INDIAN CORPORATE LAW

Competition Act: Status of Director General’s Finding

2013-06-17T15:22:00.002+05:30

[The following post is contributed by Akanksha Mehta, a student of Dr. R.M.L. National Law University, Lucknow, who has an interest in competition law]

One of the major loopholes in the present Competition Act, 2002 seems to have found some judicial clarification through COMPAT’s (Competition Appellate Tribunal) order dated 18^th April, 2013.

Section 26 of the Act includes all the orders that the Competition Commission of India (CCI) can pass to carry out the procedure for inquiry under Section 19 of the Act. While this Section explicitly gives CCI the power to direct the Director General (DG) to investigate matters, to close the matter if the DG finds no contravention and to order for a further investigation if the DG finds a contravention in his report, it does not explicitly give CCI the power to disagree with the DG and close the matter even when the DG has found a contravention. Though there have been various cases till now where the CCI has disagreed with the DG and closed the matter therewith but there has also been a dissenting opinion by Member R. Prasad in all these cases stating the inability of the CCI to pass such orders as there is no Section or provision giving CCI such powers. This lacuna in the Act has given rise to ambiguities relating to the powers of the CCI and nature of the DG’s report. Does it remain binding on the CCI? Or is it merely recommendatory in nature?

COMPAT’s latest order in the case of M/S Gulf Oil Corp. Ltd. v. CCI & others has brought some clarity to this vagueness. While determining the question of whether it is mandatory for CCI to pass an order under Section 26(7) for further inquiry after the DG has found a contravention in his report, it stated-

“The report of the DG is only recommendatory in nature and it is not binding on CCI in any manner. It is only if the CCI formulates an opinion on the basis of the report that the DG has either not done full investigation or that the further investigation is necessary then it proceeds under Section 26(7) and not otherwise. Therefore, it is not in every case where the CCI disagrees with the report of the DG, it has to proceed under Sec 26(7).”

Though this Judgment has brought certainty and clarity in determining the nature of the DG’s report, yet it does not provide an answer to the most fundamental questions of CCI’s power to close the matter while disagreeing with the DG’s report which has found contravention. This ambiguity can be resolved by either a legislative amendment in the Act or by a purposive interpretation of Section 26 by the Judiciary.

- Akanksha Mehta

Petrodel v Prest: Lord Sumption’s Masterly Analysis of the Corporate Veil

2013-06-13T00:12:00.000+05:30

When the history of the corporate veil is written, the year 2013 will perhaps be given as much prominence as the year 1897. Today, the UK Supreme Court allowed Mrs Prest’s appeal against the judgment of the Court of Appeal that seven properties in London owned by the Petrodel group of companies are not properties to which the sole controller of the group is ‘entitled, in possession or reversion’. The judgment of Lord Sumption contains a masterly analysis of this difficult area of law and is likely to become the definitive authority on the corporate veil in the years ahead. Along with (and perhaps even more than) VTB Capital v Nutritek Corporation, this is the most important judicial analysis of the corporate veil in recent times. We have commented on the decisions in VTB (Court of Appeal and Supreme Court) and Petrodel, to which readers may refer for an account of the facts and the background. In short, after Mr and Mrs Prest divorced, Moylan J. awarded Mrs Prest a sum of £17.5 million as a fair division of Mr Prest’s assets. In part satisfaction of this sum, the judge ordered three Petrodel group companies to transfer the seven properties in question to Mrs Prest. It was established, inter alia, that Mr Prest was the controller and sole person interested in the Petrodel companies and that he had used the assets of the company to defray personal expenses. The question was whether the court was empowered to grant this order.

At an early stage of his judgment (para 9), Lord Sumption identifies three (and no other) possible bases on which such an order can be validly made against the corporate defendants: (1) ‘piercing the corporate veil’ in order to give effective relief; (2) section 24(1)(a) of the Matrimonial Causes Act, 1973 and (3) the Petrodel companies hold the London properties on trust for the husband (not simply because he is the controller). Our interest here is (1) but we note in passing that Lord Sumption (correctly, it is submitted) rejected the proposition that section 24(1)(a) authorises the court to ignore the corporate entity simply to make a fairer distribution of assets.

Lord Sumption’s analysis of the corporate veil contains so many important propositions of law that it is best to summarise them, and then consider two or three of them in more detail:

The corporate veil has been described as a fiction but it is a fiction which is the whole foundation of the English law of company and insolvency. It also clearly accords with the commercial understanding of companies although, as Goff LJ rightly said, the courts are here “concerned not with economics but with law” (para 8);
In some cases, some rule of law has the effect of attributing to the controller the knowledge of the company, or in some other way treating (without ignoring the separate legal entity of the company) as the act of the company an act of some other person. These are not, and should not be, considered as instances of piercing the corporate veil. That is done only when the corporate personality of the company is disregarded (para 16);
Most advanced legal systems recognise corporate personality but adopt different ways of introducing some limits to its logical consequences. The civil law countries use the doctrine of ‘abuse of rights’ but the common law knows no such general principle: instead, “it has a variety of specific principles which achieve the same result in some cases”, one of which is that the law, in defining the incidents of a legal relationship, assumes that persons who engage it deal honestly with each other: if not, the same incidents may not necessarily apply (para 18);
Much of the case law on the corporate veil “is characterised by incautious dicta and inadequate reasoning”. Many of these cases attribute the doctrine of piercing the veil to the fact that the company is a ‘sham’ or a ‘façade’ but these expressions beg more questions than they answer. In recent times, the law has crystallised around the six principles formulated by Munby J. in Ben Hashem v Shayif, of which the most important is that there must be ‘relevant impropriety’, that is, impropriety in the use of the corporate structure to avoid liability. The one modification made to this by the Court of Appeal in VTB (that the corporate veil can be pierced even if other remedies are available to the claimant) is wrong (para 25);
Although the recognition of the veil was obiter in many of these cases, and those in which it was not can be explained by conventional legal principles, the existence of the doctrine is well-established in the authorities: “I would not for my part be willing to explain that consensus out of existence” (para 27);
Much of the confusion in the case law has arisen from a failure to distinguish between “the concealment principle” and the “evasion principle” (para 28);

The concealment principle is, in fact, not an instance of piercing the veil but is the principle that “the interposition of a company…so as to conceal the identity of the real actors will not deter the courts from identifying them, assuming their identity is legally relevant”.
The evasion principle is the only real instance of piercing the veil. This is done if “there is a legal right against the person in control of the company which exists independently of the company’s involvement, and a company is interposed so that the separate legal personality of the company will defeat the right or frustrate its enforcement”.

Lord Sumption illustrates the difference between the concealment principle and the evasion principle by comparing, on the one hand, Gilford Motor Co v Horne [1933] Ch. 935 and Jones v Lipman [1962] 1 WLR 832 with, on the other, Genco ACP v Dalby [2000] 2 BCLC 734 and Trustor AB v Smallbone (No 2) [2001] 1 WLR 1177). In Trustor and Genco, at the risk of over-simplification, a claim was made that a former director of the claimant was liable in knowing receipt by reason of the receipt by a company under his control of funds belonging to the claimant which the controller had procured the company to receive. In both cases, the claimant succeeded apparently on the basis that the veil was pierced so that it could be said that the former director had received the money. Lord Sumption explains that this is a wrong analysis of the cases: correctly analysed, both cases are instances of the concealment principle, not the evasion principle. This is because there was no legal right or liability on the part of the director independently of the company’s interposition: by attributing his knowledge to the company, the company became directly liable to the claimant, but without losing its corporate personality. As Lord Sumption puts it, the result would have been the same if Mr Dalby had caused his uncle to receive the funds with prior knowledge, instead of the company, and there would have been no doubt about his uncle’s separate existence. On the other hand, the order of injunction made against JM Horne & Co can be explained only on the basis that the company was created by Mr Horne for the purpose of defeating the right that his former employers had against him. That liability existed independently of the company (paras 29-33).
This distinction explains why the veil could not be pierced in VTB Capital and indeed in Prest: in VTB, there was no legal right against or liability of Mr Malofeev that existed independently of the role of Nutritek and the other companies. In Prest, there was certainly impropriety, but it had nothing to do with Mr Prest’s obligation to Mrs Prest. This suggests that the result might have been different if Mr Prest had transferred his assets to the companies (beneficially owned by the companies) after the order was made, in order to defeat it (paras 34-36).
The principle is best stated in the words of Lord Sumption, at para 35:

35. I conclude that there is a limited principle of English law which applies when a person is under an existing legal obligation or liability or subject to an existing legal restriction which he deliberately evades or whose enforcement he deliberately frustrates by interposing a company under his control. The court may then pierce the corporate veil for the purpose, and only for the purpose, of depriving the company or its controller of the advantage that they would otherwise have obtained by the company’s separate legal personality. The principle is properly described as a limited one, because in almost every case where the test is satisfied, the facts will in practice disclose a legal relationship between the company and its controller which will make it unnecessary to pierce the corporate veil.

There are three important points that arise out of this judgment. First, the point left open by the Supreme Court in VTB—whether at all the court has the power to pierce the veil—has now been decided, although Lord Neuberger appears to have done so with some reluctance, considering (rightly) that the doctrine is anomalous. He demonstrates (para 74) that in some eighty years of its existence, the doctrine of piercing the veil has not been successfully and correctly invoked even once. Secondly, Lord Neuberger (para 62) and Lord Sumption (para 35) agree that there is a ‘necessity’ threshold to cross before the veil can be pierced: that is, contrary to what the Court of Appeal decided in VTB Capital, the veil should not be pierced even where the evasion principle applies, if other appropriate remedies are available to the claimant. Thirdly, Lord Neuberger and Lord Sumption differ in their treatment of the important cases of Gilford Motor Co v Horne and Jones v Lipman. To Lord Sumption, these cases illustrate the evasion principle insofar as an order was made against the company; to Lord Neuberger (para 70), these cases wrongly invoked the doctrine of piercing the veil and the order made against the company can be explained on the basis of agency.

It is evident, especially after Petrodel Resources, that the law in India could not be more different: the courts pierce the veil more readily, and do not insist that the fraud or impropriety must be concerned with the use of the corporate structure. However, since the Supreme Court is yet to closely examine this question in the light of recent developments, the scope of the corporate veil remains an open question in India.

