIGHTS GIVE CONTROL TO LML

It is submitted that under clause 4.1- Covenants, Annexure-I, LML can exercise its veto powers
in case of vital management decisions. The minority having veto power can use this provision to
block the board or majority of shareholders from executing substantial plans, even when the

1 Report of the take regulations advisory committee,

<http://www.sebi.giv.in/cms/sebi_data/attachdocs/121287826537018.pdf>
accessed 18 August 2016.

2 Report of the take regulations advisory committee,

<http://www.sebi.giv.in/cms/sebi_data/attachdocs/121287826537018.pdf>
accessed 18 August 2016; Ashwin K. Doshi v SEBI 2004 SCC OnLine SAT 113 : [2004] SAT 112.

3 Jet-etihad case 2014 SCC Online SEBI 283.

4 Definition Target, Company, SAST Regulations 2011, Regulation 2(1)(z).

5 Regulations 2011, Regulation 2(1)(e).

majority controls the board. The party protected by the protective provision could threaten to
block desirable outcomes6. Veto can effectively creates a form of deadlock, since the consent of
both the controlling party and the protected party is necessary for the board to take any
affirmative action and accordingly, the minority shareholders can make the majority to agree on
their terms in order to solve the deadlock ultimately, controlling the management and policies
decisions.
In Subhkam Ventures case7, SAT gave the reasoning of Driving Seat Test. Further elaborating the
metaphor SAT said, the question would be whether who controls the steering, accelerator, the
gears and the brakes. it is submitted that the word veto is of Latin extraction, and, literally
translated, reads, I Forbid, or I Deny 8. Hence it is a blocking power, which will act like
brakes. Now brakes being the most power full thing can overcome steering, accelerator and the
gears by not allowing the car to move and hence, overpowering the person seating in driver seat
to follow the person with brakes course of action in order to allow the car to move. If investors
are not in control and if promoters are unable to take a decision because investors are exercising
their rights, then logically who is in control?9
In the similar way LML has the veto power through which it can create the situation of deadlock
over major managerial decisions. In such situation, LML can compel the target company to
follow a certain course of action which it would otherwise not have followed had it not been for
the veto. With veto rights, the board of directors and other shareholders of the target company are
not permitted to take specified actions without the affirmative approval of the minority
shareholder. Veto rights requirements may contend that empowering a shareholder to determine
the outcome of fundamental activities relating to the business and management of the subject

6 Brain J. broughman, The Role of Indepzendent Directors in Satrtups Firms [2010] UTAH Law Review
461, 987.

7 Subhkam Ventures Private Limited v SEBI 2010 SCC OnLine SAT 35 : [2010] SAT 35.

8 People v Board of Councilmen 20 N Y Supp 51.

9 Murtuza Bohra, Takeover Code: Subhkam Case - What Control Means: Negative Power or
Positive Power? < https://www.taxmann.com/filecontent.aspx?
Page=ART&isxml=N&id=105010000000008509&PageType=1&search=Takeover
%2bCode&tophead=true> accessed 25 August 2016.
company improperly strips the board of directors of its statutory authority to supervise and
management the company10.
In Rhodia S.A. case11, SAT held Rhodias veto right over important managerial decisions as
exercise of control. After drawing a parallel comparison it is submitted that LMLs veto rights
give control to LML.
II. AFFIRMATIVE VOTE OF INVESTOR DIRECTOR GIVES CONTROL TO LML.
Prof. R. K. Hazari, in an authoritative work- the structure of the corporate Private
Sector,mentioned-
if the shareholding is widely dispersed, even a fractional holding of equity can suffice to ensure
control over the company12
Similarly, the equity holding of LML is 18.21%13 but through Affirmative Voting Rights of
investor Directors LML exercises control over the target company.
According to US GAAP guidance provided in FASB ASC 810- Consolidation 14, US GAAP
distinguishes between: i)protective rights that exist to protect the minority shareholders from
potentially damaging actions by the majority shareholders; and ii) participative rights that result
in active participation in daily decisions of the entity 15.Further it is submitted, the non controlling
rights that appear to be participating are substantive rights if they provide for effective

10 F. Hodge ONeal & Robert B. Thompson, ONeal Close Corporations (3 rd ed. 1998).

11 Rhodia SA case 2001 SCC OnLine SAT 30 : [2001] SAT 30.

12 Ashwin K Doshi v SEBI 2004 SCC OnLine SAT 113 : [2004] SAT 112.

13 Factsheet, para 2.

14 US GAAP, Consolidation (Topic-810)- FASB [2009] Financial Accounting Series

<http://www.fasb.org/cs/BlobServer?
blobcol=urldata&blobtable=MungoBlobs&blobkey=id&blobwhere=1175820006385
&blobheader=application/pdf> accessed 25 August 2016.