Arbitration of Shareholder Disputes

2013-06-12T00:44:00.001+05:30

In an article in the Financial Express, my colleague Debashish Sankhari and I have looked at whether disputes of oppression and mismanagement in relation to the affairs of a company can be adjudicated through arbitration. This is an important practical question for many a financial investor (and even a long-term strategic investor) who has agreed to arbitration clauses in the investment/ shareholder agreements, and which may also have been incorporated in the articles of association of the company.

After examining various CLB orders and the Supreme Court judgement in Booz Allen & Hamilton, we come to the conclusion that the test to determine as to whether the matter/ claim of oppression and mismanagement is to be relegated to arbitration is to examine as to whether the allegations of oppression/mismanagement can by adjudicated without reference to the terms of the arbitration agreement. In other words, the nature of the allegations should be such that if established, it could definitely be declared as an act of oppression/ mismanagement. In such cases, the matter cannot be referred to arbitration.

-- Satyajit Gupta

Conflicts between Shareholders Agreements and Articles of a Company

2013-06-06T20:02:00.000+05:30

[The following post is contributed by Aditya Swarup, who is an advocate practising in the Bombay High Court. He has a B.A., LL.B (Hons.) degree from NALSAR, Hyderabad and B.C.L. and M.Phil degrees from Oxford]

The issue of conflicting provisions in a Shareholders Agreement (SHA) and the articles of association (Articles) of a company is a never ending debate, and perhaps a rather confounding one in company law. A recent order of the Delhi High Court in World Phone India Pvt. Ltd v. WPI Group Inc USA, [2013] 178 Comp Cas 173 (Del) (also available here), holding that clauses in a SHA which are not repugnant to the Companies Act but not incorporated in the articles of the Company, would be unenforceable, has only added to this confusion. This post is an attempt to expound the law surrounding this decision.

As a background, it would be apt to note that conflicts between SHA and the Articles of a company can be of two types; first, where the conflict relates to the management of the company (affirmative vote, board of directors, accounts, etc.) and second, where the conflict relates to the transferability of shares. The latter has been the subject of extensive case law in the Supreme Court and High Court and has been dealt with in this blog at various instances (e.g. here and here). As regards the former, two main questions arise;

1) Whether a provision in a SHA that is contrary to the Articles of the company is valid and enforceable?

2) What are the possible remedies for a shareholder against breach of a SHA by other shareholders even though such action would not be construed as a breach under the Articles of the company?

Probably the most important case in this regard is that of VB Rangaraj v. VB Gopalakrishnan, (1992) 1 SCC 160 (available here). In that case, while dealing with a conflict between the SHA and the Articles of the company of the latter type, i.e. a conflict dealing with the transferability of shares, the Supreme Court took the view that the provisions of a SHA imposing restrictions even when consistent with the Companies Act, are to be authorised only when they are incorporated in the Articles of the Company. The decision of the Supreme Court was based on the seemingly settled position that where there is a contradiction between the SHA and the Articles of acompany, the latter will prevail. In IL & FS Trust Co. Ltd. v. Birla Perucchini Ltd., [2004] 121 Comp Cas 335 (available here), the decision in Rangaraj was also held applicable to conflicts in the Articles and SHA not involving transfer of shares.

It is settled law that the Articles of a company would prevail when there is a contradiction between the SHA and the Articles. But assuming that there is a certain provision in the SHA that has not been incorporated in the articles of the Company, would it mean that merely because the articles are silent (not contradictory), the articles will prevail?

The answer to this question might lie in recognition of the legal position that a company is controlled only by its Memorandum and Articles. The Articles are a form of a statutory contract binding all the members of the company as regards the affairs of the company. A company cannot contract outside the Articles in so far as the management of the affairs of the Company is concerned, and any other agreement attempting to bind the company as regards its affairs, not provided for in the Articles and Memorandum of the company, may not be enforceable. For instance, a provision in a SHA giving a casting vote to the Chairman of the Board in case of a tie, not provided in the Articles, will not be enforceable. However, this may also depend on whether the company is a party to the SHA. (See Russell v. Northern Bank Development Corp Ltd, [1992] 1 WLR 588 )

In World Phone, the Board of Directors of the company passed a resolution approving a rights issue in accordance with the Articles of the company, even though such an action required the affirmative vote of the Appellant in accordance with a SHA entered into between the shareholders of the company. The Company Law Board had held that since the provisions of the SHA granting an affirmative vote to the appellant were not incorporated in the Articles of the company, the said provision is unenforceable and the board resolution approving the rights issue was valid. On appeal, Justice Muralidhar of the Delhi High court held;

“ the legal position is that wherethe articles of association are silent on the existence of an affirmative vote, it will not be possible to hold that a clause in an agreement between shareholders would be binding without being incorporated in the articles of association. The question to be asked is whether the provisions of an agreement, that are not inconsistent with the Act, but are also not part of the articles of association, can be said to be applicable. All that section 9 states is that the clauses in the agreement that that “repugnant” to the Act shall be “void”. This does not mean that the clauses in the agreement which are not repugnant to the Act would be enforceable, notwithstanding that they are not incorporated in the articles of association.”

Thus, the court has held that the provisions of the SHA, though silent in the Articles of the company, and not in contradiction with them, will not be enforceable. This ruling, as it stands, brings in a lot of confusion to the issue of conflicts between SHAs and Articles of a company- because the issues don’t stand resolved merely with the conflicting provisions being unenforceable. Further issues arise in light of the judgment of the Supreme Court in Vodafone International Holdings BV v. Union of India, (2012) 6 SCC 613 (available here), that have not been considered by the Delhi High Court in World Phone.

In Vodafone, three main observations were made by the Supreme Court on the issue;

a) That the Supreme Court does not subscribe to the view in Rangaraj that restrictions in a SHA, though consistent with company law, are to be authorised only when they are incorporated in the articles of the Company. (it is still doubtful whether Rangaraj has been overruled as the Court didn’t explicitly say so)

b) Shareholders can enter into any arrangement in the best interests of the Company, but the only thing is that the provisions of SHA shall not go contrary to the articles of the Company.

c) Breach ofSHA which does not breach the Articles of a company is a valid corporate action, but the parties agreed can get remedies under the general of the land for breach of any agreement and not under Companies Act.

In light of the above, a logical extension of the judgment in World Phone would be that even though the provisions of an affirmative vote are not incorporated in the Articles of the company, and though the action of the company in providing for a rights issue would be valid under the Companies Act, such an action will still be in breach of the SHA for which the aggrieved shareholder can pursue an action for breach of contract.

This view is also consistent with the position in English law. In Southern Foundries Ltd v. Shirlaw, [1940] AC 701 it was held, “a company cannot be precluded from altering its articles thereby giving itself power to act under the provisions of the altered articles–but so to act may nonetheless be a breach of contract if it is contrary to a stipulation in the contract validly made before the alteration”, and the court awarded damages for wrongful dismissal of the managing director of the Company even though the mode of dismissing was valid under the Articles of the company. There is considerable opinion to show that the relief may also lie in terms of an injunction to restrain it possible breach of the SHA contract.

On 9^th May, 2013, the Supreme Court refused to admit a SLP in the World Phone case stating the opinion expressed in the order was only as regards interim relief and that the CLB was to decide the issue uninfluenced by the observations of the High Court. This sets the stage for a new round of litigation where it is hoped that issues concerning the conflicts between SHAs and Articles of a company would be finally settled.

- Aditya Swarup

SEBI Order on Public Shareholding Norms

2013-06-05T10:00:00.000+05:30

The deadline for compliance by non-government entities of the public shareholding norms went by on June 3, 2013. Immediately thereafter, SEBI yesterday issued an order against 108 companies that have failed to comply with these norms. SEBI’s press release summarizing its order is available here.

A couple of points are noteworthy. The first relates to the rapidity with which SEBI has acted. This is consistent with its strict stance of not delaying the date of compliance and also its intention to enforce this rule very strictly. It is almost as if SEBI had been preparing for this eventuality where some companies would be non-compliant. The second, and more important, aspect of the order (which is interim in nature) is that it seeks to proceed against the promoters and controlling shareholders. The orders passed against them include freezing their corporate rights (such as voting and other corporate benefits such as dividends, rights entitlements, etc.), prohibitions on the promoters from buying and selling shares in those companies and also restraining the promoters from holding any further positions on the board. By proceeding against the promoters rather than the company itself, SEBI has sought to impose greater pressure to ensure compliance. As we had earlier noted, proceeding against the company would adversely affect the minority shareholders and ought not to be pursued.

This saga is likely to continue as some of the companies/promoters may very well appeal against the order of SEBI considering the severity of the consequences visited upon them.

SEBI order in Educomp matter

2013-06-04T15:58:00.003+05:30

A recent SEBI order has granted an exemption to Educomp's CMD, Mr. Shantanu Prakash from having to make an open offer in relation to an acquisition of 7.5% of the shareholding of Educomp. At the outset, we should look at the facts in this case which are quite peculiar - Educomp's CMD, Mr. Shantanu Prakash had pledged 91.8 lakh shares (7.5% of the share capital) of Educomp as security with Macquarie against a loan of Rs 46 crores. Macquarie had invoked the pledge on account of fall in collateral cover and transferred the pledged shares in its name. However, Macquarie did not sell these shares and once the loan was re-paid in full, it sought to transfer the shares to Mr. Prakash. Mr. Prakash approached SEBI for an exemption from making an open offer under Regs 3(2) & 3(3) of the Takeover Regulations 2011.

SEBI granted the requested exemption on the grounds that (a) the said acquisition will not result in a change of control/ management of Educomp, (b) there is no further payment of fresh consideration for the said acquisition and it is merely a return of shares pledged by the acquirer with the lender, (c) Educomp will continue to be in compliance with the minimum public shareholding requirements even pursuant to the said acquisition and (d) the proposed acquisition would not affect or prejudice the interests of the public shareholders of Educomp in any manner.

The order appears fairly logical keeping in mind that the Takeover Regulations 2011 generally exempts acquisitions of shares pursuant to invocations of pledges in the ordinary course of business, and also exempts certain acquisitions where there is no change in control.