15 Ernst and Young LLP, International GAAP 2013: Generally Accepted Accounting
Principles under International Financial Reporting Standards( 1st edn, 2013).
participation in significant decisions related to the investees ordinary course of business 16. As
mentioned by the Honorable Supreme court, participative rights are subsets of protective
rights, given to minority shareholder, enable them to overcome the presumption of
consolidation of operations or assets by the controlling shareholders. These participative rights in
certain instances restrict the powers of the shareholder with majority voting interest to control the
operation of the target company17.
It is submitted that the affirmative rights given to LML are participative in nature and hence
gives control to LML.
Memorandum of association is the charter of the company and defines the scope of its
activities18. An article of association of the company is a document which regulates the internal
management of the company19. It is to be noted that the intensity of influence the amendment of
Memorandum or association of the target company lies with the investor directors of LML 20.
Hence, LML can affect the object and management of the target company giving control to LML.
Further it is submitted that whatever decisions are taken regarding running the affairs of the
company, are taken by the board of directors. The directors of companies have been variously
described as agents, trustees or representatives 21. Board of Directors shall be entitled to excersie
all such powers, and to do all the acts and things, as the company is authorsed to exercise and

16 Emerging Issues Task Force, Investors Accounting for an Investee when the
Investor has a Majority of the Voting Interest but the Minority Shareholder or
Shareholders have Certain Approval or Veto Rights <
http://www.fasb.org/jsp/FASB/Document_C/DocumentPage?
cid=1218220144482&acceptedDisclaimer=true> accessed 27 August 2016.

17 Vodafone International Holdings BV v Union of India & Anr (2012) 6 SCC 613.

18 Company Act, 2013, s 4.

19 Company Act, 2013, s 5.

20 Sub-clause (a), Clause 9. Protective Provisions, Annexure-I, Factsheet.

21 Dale & Carrington Invt (P) Ltd and Another v PK Prathapan & Others (2005) 1
SCC 212.
do22. In the instant case investor directors have the ultimate approval to alter the composition and
strength of the board or to delegate the authority or any of the powers of the board to any
individual or committee. In Steele v EVC International NV23, the court highlighted the
relation between power of making ultimate decisions and control. One, who has
the ultimate power to make decisions ultimately exercises controls as has been explained above
through the deadlock example. Hence, LML has control over the board as well. It can control the
composition of board as well as delegate the authority of board to anyone it desires24.
After doing a parallel comparison from above stated references it is submitted that the
affirmative rights of investor directors are of participative nature and constitute to control.
Further CCI, has also elaborated upon the concept of Control in the matter of Tokyo Leasing
Corporation and Tata Capital Financial Services25. In its order CCI observed that approval rights
can create a situation of control over the operation of an enterprise when they pertain to- a)
approval of the business; b) approval of annual operating plan (including budget); (c)
discounting any existing line or commencing a new lines of business; and (d) appointment of key
managerial personnel and their compensation26. It is submitted that in matter of acquisition of
shares of Jet limited by Etihad airways 27, the SAT deemed it necessary to refer the definition of

22 Companies Act 2013, s 179.

23 Steele v EVC International NV [1996] STC 785.

24 Subclause (j), 9. Protective Provisions, Annexure-I, Factsheet.

25 Combination Registration No. C-2012/09/78.

26Poddar Shreya, SEBI Clearance on Jet-Etihad Deal: The Issue of Control Still
Sticky? [2014] 50 taxxmann.com 164 (Article),
<https://www.taxmann.com/filecontent.aspx?
Page=ART&isxml=Y&id=105010000000011602&PageType=1&search=
%5b2014%5d+50+taxmann.com+164+(article)&tophead=true> accessed 22
August 2016.