Delaware Court on Going Private Transactions

2013-06-01T15:31:00.000+05:30

Transactions such as mergers between a company and its controlling shareholders are subject to close scrutiny by courts. Such transactions give rise to conflict of interest as they are carried out between related parties and therefore require close supervision. Moreover, mergers with controlling shareholders may also be utilised to force out minority shareholders of a company if the non-controlling shareholders are paid the consideration in cash. These are generally referred to as freezeout mergers in the US context. Historically, such mergers have been subjected to a high standard of scrutiny where courts have applied the “entire fairness” standard commencing from the landmark case of Weinberger v. UOP.

This position was revisited earlier this week by the Delaware Chancery Court in Re MFW Shareholders Litigation where the court applied the less onerous business judgment rule to the merger of a company with its controlling shareholder in which an offer was made to buy out the minority shareholders. The court adopted a deferential approach because the transaction was structured in a manner that took into account minority interests. Two protections specifically found relevance. First, an independent special committee of directors approved the transaction. Second, a majority of the shareholders unaffiliated with the controlling shareholder approved it as well. In other words, it was an independent shareholder approval or a “majority of the minority” vote. This decision indicates the key protections that transaction planners must offer minority shareholders if they are to be sustainable if challenged in a court of law.

A commentary of the decision and its background can be found on Reuters, and it is not intended to discuss the merits of the decision in any detail.

In juxtaposition, the law in India arguably confers lesser protection on minority shareholders both in related party transactions generally as well as in squeeze outs. As discussed extensively on this Blog, related party transactions are subject to greater disclosures but not to approval by either an independent committee of directors or independent shareholders, although the position is likely to change drastically if and when the Companies Bill, 2012 is enacted (e.g. section 188, although a merger is not expressly covered in that provision).

As regards squeeze outs, the legal position continues to be unsettled where companies have the option of following either schemes of arrangement (where minority shareholders have some protection due to classification of shareholders) or reduction of capital (where no independent shareholder approval is required). Previous discussion on squeeze outs is contained here and here.

Supreme Court on Withdrawal of a Takeover Offer

2013-05-30T09:06:00.000+05:30

Background

The Supreme Court earlier this month issued its decision on the takeover offer by Nirma Industries Limited to the shareholders of Shree Rama Multi Tech Limited (SRMTL). The court concurred with the view of the Securities Appellate Tribunal (SAT) and the Securities and Exchange Board of India (SEBI) in disallowing the withdrawal of the offer by Nirma.

In a column appearing on CNBC’s The Firm – Corporate Law in India, Shishir Vayttaden sets out the facts and issues of the case in detail and also offers a critique of the judgment. Here I propose to summarise the key facts, deal with the overall policy issue at hand and also suggest a possible way out for acquirers desirous of retaining some flexibility to withdraw from the offer in case of unforeseen circumstances.

Nirma triggered the mandatory open offer obligations under the previous version of the SEBI Takeover Regulations of 1997 when it enforced a pledge of shares offered by the promoters of SRMTL. Since Nirma’s acquisition of shares exceeded the then prescribed threshold of 15%, it triggered an offer. During the course of the offer, certain revelations were made regarding the financial situation of the target company that became the subject of a financial fraud that significantly reduced the company’s share value. According to Nirma, these facts were not known to it during due diligence conducted prior to the offer. It therefore approached SEBI to withdraw the offer.

As SEBI and SAT (on appeal) refused to permit a withdrawal, Nirma approached the Supreme Court. The Supreme Court largely relied upon an interpretation of Reg. 27 of the Takeover Regulations, 1997 to come to the conclusion that the withdrawal was not permissible. Shishir has dealt with the reasoning of the court in detail in his column, and also pointed to some of the weaknesses of that approach.

Policy Analysis

From a policy standpoint, withdrawal of mandatory offers creates a conflicting situation. On the one hand, takeover regulation considers mandatory offers as sacrosanct as they are intended to offer equality of treatment and exit opportunities for minority shareholders when there is a change in control of the target. In other words, minority shareholders must be allowed to exit on same terms as those who have sold shares to the new acquirer who has obtained control over the target. This is the reason why withdrawals are treated with great circumspection by SEBI.

At the same time, there are situations where a withdrawal must be permitted because the circumstances that triggered the offer or the basis on which the offer was made may no longer exist. Such situations could be varied in nature. The first is impossibility, for example due to the death of an acquirer who is an individual. The second could be circumstances beyond the control of the acquirer, such as a drastic adverse change in the financial condition of the target, similar to the case of SRMTL. Thirdly, there could be situations where the acquirer is unable to perform its obligations under the offer on account of its own circumstances, e.g. inability to complete the offer due to lack of sufficient funds to discharge the consideration to shareholders tendering in the offer. While the first situation clearly makes a case for withdrawal, the third does not merit a withdrawal as that would affect the sanctity of a mandatory offer. It is the second situation, present in this case, which is somewhat tricky as it essentially involves a question of whether or not the acquirer ought to bear the risk of a change in the target’s financial condition. While the Supreme Court’s approach has been to place that risk on the acquirer, Shishir’s critique makes a strong case the other way.

Although the acquirer’s actions are in good faith and deserve some sympathy, a withdrawal of a mandatory offer could result in an incongruous situation unless the underlying transaction that triggered the offer is also unwound. This is because the promoters would have realised the full value on their shares and exited the company leaving the minority shareholders high and dry.

Way Forward

Fortunately, this incongruity has been addressed to some extent in the current version of the Takeover Regulations of 2011, which will likely provide greater leeway to acquirers to structure their transactions such that they are able to avoid any eventuality of the type that arose in the SRMTL case. A new ground has been inserted in the form of Reg. 23(1)(c) of the 2011 Regulations where one of the circumstances where an offer may be withdrawn is as follows:

(c) any condition stipulated in the agreement for acquisition attracting the obligation to make the open offer is not met for reasons outside the reasonable control of the acquirer, and such agreement is rescinded, subject to such conditions having been specifically disclosed in the detailed public statement and the letter of offer; …

Hence, it is now possible to include a condition in the acquisition agreement that could provide for a “material adverse change” (MAC) clause. In the event that the MAC clause is attracted, the acquisition agreement need not be completed by the acquirer, and that can be a ground for withdrawal of the offer. This scheme of things is also consistent with the policy arguments discussed above. In such a situation, both the acquisition that triggered the offer as well as the offer itself would fail making it an “all-or-none” deal. Since there is no change in control, the principle of equality of treatment is not affected, and minority interests are untouched by this.

One of the lessons from the Supreme Court decision would be for transaction planners to structure the acquisition agreement and the open offer documents (public announcement and letter of offer) such that they protect the acquirer appropriate through MAC clauses and other similar conditional arrangements.

In structuring these arrangements, the key is to note that withdrawal will be permissible only if the circumstances giving rise to the inability of the acquirer to complete the offer is outside its control. Moreover, to take a cue from other jurisdictions such as the UK and Singapore, such circumstances should also be objectively determined and not by way of subjective determination by the acquirer. Furthermore, in similar circumstances, regulators in other jurisdictions have also paid heed to the sanctity of an offer and hence allowed a withdrawal for failure of a MAC clause only if the event is material in the sense that it strikes at the heart of the transactions, almost akin to a frustration of a contract (see UK Takeover Panel Statement 2001/15 involving an offer by WPP Group plc for Tempus Group plc following the events surrounding the September 11, 2001 attacks in the US). However, this standard has been subsequently diluted somewhat, although it remains fairly high.

Agreements to Agree

2013-05-29T18:37:00.002+05:30

As we have noted on this blog, the common law generally imposes no duty on a contracting party to negotiate in good faith. This is so even when parties ‘agree’ to agree, that is, purport to conclude a contract leaving certain (sometimes essential) terms to be agreed in the future. The House of Lords held in the well-known case of Walford v Miles [1992] AC 128 that such an agreement imposes no obligation on either party to attempt to reach agreement on the terms left open. But this is not the end of the story: in many cases, the courts have been willing to imply a term in order to make the contract effective, for example, by concluding that ‘price to be agreed’ means ‘reasonable price to be determined by the arbitrator’. The entire law on this subject was reviewed by the Court of Appeal in two leading cases, Mamidoil-Jetoil Greek Petroleum Company SA v Okta Crude Oil Refinery and BJ Aviation Ltd v Pool Aviation. There is a valuable summary, in the form of ten (non-exhaustive) principles, of the effect of the numerous authorities at paragraph 69 of Rix LJ’s judgment in the former case. Principle (vii) is that the court will more readily imply a term to make the contract effective “where where one party has either already had the advantage of some performance…”

This issue arose recently in the Court of Appeal in MRI Trading AG v Erdenet Mining Corporation LLC, a case that neatly illustrates principle (vii) and, more generally, one factor that persuades the court to imply a term to make a contract effective: part performance of a contract and the existence of a network of agreements of which the supposed contract is part. MRI Trading agreed to sell, and EMC agreed to buy, a certain quantity of copper concentrate in 2005. Disputes arose between then parties and arbitration was commenced at the London Metal Exchange [“LME”]. The parties then drew up a Settlement Agreement dated 30.01.2009 which provided that the arbitration would be discontinued; that MRI would give up all its claims under the previous contract. On its part, EMC agreed that it “shall sell MRI Trading 40,000 WMT of EMC Copper Concentrates in each of 2009 and 2010, all pursuant to new, separate contracts between EMC and MRI Trading…” The present dispute arose out of EMC’s purported obligation to sell copper concentrate in 2010. As envisaged by the Settlement Agreement, a new contract was agreed, which provided that “MRI agrees to buy…and EMC agrees to sell...40,000 WMT of concentrate plus or minus 10 % at EMC’s option”. The crucial clauses of this contract, and the basis of EMC’s contention that there was no contract at all, were 6.1, 9.1 and 9.2. These provided, in summary, that shipping schedule (6.1), Treatment Charge [“TC”] and Refining Charge [“RC”] “shall be agreed during the negotiation of terms for 2010”.