27 Jet-etihad case 2014 SCC Online SEBI 283.

control under the competition Act, 200228 to decide the question of control stating that two laws
are pari materia.
It is submitted that LML has right to (i) approve annual business plan; (ii) approve the annual
financial plan; (iii) approve appointment of key officials of the company; and (iv) approve any
startegic alliance/joint ventures; the winding up, liquidation or dissolution of the company 29.
Hence, it is submitted that the right of affirmative vote of directors over these provisions gives
control to LML over the target company.
III. CONTROL OVER OTHER STRATEGIC DECISIONS
In Rhodia S.A. case30, SAT ruled that the Appellent had the ability to control the affairs of the
company due to his contractual veto rights vested in Rhodia on all major strategic matters such
as payment of dividend, acquisition or disposal of assets and issuance of securities, changes in
business strategy by terminating or initiating a significant business and entry into (or withdrawal
from) key markets plus due to other circumstances surrounding the case.
In the instant case, the investor directors of LML also has affirmative voting rights over major
strategic decisions like redemption, retirement, purchase or other acquisition by the company of
any shares of the company; acquisition of any other body corporate; amalgamation, splitting,
reorganization or consolidation of the company; transactions with affiliates; distribution of
profits and coverage of losses etc. The investor directors have affirmative voting rights over
major strategic decisions of the target company, which ultimately affect the management,
business and policies of the target company ultimately giving control off the target company31.
Hence, it is submitted that the veto rights and affirmative voting right of the investor directors of
LML constitutes to control and accordingly LML triggers Regulation 4 of SAST regulations
making it compulsory for LML to make a public announcement32 .

28 Control, Competition Act 2002, s 5.

29 Sub-clause (d); (h);(n); (p) and (q), 9. Protective Provisions, Annexure-1,

Factsheet.

30 Rhodia SA v SEBI 2001 SCC OnLine SAT 30 : [2001] SAT 30.

31 SAST Regulations, 2011, Regulation 2(1)(e).

It is humbly submitted before the honorable Supreme Court of Inasia that CGL can be regarded
as an associate company of LML. According to Companies Act, 2013-

associate company, in relation to another company, means a company in which that other
company has a significant influence, but which is not a subsidiary company of the company
having such influence and includes a joint venture. Further, the concept of significant influence
has been explained Significant influence means control of at least twenty per cent or Of total
share capital or of business decisions under an agreement33

It is submitted that the control of LML over business decisions of CGL has already been
established in the above arguments.

I. Other Aspect of Significant Influence

According to Accounting Standards 23, An Associate34 is an enterprise in which the investor has
significant influence and which is neither a subsidiary nor a joint venture of the investor, where
Significant Influence35 is the power to participate in the financial and/or operating policy
decisions of the investee but not control over those policies. The Honorable Supreme Court has
recognized the Accounting Standards36. Further, AS are prescribed by the central Government 37
and they have binding value under companies act38. Further, it is submitted that the report of the
companies Law Committee 2016 recommended that the explanation to section 2(6) should read

32 SAST Regulations 2011, Regulation 4.

33 Companies Act, 2013, s 2(6).

34 Definitions,3.1, AS 23.

35 Definitions, 3.2, AS 23.

36 Challapalli Sugar Ltd v CIT (1975) 3 SCC 572; CIT v Woodward Governor India (P)
Ltd (2009) 13 SCC 1; J.K. Industries Ltd v Union of India (2007) 13 SCC 673.

37 Companies Act 2013, s 133.

38 Companies Act, 2013, s 129.

as for the purpose of this clause, significant Influence means control of at least twenty per
cent of the total voting power, or control of or participation in taking business decisions under an
agreement39. It has also been incorporated in The Companies (amendment) Bill, 2016 as
introduced in Lok Sabha40. The honorable Supreme Court has also referred to the Reports of
Company Law Committee from time to time41.

Therefore, it is humbly submitted that participation in business decision or participation in

financial and operating/management policies contributes to significant influence.