The arbitral tribunal found that the shipping schedule, TC and RC were essential terms of the contract to buy copper concentrate; that since these terms were not agreed, there was no obligation on EMC to sell. Crucially, the Tribunal held that the contract should be construed without reference to the Settlement Agreement, overlooking, as Tomlinson LJ points out at [14], that the Entire Agreement Clause in the contract expressly excluded the Settlement Agreement. Once it came to this conclusion, it could not be said that EMC had received any benefit for the purpose of Rix LJ’s seventh principle: the fact that MRI had abandoned its claims by virtue of the Settlement Agreement was irrelevant because the Settlement Agreement could not be taken into account in construing the Sale Agreement.

The general reluctance of the English courts to interfere with the reasoning of an arbitral Tribunal, particularly when no question of jurisdiction arises, is well-known. Tomlinson LJ notes that two very experienced judges of the Commercial Court (Christopher Clarke J., granting leave to appeal, and Eder J., who decided the appeal) were nevertheless driven to conclude that this award was “obviously wrong” and one that no reasonable Tribunal correctly applying the law on the point could have made. In the appeal, MRI’s principal contention was that the court could not revisit the Tribunal’s conclusion that shipping schedule, TC and RC are essential terms: that is a matter for the Tribunal alone. Tomlinson LJ rejected this submission, essentially because the Tribunal had failed to take the Settlement Agreement into account, and also because the parties had supplied a mechanism to resolve this dispute, should agreement not be forthcoming: arbitration. The Tribunal’s conclusion was also inconsistent with the peremptory language of other portions of the agreement, particularly the Recitals, which placed a positive obligation on the parties to buy and sell, respectively. The Court was therefore willing to imply a term. As Tomlinson LJ explains at [19]:

In my judgment the language used by the parties in both the Settlement Agreement and the 2010 contract shows beyond any doubt that they did not intend that, in the language of Chadwick LJ in the B J Aviation case, they should remain free to agree or to disagree about the TC/RC and the shipping schedule as their own perceived interests should dictate with the result that, should they not reach an agreement, there would be no obligation in respect of 2010 at all. I have no doubt that, just as in Foley v Classique Coaches and Wessex v Fine Fare [1967] 1 Lloyd’s Rep 53, another decision of this court, a term is to be implied that the TC/RC and shipping schedule shall be reasonable, and in the event of any dispute as to the appropriate charges and schedule the dispute is to be determined by arbitration.

Defining “Control” in Takeover Regulations

2013-05-29T03:51:00.000+05:30

The question of what constitutes “control” under the SEBI Takeover Regulations of 2011 is a vexed one. This is because an acquirer could acquire less than the mandatory offer threshold of 25% and still be required to make an offer if it is said to be in control of the target company. Control is defined in an inclusive manner and could result in some amount of subjectivity in its determination. The issue has been surfacing again and again in a few cases, where it is primarily the contractual arrangements between the parties that are under scrutiny, and specifically in terms of the rights conferred upon the investor/acquirer.

In an interesting column last week in the Financial Express, Menaka Doshi points to the background regarding the concept of “control” in the Takeover Regulations and stresses the paradoxical results it can lead to. She also sets out the background to the definition of “control” and the failed opportunity to receive an interpretation from the Supreme Court in the Subhkam case.

While the Takeover Regulations Advisory Committee (TRAC) that recommended the 2011 Regulations reemphasized the need for mandatory offers to be triggered by de facto control situations in addition to de jure control situations, the Committee refrained from making specific recommendations on type of exercise of the control (including the power of the investor/acquirer to say “no” to proposals of target companies). This was because the Subhkam case was pending before the Supreme Court at that stage with a ruling anticipated to clear the air.

The reason why I was drawn to this issue again now is because I was researching in a different context on the question of mandatory offers being triggered by a change in control, and was examining the position internationally. In a handful of jurisdictions that I examined, none of them had a subjective definition of control. All of them had a specific percentage threshold for defining control, similar to the 25% threshold in India. Examples are UK (30%), Singapore (20%), Hong Kong (30%), Malaysia (33%) and European Union (30%). Of course, the US takeover regime does not carry a mandatory offer obligation. India was the only jurisdiction I came across that has a subjective definition of control in addition to a percentage threshold, a point that Menaka too notes. While this will certainly benefit minority shareholders by providing them with an equal exit opportunity through mandatory offers during a change in control, it could also cause uncertainties as we have seen in the few Indian cases.

Interestingly, some other jurisdictions carried a subjective definition of control in their early years and, since it did not work well, migrated to a regime where control is defined through a specific percentage threshold. It would be useful to consider the merits and demerits of both approaches.

The reason for a subjective definition of control is that there can be various shades of control in a target company. That would depend not only on the legal rights conferred upon shareholders holding certain number of shares with voting rights (e.g. 75% to pass a special resolution), but also upon the distribution of shares among shareholders of the target (in a widely distributed shareholding, a small holding may be sufficient to gain control). Therefore, a subjective definition of control would enable SEBI to make a determination based on the facts and circumstances of individual cases. This would ensure that acquirers cannot circumvent their mandatory offer obligations by structuring their transactions through ingenious methods to stay outside the purview the rule. Although this approach could significantly minimise the circumvention or abuse of the rule, it is fraught with uncertainty that could severely impinge upon a free market for acquisition of shares in a listed company if acquirers are put under a constant fear of having to make an offer even though they do not fancy a controlling position in the target.

The element of uncertainty surrounding a subjective definition of control is removed in a specific numerical percentage threshold. A bright-line test such as 25% voting rights in a company, which is a proxy for control, introduces considerable ease in interpretation and implementation both for the regulators and the participants in the takeover market. However, one of the key disadvantages of this approach is that it introduces an element of arbitrariness to the process. While due care may be exercised while fixing the appropriate limit to determine control, it is always possible for persons acquiring shares in the targets to acquire such number of shares so that they stay below the threshold for mandatory offers. Hence, in India, it is possible for a person to acquire 24% shares with voting rights and avoid making an offer to acquire the remaining shares even though such level of shareholding may provide the person with de facto control of the target, especially if the remaining shareholding in the target is diffused.

Given that both the subjective and bright-line approaches have their disadvantages, neither may be considered optimal on its own. After having experimented with the subjective approach during their initial years of takeover regulation, several jurisdictions have reconciled to adopting the bright-line approach.

Only time will tell if India’s approach of combining both a numeric percentage threshold and subjective determination of control will be optimal or counterproductive. Even if there is no case yet to eliminate the subjective concept of control, it would do well for SEBI to delineate its scope as clearly as possible.

SEBI Clarifies on Schemes of Arrangement

2013-05-22T19:30:00.001+05:30

Following SEBI’s circular of February 4, 2013 imposing stringent requirements for oversight of schemes of arrangement, there were certain issues that required clarification (discussed here and here).

Now, by way of another circular dated May 21, 2013, SEBI has clarified some of the outstanding issues and also made some modifications to the previous circular. In this post, we discuss some of the key items:

1. Applicability of the Circular

SEBI has now clarified that the February 4 circular is applicable to all types of schemes of arrangement including amalgamation, reconstruction and reduction of capital. It is not limited to reverse listings or other schemes that may require an exemption under Rule 19(7) of the Securities Contracts (Regulation) Rules, 1957.

The wide applicability of the circular would mean that all schemes of arrangement will now be closely scrutinized and will require review by the stock exchanges and SEBI.

2. Majority Requirements for Voting

The February 4 circular provided that proposal for a scheme will pass muster only “if the votes cast by public shareholders in favor of the proposal amount to at least two times the number of votes cast by public shareholders against it.” In other words, in addition to the usual majority the scheme must also receive the approval of 2/3rds of the public shareholders. This requirement has now been done away with.

A more stringent majority requirement as well as voting through postal ballot and e-voting and greater disclosure measures are now limited to schemes of arrangement that are undertaken where promoters are a party or are affected by it. Examples of this are where promoters are allotted further shares under the scheme, or where a group company is a party to the transaction. In such cases, there must be a majority of public shareholders voting in favour of the scheme, in addition to the normal majority required by the Companies Act. The stringent majority requirements therefore apply only to related party transactions undertaken through schemes of arrangement and not to all transactions (which are carried out at arm’s length).

It appears that the earlier circular treated all transactions with the same level of circumspection and imposed high burden on companies that would have made obtaining the requisite majority cumbersome, but now that is limited only to related party transactions that require greater protection for minority shareholders.

3. Others

Under the revised circular, while valuation reports are required to be submitted in all types of schemes, they are required to be obtained from an independent chartered accountant only if there is a change in the shareholding of the listed company / resultant company. What amounts to change in shareholding pattern is defined with specificity along with illustrations.

The revised circular achieves two results. On the one hand, it clarifies the scope of applicability of the previous circular. On the other hand, it lessens the stringency of the previous circular by making some of the onerous requirements applicable to specific types of schemes where minority interests are likely to vulnerable rather than to all types of schemes.

Public Shareholding Norms: Consequences of Non-Compliance

2013-05-21T11:10:00.000+05:30

The June 2013 deadline for compliance by listed companies with the minimum public shareholding of 25% is looming closer. The deadline for compliance by public sector (government) listed companies to comply with the 10% minimum public shareholding will follow in August.

Over the last few months, several companies have already reduced their promoter shareholding to meet with these norms. This has been accomplished through various facilities provided by the Government and SEBI to achieve the minimum public shareholding norms. SEBI has also provided specific exemptions and dispensations in certain cases. The latest episode of The Firm has a comprehensive discussion on the manner in which companies have gone about reducing their promoter holdings and the various issues that have arisen in the process.

Despite a rush to achieve these norms, there will certainly be a significant number of companies that are unable to comply with them by the June deadline. SEBI has been steadfast in its stance that it will not extend the time period for compliance.

In these circumstances, a lawyer friend recently raised the issue of the possible consequences of non-compliance by listed companies. In order to consider this, we must note that the minimum public shareholding norms are embodied in Rule 19A of the Securities Contracts (Regulation) Rules, 1957 (SCRR) that was introduced by way of amendment in 2010. In addition, the listing agreement in clause 40A requires companies to comply with Rules 19(2) and 19A of the SCRR.

The first consequence of non-compliance would be a delisting of securities on account a breach of the listing agreement. As we have repeatedly argued before, this would be a paradoxical tool to ensure compliance with listing norms. In case of a delisting, it is the public shareholders who would suffer due to a loss of liquidity and exit opportunity in the markets. Public shareholders would be penalized by failure of the company and promoters to comply with norms that are intended to benefit them. While this regulatory response exists on paper, it must be exercised cautiously after considering the extensive impact it may have.

The second consequence would be penalties levied on the non-compliant companies. Section 23E of the Securities Contracts (Regulation) Act, 1956 (SCRA) provides that in case of failure to comply with the listing conditions, SEBI could impose a penalty not exceeding Rs. 25 crores (rupees 250 million). SEBI could potentially invoke this power in case the public shareholding norms are not met by the deadline.

While these measures exist on the statute books, it is a different matter as to how they might be exercised by SEBI in practice. The past track record indicates certain difficulties in the implementation of corporate and securities laws. For example, when stringent measures of corporate governance were to be introduced by amendments to clause 49 of the listing agreement in 2004, the implementation was delayed several times and they came into effect only on January 1, 2006. These include a tighter definition of board independence and the like. Even thereafter, when SEBI tried to enforce the board independence requirements against several listed companies, primarily in the public (government) sector, it had to drop them subsequently.

To make a comparison, during October and November 2008, SEBI passed a series of orders involving the lack of appointment of the requisite number of independent directors to several government companies, viz. NTPC Limited (Oct. 8), GAIL (India) Limited (Oct. 27), Indian Oil Corporation Limited (Oct. 31) and Oil and Natural Gas Corporation Limited (Nov. 3). The principal ground for dropping the action was that in the case of the government companies involved the articles of association provide for the appointment of directors by the President of India (as the controlling shareholder), acting through the relevant administrative Ministry. SEBI found that despite continuous follow up by the government companies, the appointments did not take effect due to the need to follow the requisite process and hence the failure by those companies to comply with Clause 49 was not deliberate or intentional.

Returning to the public shareholding norms, a lot would depend upon the stance adopted by SEBI for enforcing them after the deadline has expired. While some of it may be known post-June 2013 when the deadline for private sector companies expires, but the real enforcement test may lie if there are violators among the public sector companies, which will be clear subsequently.

Madras High Court on SEBI Circular for Scheme of Arrangement

2013-05-20T15:39:00.000+05:30

A few months ago, I had discussed SEBI’s circular of February 4, 2013, which imposes more stringent oversight by SEBI and the stock exchanges on different types of schemes of arrangement.

Shortly thereafter, our guest contributor Yogesh Chande has pointed to issues relating to the scope of the SEBI circular, and specifically whether the circular applies only to such schemes that require exemption from Rule 19(7) of the Securities Contracts (Regulation) Rules, 1957 (SCRR), which principally relates to reverse listings, or whether it applies more widely to all types of arrangements. This ambiguity is caused because although the SEBI circular applies generally to all types of schemes, including schemes among listed companies and even capital reductions under section 100 of the Companies Act, the genesis for the circular can be related to a 2009 circular which is confined to reverse listings and was also repealed by the February 2013 circular.

In an unreported judgment dated April 1, 2013, the Madras High Court holds that SEBI’s circular is applicable only where an exemption is being sought from Rule 19 of the SCRR and not for other schemes. That case involved a merger of two companies both of which were listed on the stock exchanges. The companies made an application to the court for convening meetings under section 391 of the Companies Act. Since this was not a reverse listing, the court clarified in response that the SEBI circular is not applicable. The relevant portion containing the discussion on the point of law on the issue is extracted below:

5. The learned counsel for the applicant contended that the conditions laid down by the Securities and Exchange Board of India vide circular CIR/CFD/DIL/5/2013 dated 04.02.2013 are not applicable to the case of the applicant, as the applicant is not seeking exemption under Rule 19(7) of the Securities Contracts (Regulation) Rules, 1957, as the transferor company listed its shares in the recognised Stock Exchange after complying with the conditions laid down under the Securities Contracts (Regulation) Rules, 1957.

6. On consideration, I find force in this contention. Rule 19 of the Securities Contracts (Regulation) Rules, 1957 stipulates that a public company as defined under the Companies Act, 1956, desirous of getting securities listed with the recognised Stock Exchange are required to apply for the purpose to the Stock Exchange along with its application, document contained under the Rule.

7. A submitted by the learned counsel for the applicant, this already stood complied with, when the stock was listed with the recognised Stock Exchange.

8. The learned counsel for the applicant is also right that Rule 19(7) gives right to the Securities Exchange Board to waive or relax strict enforcement of any of the rules. In the present case, it is not a case where the applicant is to get the stock listed. In the case in hand, what is being done is that the stock which is already listed is being regulated without seeking any exemption, therefore, for the purpose of amalgamation of the companies, the provisions of Rule 19(7) would not be applicable, as no exemption under the rules is being sought therefore, the circular issued in exercise of power under Rule 19(7) will not be applicable to the applicant.

The court has adopted a narrow view of the circular. While it is understandable that the circular refers to Rule 19(7), that does not explain the wider objective of SEBI that is evident in the circular and also in the fact that it covers other schemes of the arrangement such as capital reduction that does not involve any listing of securities without following the usual disclosure process.

As Yogesh mentions in his post, there is some ambiguity regarding the scope of the circular, and this decision also underscores the type of issues that could arise in practice. Given this ambiguity, it is recommended that SEBI expressly state its intention regarding the scope of the circular. By issuing a clarification or a set of FAQs, possible uncertainties regarding the schemes of arrangement, which are a popular form of a transaction in India, can be avoided.

Update - May 22, 2013: SEBI has since clarified that the circular is applicable to all types of schemes of arrangement and not only those that require an exemption under Rule 19(7).

Enforceability of Put and Call Options: Reality Soon?

2013-05-18T03:52:00.001+05:30

Although put and call options are quite common in investment agreements, its enforceability under Indian law has been in serious doubt due to age-old provisions in securities laws which have not been updated to meet with the requirement of the times. I have discussed the issue in detail in this paper and also called “for a reconsideration of the legal regime so that physically settled options that are customary in investment agreements may be treated as valid and legally enforceable”.

Although this issue has been on the anvil for a long time, now there seems to be some tangible movement towards resolution. News reports indicate that the Law Ministry has, based on a proposal from the Finance Ministry, decided to permit options in investment agreements.

It is not clear how the revisions will be effected. It could be done simply by way of a notification by SEBI amending/repealing its earlier notification of March 1, 2000, which put paid to these options. The other alternative would be to amend the Securities Contracts (Regulation) Act, 1956 (SCRA), which is perhaps both unnecessary and more cumbersome given that the intervention of Parliament will be required.

It is too early to be euphoric because the devil is always in the detail!

Papers published on BALCO

2013-05-17T15:39:00.002+05:30

Ironically, the judgment of the Constitution Bench in BALCO may turn out to be as significant for domestic arbitration as it is for finally shattering the misconception that the omission of the word “only” in section 2(2) of the Arbitration and Conciliation Act 1996 was designed to expand the jurisdiction of the Indian courts in relation to foreign arbitration. Some of these questions have been explored in three articles recently published in the Supreme Court Cases journal, of which the following is a brief summary.

Shantanu and I wrote a paper titled “Three Errors in BALCO” ((2012) 9 SCC J-26) in which we argued that while the Court was entirely right in overruling Bhatia International on the applicability of Part I of the Act to foreign arbitrations, it nevertheless made-as the title of the article suggests-three significant errors on other points. To briefly summarise:

(1) The conclusion in paragraph 96 that section 2(1)(e) of the Act refers to two courts, the court of the seat and the court of the cause of action is, with respect, clearly incorrect. Section 2(1)(e) confers jurisdiction on the court which would have had jurisdiction to entertain a suit forming the subject matter of the arbitration. As the Delhi High Court rightly pointed out in GE Countrywide, this means that a court in which an application under the 1996 Act is instituted must imagine that the arbitration clause does not exist and ascertain whether it would have had jurisdiction to entertain a suit relating to that dispute. So, if two parties from Mumbai and Delhi respectively choose Calcutta as the seat of arbitration, the Calcutta High Court would not have jurisdiction to entertain an application under the 1996 Act unless it was shown that some part of the cause of action arose in Calcutta. Unfortunately, the Supreme Court assumed in paragraph 96 of its judgment that section 2(1)(e) is a reference to two courts (the court of the seat and the court of the cause of action) and has therefore overruled by implication, a consistent view that has prevailed for over seventy years.

(2) The Court, with respect, misunderstood the decision of the House of Lords in the Siskina and consequently proceeded on the erroneous premise that an action instituted solely to obtain interim relief in aid of foreign arbitration is alien to the common law. Had the Court appreciated that the common law does recognise such an action, it would then have had the opportunity to consider whether such an action is recognised by Indian law. We suggested that such an inquiry would likely have led the Court to conclude that such an action may be brought under section 151 CPC, addressing one of the major concerns raised by practitioners about the consequences of BALCO.

(3) There was no case whatsoever for overruling Bhatia International prospectively, considering that the dispute related to a point of statutory construction, and in particular a jurisdictional statute. As the House of Lords emphasised in Re Spectrum, the power should be exercised only in wholly exceptional cases, and with particular caution if the point the court is asked to overrule prospectively is one of statutory construction rather than the common law (Lord Scott of Foscote in his dissenting speech thought the power should never be exercised in relation to statutory construction).

A response to this article titled "Not Three but Half an Error in BALCO" ((2013) 1 SCC J-81) was published by Mr SK Dholakia, Senior Advocate and Ms Aarthi Rajan, Advocate in which they sought to support the judgment of the Court. In summary, their contention on section 2(1)(e) was that the “overarching seat theory” was the basis of which BALCO was decided, and led to the conclusion that the territorial court for domestic arbitration is solely the court of the seat, regardless of where the cause of action arises. According to them, in the Mumbai/Calcutta example above, the Calcutta High Court would have exclusive jurisdiction by virtue of being the supervisory court, that is, the court exercising territorial jurisdiction over the chosen seat of arbitration. They make the powerful argument that if two foreign parties choose Chennai as the seat of arbitration, and the cause of action arises entirely outside India, neither the Madras High Court nor any other Indian court would have jurisdiction under section 2(1)(e) even though Part I of the Act applies (by virtue of section 2(2)), which they contend is an anomaly that impedes the growth of arbitration where India is a neutral forum. In relation to our argument on the maintainability of an action for interim relief in aid of foreign arbitrations, they relied on the well-known judgments of the English courts in Castanho and Siskina, and the recent judgment of the High Court in Royal Westminster, to suggest that there can be no “suit” purely for interim relief. They also suggest that section 151 CPC cannot be invoked for this purpose because Order 39 Rule 1 is exhaustive. In relation to prospective overruling, they agree that using arbitration agreements (as opposed to pending petitions or applications, for instance) entered into after 06.09.2012 as the yardstick was erroneous, but support the use of prospective overruling in principle, relying on Patel Engineering.