II. Appointment of LMLs Nomiees On Board of LML

Ability to appoint board representatives and affirmative vote over major decisions confirms
rather than rebut an investors ability to influence42
A key decision-making organ of CGl is its board of directors, which has the ultimate
management responsibility for the company. The board is responsible for setting the strategy and
overall direction for the companys business. It is submitted that LML can appoint 2 directors on
the board of CGL. Hence, LML can participate in business decisions regarding management
policies through its directors. Also according to AS 23, representation on the board of directors
constitutes to significant influence43. In United Energy Distribution (P) Ltd. v Alinta Asset 44,

39 Company Law Committee, Recommendations Proposing Amendments To The Act (2016)

<http://www.mca.gov.in/Ministry/pdf/Report_Companies_Law_Committee_01022016.pdf > accessed 28
August 2016.

40 The Companies (Amendment) Bill 2016, s 2(j).

41 R.D. Goyal & Prs v Reliance Industries Ltd (2003) 1 SCC 81, para 17; Rajratha
Naranbhai Mills Co Ltd v Sales Tax Officer Petlad (1991) 3 SCC 283, para 11.

42 SEC, Speech by SEC Staff 1999 WL 1212669 (SEC) ( 8 December 1999)

<https://a.next.westlaw.com/Document/I8712ad414fd811dbbd2dfa5ce1d08a25/Vie
w/FullText.html?
transitionType=UniqueDocItem&contextData=(sc.Default)&userEnteredCitation=19
99+WL+1212669+(S.E.C.).> Accessed 28 August 2016.

43 5(a), AS 23.
while deciding the meaning of term significant influence, the court deemed it necessary to
refer to Australian Accounting Standards.

In a business 9.23% acquisition shares of Philex Mining Corp by Two Rivers Pacific Holding
Corp45, having 5 out 11 board member allowed Pacific to exercise significant influence over the
future strategic direction of Philex. Having a representative on the board of directors could
enable the minority shareholders to influence the outcome of corporate decisions of the subject
company, especially if the unanimous approval of all the directors is required 46. The Honorable
Supreme Court has held that by participation in decision making as a member of commission is
likey to give rise to a reasonable apprehension in the mind that the person can influence the
functioning of the commission47. Hence, it is submitted that by appointing two directors LML
have significant influence over CGL.
III. Veto power with LML and Affirmative Rights with Investor Directors Constitute to
control

It is submitted that the veto rights which LML has over vital management decisions leads to the
participation in the management policies by LML by having the ultimate decision making power.
It can influence the management decision by creating deadlocks. Thus, LML has significant
influence.

According to Accounting Standard 23, participation in policy making process constitutes to

significant influence48. Significant Influence is the power to participate in the financial and/or

44 United Energy Distribution (P) Ltd v Alinta Asset [2009] VSC 19.

45 Philex Mining CorpI Two Rivers Pacific Holdings Corp 2009 WL 9490481.

46 Stephen D. Bohrer, Protecting the Rights of Minority Shareholders in Privately-Owned Companies

(2007) 21 Insights <https://www.jurists.co.jp/en/publication/tractate/docs/o_070606_sdb.pdf> accessed
22 August 2016.

47 Pucl V Union of India (2005) 2 SCC 436.

48 5 (b), AS 23.
operating policy decisions49. It is submitted that LML investor directors can approve annual
business plans and annual financial statements. A business plan is a formal statement of a set of
business goals. If someone has the ultimate power for deciding the business plans then he or she
will definitely have participation in operating policy decisions. LML also has participation in
financial policy decisions of CGL by having the ultimate decision over annual financial
statement. Investor directors can affirm or disaffirm the decision relating to the supply agreement
with DOCL50. Decision relating to the supply agreement is a part of business decision, LML does
not only have influence over such decision but it can control this business decision. LML
investor directors have their final say in many other major business decisions ultimately having
LML participation in Business decisions of CGL.

Therefore, it is submitted that CGL is an associate company of LML under section 2(6) of
Companies Act, 32013 and Mr. Mormont Harris cannot be appointed as Independent Director by
LML being bad in law51.

49 3.2, AS 23.

50 Sub-clause (s), 9..Protective Rights, Annexure-I, Factsheet.

51 Companies Act 2013, s 149.