We have now published a response to this article titled “Three Errors Revisited” ((2013) 4 SCC J-1), explaining our original argument and responding to some of the points raised by Mr Dholakia and Ms Rajan. We point out that the jurisdiction of the Indian courts to supervise arbitration is statutory, not inherent, supporting the view taken by the Delhi High Court in GE Countrywide, and therefore that it is not permissible for an Court to assume jurisdiction not provided by section 2(1)(e) on the basis of the "overarching seat theory". This cause-of-action based system of organising jurisdiction has, for better or worse, been part of Indian law for over seventy years. Whether that should be discarded in favour of a consent-based system of jurisdiction is, we suggest, a decision for Parliament, not the Supreme Court. On the maintainability of an action for interim relief in aid of foreign arbitrations, we demonstrate that the transition from the 1882 CPC to the 1908 CPC contains indications that what is now Order 39 Rule 1 is not exhaustive (indeed, the Calcutta High Court so held in the early 1900s), and that section 151 CPC is a possible basis on which such interim relief may be granted. We also revisit the discussion of the common law and establish that it contains no bar to such an action. Finally, we reiterate that it was not appropriate to overrule Bhatia International prospectively, because the appellants had not established that this was, to quote Lord Nicholls in Re Spectrum, “the wholly exceptional case” in which parties had relied on Bhatia International in organising their affairs. More generally, we suggest that prospective overruling should not be used on a case-by-case analysis of the “justice” of the competing claims but should proceed on the basis of clearly established legal principle, which should distinguish between overruling a point of common law and overruling a point of statutory construction.

Call for Papers – Journal on Governance

2013-05-15T07:44:00.002+05:30

[The following announcement is posted on behalf of the Center for Governance, National Law University, Jodhpur]

Center for Governance, National Law University, Jodhpur, proposes the VII issue of “Journal on Governance,” its annual publication. Journal on Governance offers a forum for critical research on interplay of contemporary corporate governance issues with other disciplines, including, inter alia, law, management and societal studies. Aside to highlighting the problems and the challenges, the Journal attempts to explore and offer workable solutions, which may be helpful in regulatory and policy decisions.

A few of the Center’s such endeavours include comments on the consultative paper on the SEBI’s suggested Clause 49 reforms, followed by a panel discussion involving eminent stalwarts like Padmabhushan Shri D.R. Mehta (Founder Chairman, SEBI), and Ms. Usha Narayanan (Former Executive Director, SEBI, and currently partner, Amarchand & Mangaldas & Suresh A Shroff & Co.).

Previous issues of the Journal boast of scholarly discourses from eminent legal practitioners, academicians, research scholars and students. The articles for publication are selected through a meticulous and intense process of review, edit and refinement. The Journal has received acclaim and appreciation from all contours of the industry and academia. For the forthcoming issue, the Center invites Articles on the following sub-themes under the broad theme of "Governance- the contemporary challenges":

1. Governance in Microfinance Industry

2. SEBI’s Jurisdiction on Corporate Governance- a critical assessment

3. Governance in PPP Model of Infrastructure Projects

4. Corruption and Corporate Citizenship

5. Conflict of Governance and Related Party Transaction

Please note that the submissions must conform to the following requirements:

- The acceptable length of Articles is 5000 words, and of notes and comments is 3000 words, including footnotes.

- All submissions must include an abstract of not more than 300 words, explaining the main idea, objective of the article and the conclusions drawn from it.

- The Article should be on A4 sized paper, in Times New Roman Font Type, font size 12, 1.5 line Spacing and 1 inch margins on each side. Authors should follow Harvard Blue Book Footnoting style. Footnotes should be in font size 10 and with single line spacing.

- Authors should provide their contact details, designation and institutional affiliation in the covering letter for the submission.

- The submission must be the original work of the authors. Any form of plagiarism will lead to direct rejection. The relevant sources should be duly acknowledged as footnotes. The decision of the reviewers in this regard shall be final.

- Authors are requested to send an electronic version of their manuscripts (.doc or .docx format) to journal.governance@gmail.com with the subject as “Submission”. All queries may be addressed to the Editors on the aforementioned email address.

- Submission deadline for the Article, Notes and Comments is on the 31 July 2013.

Extension of Date for Implementation of Modified ESOP Rules

2013-05-14T07:14:00.000+05:30

Earlier this year, SEBI had announced the implementation of amended rules for the issue of employee stock options (ESOPs), which restricted the types of schemes to only those that comply with SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999. Particularly, curbs were imposed on the acquisition of shares in the secondary markets by ESOP trusts. The rationale for these measures was previously discussed on this Blog. These measures were to take effect on June 30, 2013 by which time companies were required to ensure compliance of their ESOP programmes with these requirements.

SEBI has now extended the implementation of these new requirements until December 31, 2013, primarily due to representations received from industry participants. By then, the ESOP schemes of companies must be brought in line with these rules. Failing this, the securities acquired by the ESOP trusts must be divested by that date. It has also been clarified that this revised set of guidelines is applicable to all employee benefit schemes involving the securities of the company provided that the schemes are set up, managed or financed by the company directly or indirectly if any of the following conditions are satisfied:

a) if the company has set up the scheme or the trust/agency managing the  scheme; or

b) if the company has direct or indirect control over the affairs of the scheme  or the trust/agency managing the scheme; or

c) if the company has extended any direct or indirect financial assistance to  the employee benefit schemes or the trust/agency managing such schemes.

In other words, the stringency of these guidelines operates when there is a close nexus between the company and the trust, but not if the trust is set up and managed truly independently. The recent circular also sets out disclosure requirements regarding the operation of the ESOP schemes.

Miscellaneous

2013-05-09T07:59:00.000+05:30

1. Exemption from Takeover Regulations for Gift of Shares to Family Trust

SEBI has granted an exemption to an acquirer from making an open offer under the SEBI Takeover Regulations in the case involving Gujarat Organics Limited (the company). In that case, the promoter Mr. Ashwin S. Dani, owns 71.15% shares in the company, and proposes to transfer it by way of a gift to a private trust HD Trust, of which he is one of the trustees. The beneficiaries of the trust are his family members. The acquirer, HD Trust, does not hold any shares in the company, while Mr. Dani has been shown as a promoter for more than 3 years. SEBI granted the exemption for the transfer because this was an inter se reorganization of holdings that does not alter the control of the company in any way. Moreover, it was a gift and merely a private family arrangement to facilitate succession planning.

This is understandable because there is no change of effective control of the company, and an exemption order was sought from SEBI only because the transaction may not have satisfied the technical requirements for an automatic exemption.

2. Another SEBI Adjudication Order in the IPCL Insider Trading Case

Last month, we had discussed an adjudicating order of SEBI finding that the charges of insider trading were not established against Mr. Manoj H. Modi and Mrs. Smita M. Modi in relation to the trading of shares in Indian Petrochemicals Corporation Limited (IPCL). Now, on a related set of facts and circumstances, another adjudicating order of SEBI has found that a charge of insider trading is sustainable against Reliance Petroinvestments Limited (RPIL), the controlling shareholder of IPCL, and also imposed a fine of Rs. 11 crores on RPIL. The facts relating to the information and announcements are essentially the same as that contained in the previous post, and are not repeated here.

From a legal perspective, SEBI’s assertions are based on two grounds. The first is that RPIL is a “deemed connected person” and second that it is “reasonably expected to have access to unpublished price sensitive information” with respect to IPCL. This is necessary to establish RPIL as an insider with respect to IPCL. On the first count, SEBI found that RPIL and IPCL are companies under the same management as they are under the common control of Reliance Industries Limited, which is a fact-based determination. On the second count, SEBI found that as a controlling shareholder of IPCL, RPIL is naturally said to have access to unpublished price sensitive information (UPSI) relating to IPCL:

25. The above facts establish that RPIL was having control over IPCL. It may therefore, be concluded that by virtue of RPIL having control over IPCL, it was reasonably expected to have access to UPSI of IPCL. Noticee being the promoter having control over the company holding approx. 46% shares of IPCL is inherently expected to have access to UPSI. Noticee being in such a position it is unacceptable that the Noticee was not aware of such major/ important decisions of the company IPCL.

This conclusion suggests that any promoter entity that falls within the definition of a “deemed connected person” would generally have access to UPSI in relation to the investee company and that nothing more needs to be shown.

3. Interpretation of the MAC Clause in Financing Documentation

The England and Wales High Court passed a ruling, which interprets the material adverse change (MAC) clause in financing documentation. In that case, the lender withheld further funding based, among other things, upon the occurrence of a MAC event that adversely affected the borrowing company. Although the judgment is quite long and involves ascertainment of detailed facts, the interpretation of the MAC clause is summarised in the judgment as follows:

364. In summary, authority supports the following conclusions. The interpretation of a "material adverse change" clause depends on the terms of the clause construed according to well established principles. In the present case, the clause is in simple form, the borrower representing that there has been no material adverse change in its financial condition since the date of the loan agreement. Under such terms, the assessment of the financial condition of the borrower should normally begin with its financial information at the relevant times, and a lender seeking to demonstrate a MAC should show an adverse change over the period in question by reference to that information. However the enquiry is not necessarily limited to the financial information if there is other compelling evidence. The adverse change will be material if it significantly affects the borrower's ability to repay the loan in question. However, a lender cannot trigger such a clause on the basis of circumstances of which it was aware at the time of the agreement. Finally, it is up to the lender to prove the breach.

The MAC clause has been extensively litigated in the last few years following the financial crisis, especially in M&A that is supported by acquisition financing.

Hat tip: Corporate Law and Governance

CSR and Global Supply Chains

2013-05-07T16:57:00.000+05:30

The tragic building collapse in Bangladesh has brought to the fore corporate social responsibility (CSR) issues involving global supply chains as the building is said to have housed factories employing workers manufacturing apparel for well-known global brands. Apart from the focus on local regulations and their enforcement in Bangladesh, the spotlight is now also thrown on the role of the multinational companies (MNCs), most of whom are domiciled in developed nations, as procurers of the products being manufactured in the building. While some of the MNCs have opted to withdraw from Bangladesh, others have vowed to stay on and improve conditions.

All of these give rise to CSR issues, which are not in any way novel. The intense competition and squeeze on margins place emphasis on cost reduction. While the benefits of the cost reduction are enjoyed by shareholders and customers, this leaves the employees vulnerable, as this episode has shown once again. This will only increase the demand for companies to meet “triple bottom line” with focus on workers’ rights, human rights, environment and even anti-corruption.

For a sampling of the debate that this tragedy has evoked, see Forbes, Economist and Reuters.

Shareholder Activism Enters the Boardroom

2013-05-06T07:41:00.000+05:30

Over the last month or so, an interesting debate has surfaced that takes shareholder activism to the next level. As the Deal Professor column notes, two hedge funds have initiated proposals whereby they have promised to pay their nominees, if elected to the board of the investee company, director compensation linked to the profitability of the company as if they were executives. The promised compensation has two parts: one, a fixed retainer/fee; another, a bonus depending upon the financial performance of the company that could extend to a few million dollars. This has the effect of treating institutional shareholder nominees on par with executives for the purpose of compensation. This development raises a number of legal issues pertaining to corporate law and corporate governance. Although the details regarding the issue are only beginning to get fleshed out, a post on the Conglomerate Blog helpfully provides links to the key debates.

Although shareholder activism has taken off quite strongly in India (as noted here and here), it might be some time away before the issue of institutional investor nominees takes such a deep grounding in the Indian context. Nevertheless, it is useful to consider some of the key conceptual issues that this gives rise to:

1. The first issue relates to who pays the compensation to the institutional nominee directors. The current trend seems to suggest that the compensation is paid by the nominator/investor rather than the company itself, which would minimise the effect of the usual issues pertaining to executive compensation if it were to be paid by the company itself.

2. These appointments could create factions on the board, i.e. between the inside directors (executives) and the so-called outsiders (nominees), thereby possibly curbing efficient (if not effective) decision-making. A contrarian approach to this would suggest that such differing views and perspectives may actually be beneficial to the overall well-being of the company and the interest of the shareholders.

3. There could be questions regarding the effectiveness of the nominee directors. For example, given that they are non-executive directors, they may have difficulties in accessing information regarding the business of the company or to other officers in the same way as an executive director can.

4. It is unclear if the nominee directors may be willing to take on the risk of facing liability because they may have responsibilities without the accompanying power or control within the company.

5. As these directors are nominated by the institutional investors (who may have a significant holding in the company), it is unlikely that these directors would be treated as independent directors. Their appointment on the board may tilt the balance of independent and non-independent directors which may make it difficult to comply with the requisite board independence requirements under the corporate governance norms without appointing more independent directors maintain the appropriate balance.

6. Since the nominee directors would owe fiduciary duties to the company, they are in an unenviable position whereby they may have to prefer the interests of the company over those of their nominating investor in case of a conflict between those interests.

These are only some initial thoughts, but a number of other issues and concerns on both sides of the debate are contained in the links provided above.

Update – May 14, 2013: A memo from Wachtell Lipton provides a strong response to the proposal for offer of incentive compensation to investor nominees, and a column by the Deal Professor advocates caution in adopting the incentive compensation approach.

NLSIR Symposium

2013-05-04T15:06:00.001+05:30

(The following announcement comes to us from the National Law School of India Review)

The National Law School of India Review (NLSIR) - the flagship journal of the National Law School of India University (NLSIU), Bangalore is pleased to announce the VI^th NLSIR Symposium on “Mapping the Future of Commercial Arbitration in India” scheduled to be held on May 18 and 19, 2013 at the NLSIU campus. The last three years have witnessed dynamic shifts in the law and practice of Arbitration in India. While there have been steps in the right direction, an unwieldy system continues to weigh down practitioners. Four years after first delving into the nuances of commercial arbitration in India, the Symposium hopes to assess the development of Arbitration law over the last few years.

Confirmed speakers for the symposium include renowned legal luminaries such as Hon’ble Mr. Justice (Retd.) S U Kamdar (Former Justice, Bombay High Court), Mr. Anirudh Krishnan (Advocate, Madras High Court), Mr. Ashwin Shanker (Advocate, Bombay High Court) Mr. Aditya Sondhi (Advocate, Karnataka High Court), Mr. Ajay Thomas (Registrar, London Court of International Arbitration, India), Mr. Vivekananda N. (Head (South Asia) & Counsel, Singapore International Arbitration Centre), Mr. Nangavaram Rajah (Nani Palkhivala Arbitration Centre), Mr. Promod Nair (Partner, J Sagar Associates), Mr. Shreyas Jayasimha (Partner, AZB & Partners), amongst others.

This year, the discussions will be divided into four panels:

Session I: The Implications of BALCO on Arbitration Practice

(Forenoon, May 18, 2013, Saturday)

Session II: Revisiting the Expansive Role of the Indian Judiciary and its Implications

(Afternoon, May 18, 2013, Saturday)

Session III: Determining the Governing Law of the Arbitration Agreement – Arsanovia and Beyond

(Forenoon, May 19, 2013, Sunday)

Session IV: The Way Forward: A Call for Institutional Arbitration?

(Afternoon, May 19, 2013, Sunday)

Registration fee for those who make an advance payment/bank transfer is Rs. 500 for students and Rs. 1000 for others. All those interested are requested to register at:

https://docs.google.com/forms/d/1hXthITsHurIQBClJAkZkiKWdbjkXoKJ4MFRSI0VgGfU/viewform

The registration fee for those who register at the venue is Rs. 750 for students and Rs. 1250 for others.

For more details including the concept note and future updates please visit: http://www.nlsir.in/symposium.html.

For regular updates, also see our Facebook page: http://www.facebook.com/nlsir?fref=ts.

For further information, please contact Ashwita Ambast (Chief Editor): +91-9986478265; Sahil Kher (Deputy Chief Editor): +91-9739265715 or email us at mail.nlsir@gmail.com

Competition Law Risks: Non-Compete Clauses in M&A Transactions – Part 2

2013-05-03T07:18:00.000+05:30

[The following post is contributed by Soumya Hariharan, who is a Foreign Lawyer at Rodyk & Davidson LLP’s Corporate & Competition Law Practice in Singapore. Soumya obtained her BSL.LLB degree from ILS Law College and has an LL.M degree (Corporate & Financial Services Law) from the National University of Singapore. She can be reached at soumyahariharan@gmail.com.

These views are personal.

After dealing the general overview of the issues in the previous post, Soumya now discusses the manner in which the CCI has dealt with the issue in India and also provides some pointers to drafting non-compete clauses such as they withstand scrutiny under law]

Treatment of Non-Compete Clauses in India

The merger control regime in India came into force only in 2011 and the CCI in one of its recent decisions, accepted modifications in relation to the non-compete obligations entered into between the parties to the combination.[1] This has been the first time the CCI has provided clarity on how it views non-compete obligations in relation to proposed combinations in India.

Orchid Chemicals and Pharmaceuticals Limited (“Orchid”) and Hospira Healthcare India Private Limited (“Hospira”) filed a notice under Section 6(2) of the Competition Act 2002; pursuant to the execution of a Business Transfer Agreement (“BTA”).

The CCI observed that the BTA contained a non-compete clause, which required Orchid and its promoter not to undertake certain business activities pertaining to the transferred business for a period of eight years and five years, respectively. The non-compete clause also restricted research, development and testing of Penem (including Carbapenem) and Penicillin API’ (Active Pharmaceuticals Ingredients) for injectable formulations. The CCI opined that non-compete obligations if necessary to be incorporated should be reasonable, particularly in respect of (a) the duration over which such restraint is enforceable; and (b) the business activities, geographical areas and person(s) subject to such restraint in order to ensure that such non-compete obligations do not result in an appreciable adverse effect on competition.

The parties to this combination, offered modifications under the provisions of Regulations 19(2) of the Combination Regulations. The parties agreed to (a) limit the duration of the non-compete obligation to four years in relation to the domestic market in India; and (b) provide in the BTA that orchid shall be allowed to conduct research, development and testing on such new molecules, which would result in the development of new Penem (including Carbapenem) and Penicillin API’ for injectable formulations, which are currently not existent worldwide.

The CCI accepted the modifications offered by the parties and also directed them to make the necessary amendments in the BTA to incorporate the modifications. The CCI approved the proposed combination under Section 31(1) of the Competition Act 2002. This decision of the CCI is helpful as it provides a basic framework as to how the CCI interprets non-compete obligations in an Indian context It is possible that the CCI may provide greater clarity in the treatment of non-compete clause in subsequent cases notified before it.

Drafting an Approriate Non-Compete Clause

The trend in Europe indicates that competition law regulators are keeping a keen watch on the use of non-compete clauses in M&A transactions. Non-compete clauses are of great commercial importance and parties must ensure that they are drafted in compliance with competition law.

The cases discussed above also serve to remind that the investigation into the non-compete obligations did not arise from complaints by third parties or competitors but was initiated by the EC itself.

Parties that wish to incorporate non-compete clauses should have a two-fold objective while drafting them i.e. non-compete clauses should be drafted appropriately not only to obtain a favorable merger clearance but also to avoid any anti-competitive concerns arising from the operation of such clauses. As a general rule, for non-compete clauses to be considered ancillary restraints they must be directly related and necessary for the operation of the transaction.

Some of the main points that parties could bear in mind while drafting non-compete clauses, include:

- the duration of the non-compete should be reasonable in length;

- the scope of the non-compete activity must relate to the particular economic activity in order to avoid broad non-compete obligations that prohibit competition outside the scope of the transaction;

- any restrictions imposed by the use of the non-compete clause must be directly related and reasonably necessary for the implementation of the transaction;

- any geographic restrictions imposed by way of non-compete obligations must not operate as market-sharing arrangements; and

- in relation to India, the operation of the non-compete clause does not result in an appreciable adverse effect on competition.

It would be prudent for companies to engage competition lawyers early in the transaction, to carry a competitive analysis on the use of non-compete clauses. The analysis would help companies to identify the geographic coverage, required duration and the legitimate scope of the non-compete to ensure that the non-compete clause is drafted appropriately taking into account the possible anti-competitive effect such an obligation would have on the transaction.

- Soumya Hariharan

[Concluded]

[1] Orchid Chemicals/ Hospira Healthcare (C-2012/09/79)

Competition Law Risks: Non-Compete Clauses in M&A Transactions – Part 1

2013-05-02T12:59:00.000+05:30

[The following post is contributed by Soumya Hariharan, who is a Foreign Lawyer in Rodyk & Davidson LLP’s Corporate and Competition Law Practice in Singapore. Soumya obtained her BSL.LL.B degree from ILS Law College and has an LL.M degree (Corporate & Financial Services Law) from the National University of Singapore.

These views are personal.

In this first part, Soumya provides a broad overview of competition law risks arising from non-compete clauses and how they have been dealt with by the European Commission]

Competition law regulators have been actively investigating non-compete clauses in Merger and Acquisition (“M&A”) transactions.[1] Most jurisdictions recognize that certain contractual restrictions in the form of non-compete clauses may be directly related and necessary for the successful implementation of a merger. However there are times when non-compete clauses incorporated in M&A transactions and joint ventures carry the risk of infringing competition law.

Non-compete clauses that carry competition law risks can delay deal timelines and affect the transaction from obtaining a favorable clearance from the competition law regulator. Companies stand a risk of investigation by the competition law regulators and financial penalties can be imposed for illegal non-compete clauses.

This series of posts aims to give a broad overview on how non-compete clauses in M&A transactions carry certain competition law risks, in light of recent decisions rendered by the European Commission (“EC”) and the Competition Commission of India (“CCI”). The article also highlights the importance of drafting non-compete clauses in compliance with competition law.

Ancillary Restraints and Non-Compete Clauses

Non-compete clauses are usually negotiated in most M&A transactions and it is fairly common for the Acquirer to require non-compete obligations from the Vendor. To effect a successful transaction, certain restrictions on competition between the Parties are required to the extent that they are directly related and necessary for the implementation of the merger.

Such restrictions, negotiated by the Parties are referred to as “ancillary restraints” in competition law parlance. The most common examples of ancillary restraints include non-compete clauses, license agreements, purchase and supply agreements.

Usually it is standard business practice to incorporate non-compete obligations for the effective implementation of the proposed merger that allows the Acquirer to obtain full value from the acquired assets including tangible and intangible assets such as know-how and goodwill. In Europe, the 2005 Notice on restrictions directly related and necessary to concentrations (the “Ancillary Restraints Notice”) provides clarity and guidance on the treatment of non-compete clauses.

The EC has been scrutinizing non-compete clauses that may result in a breach of competition law, i.e. cases where the non-compete clause is not directly related and necessary for the implementation of the merger.

Two recent decisions of the EC provide further clarity as to how it interprets non-compete clauses. One of the cases deals with an illegal non-compete entered into by two telecom operators, where the non-compete clause operated as a market sharing agreement. The second case deals with a non-compete clause that was operative post the termination of the joint venture which was considered excessive in scope and duration by the EC. The following cases serve as effective guidance to those companies that plan to incorporate non-compete clauses in their M&A transactions.

Telefónica and Portugal Telecom[2]

In 2011, the EC investigated two large telecom players Telefónica and Portugal Telecom in relation to a non-compete clause in the context of Telefónica’s acquisition of sole control of the Brazilian mobile operator Vivo. They were fined EUR 79 million for a breach of Article 101 of the Treaty on the Functioning of the European Union (TFEU) which prohibits anti competitive agreements.[3]

Article 101 prohibits all agreements, decisions and practices between undertakings and concerted practices which may affect trade within EU member states and which have as their object or effect the prevention, restriction or distortion of competition within the EU market.

In 2010, Telefónica acquired sole control of Vivo which was until then jointly owned by both Telefónica and Portugal Telecom. The parties entered into a non-compete clause in their purchase agreement as a part of the acquisition which required Telefónica and Portugal Telecom not to compete with each other in Spain and Portugal from the end of September 2010.

The EC held that by implementing the non-compete clause, Telefónica and Portugal Telecom deliberately agreed to stay out of each other’s home markets rather than competing with each other. The parties terminated the non-compete agreement in early February 2011 nearly four months into operation by offering commitments to the EC. It is useful to note that in this case, the EC commenced investigations on its own initiative and fined Telefónica and Portugal Telecom notwithstanding the short duration of the infringement.

Siemens and Areva[4]

In 2001 Areva and Siemens established a joint venture Areva NP, which combined their activities in nuclear technology and nuclear power plants. The Shareholders Agreement for the joint venture included a non-compete clause for a period of 11 years from the termination of the joint venture. The non-compete clause covered the core nuclear services of the joint venture as well as non-core products and services in relation to which the joint venture was not active. In 2009, Siemens withdrew from the joint venture and Areva acquired sole control over the joint venture.

In 2010 the EC opened an investigation over the competition concerns relating to the non-compete clause. The EC adopted a preliminary decision in 2011 that Siemens and Areva had infringed Article 101 due to the non-compete obligation being excessive in scope and duration. According to the EC the scope of the non-compete clause was excessive because it prevented Siemens from competing in markets where Areva NP was only a re-seller of Siemens products.

To address the concerns of the EC both Siemens and Areva offered commitments, to limit the scope of the non-compete clause to Areva NP’s core products and services for a period of three years after Siemens exit from the joint venture. Under the commitments the non-compete obligations would only apply to certain core products and services offered by the joint venture company solely controlled by Areva.

- Soumya Hariharan

[1] The European Commission investigated Telefónica and Portugal Telecom in 2011 and investigated Areva and Siemens in 2010.

[2] See Press Release dated 23/01/2013 http://europa.eu/rapid/press-release_IP-13-39_en.htm

[3] The European Commission fined Telefonica and Portugal Telecom EUR 66894000 and EUR 12290000 respectively for agreeing not to compete with each other.

[4] Case COMP/39736 dated 18/06/2012

Call for Papers: Indian Journal of Arbitration Law

2013-05-01T17:44:00.004+05:30

[Announcement]

The Indian Journal of Arbitration Law is pleased to announce its upcoming issue (Volume 2: Issue 2), which is to be published in September this year.

The Board of Editors cordially invites original, unpublished submissions for publication in the following categories:

- Articles

- Notes

- Comments

- Book Reviews

Manuscripts may be submitted via email to editor.cartal@gmail.com latest by 31^st July 2013.

Editorial policy and submission guidelines are available here.

One Person Company – a still-born, half-baked concept?

2013-04-29T17:35:00.001+05:30

The Companies Bill 2012 proposes a new concept of One-person Company (OPC). The obvious objective is to overcome the hurdle of needing a second person to form a company, despite the saying that “two’s company”. This brief post is to highlight its nature, some issues and also questioning the real benefit of an OPC.

OPC, as the term implies, is a company with one and only one shareholder. The need to have two directors also is avoided and only one director is needed. However, unlike a shareholder, the number of directors can be more than one. And the single shareholder need not be the director or any of the directors. A succeeding shareholder will have to be named in case of death of the initial shareholder.

Thus, it is expected to help an individual incorporate himself/herself. The need to find a second shareholder/director for a proprietary business in corporate form is avoided.

Succession/transfer of a business in corporate form is clearly easier than if it owned in a sole proprietary form. And one can delink different businesses in separate OPCs since there is no limit on how many OPCs one single individual can form.

The OPC will have to add the tag One-person Company under its name.

Some other procedural concessions in terms of meetings, etc. are given for obvious reason that there cannot be a “meeting” of a single shareholder/director.

However, beyond a few procedural concessions, and avoidance of the need of second shareholder/director, it is not clear what substantial benefits are available. The relatively long/complicated procedure for formation, maintenance and dissolution of a Company remain without any major relief. The requirement of finding a second shareholder/director is generally not found cumbersome in India where a friend, relative or staff member can easily act as such.

Further, except a few minor procedural concessions, the provisions of accounts, audit, etc. would also apply to an OPC.

Certain businesses like that of finance may face problems if sought to be carried in a Company form. Thus, an individual engaged in business of lending or investments may need prior registration from the Reserve Bank of India, minimum net owned funds of Rs. 2 crores, etc.

Conversion of existing proprietary businesses can create complexities of tax. There is an existing provision in the Income-tax Act, 1961 (section 47(xiv)) which should help in availing relief from capital gains, even if originally it was not framed with an OPC in mind. However, other tax issues may remain. The concern of deemed dividends under Section 2(22)(e), the question of allowability of remuneration to proprietor, etc. are some other challenges an OPC may face. The other challenge will be of stamp duty on transfer of the business to the OPC.

Strangely, it is not clear how an OPC may go to the next logical step of becoming a non-OPC when it wants to introduce more shareholders. Ideally, a simple amendment of its memorandum and articles should have sufficed. However, there are no specific provisions enabling this. The question therefore is whether an OPC is doomed to remain a one shareholder company during its existence?

Conversion from a non-OPC to an OPC has also not been provided for. Thus, an existing private limited company may not be able to convert itself into an OPC.

OPCs should have been useful particularly in case of wholly owned subsidiaries of companies where the parent company would be the sole shareholder. However, there is a requirement that makes one wonder whether a company can be the sole shareholder. The definition of OPC does talk of a “person” being a shareholder. However, it is required that a succeeding shareholder be named in case of death of the initial shareholder. The concept of death is generally understood in sense of natural persons and not companies. Thus, unless one takes a view that this requirement is not a mandatory one or stretch it to include dissolution of a company, the concept of OPC may not be available for forming a WOS.

All in all, it seems that despite the initial enthusiasm that this concept received, it seems that in practice, this by itself is not likely to encourage sole proprietors to convert into a company in large numbers.