Wednesday, April 30, 2014

Guest Post: Named arbitrators – No petition under Section 11 of Arbitration and Conciliation Act, 1996

(The following post is contributed by Ms Renu Gupta, Advocate)

Arbitration clauses in most contracts with government corporations specify that in case of a dispute between the parties, an employee occupying a designated post of the corporation or some other person nominated by him, shall be the arbitrator.

It is settled law that arbitration agreements in government contracts providing that an employee of the department will be the arbitrator are neither void nor unenforceable (see Executive Engineer v. Gangaram Chhapolia and Ace Pipeline Contracts (P) Ltd., v. Bharat Petroleum Corpn. Ltd). Despite this settled law, there is endless litigation where private parties resist the appointment of the employee or person of the government corporation as an arbitrator, in order to seek the appointment of an independent arbitrator.

In addition to the settled law which already creates an impediment in the strategy of the private parties, this article explores another point which reduces their ability to seek appointment of an independent arbitrator.

Clauses of the nature discussed above are referred to as clauses with “named arbitrators”, i.e., the parties have already named the arbitrator when they signed the agreement, by referring to an ascertainable designation/post. These clauses have full force of law as was held by the Supreme Court of India in Indian Oil Corporation Ltd. v. Raja Transport (P) Ltd. The Court held that where a clause provides for a named arbitrator, the “courts should normally give effect to the provisions of the arbitration agreement”. Further, “referring the disputes to the named arbitrator shall be the rule” and the “Chief Justice or his designate will have to merely reiterate the arbitration agreement by referring the parties to the named arbitrator”. It further clarifies that ignoring the named arbitrator “shall be an exception to the rule, to be resorted for with valid reasons”.

Based on this decision, one could argue that where an arbitration clause specifies a “named arbitrator”, the stage of “appointment” of an arbitrator is already over/complete on the date the parties signed the arbitration agreement.

Section 11 of the Arbitration and Conciliation Act, 1996, deals only with “appointment of arbitrators”. But in “named arbitrator” clauses, if an arbitrator already stands “appointed”, in my view, Section 11 cannot be invoked for seeking “appointment” of an arbitrator. Such petitions are nothing more than a disguised attempt at seeking appointment of an independent arbitrator, thus deviating from the procedure agreed to originally by the parties in their agreement.

Taking this argument to its logical conclusion, if a government corporation wants to invoke arbitration, it can simply inform the opposite party about its claim which will lie before the “named arbitrator”, since the stage of “appointment” is already past and the next stage is merely the arbitrator entering upon reference and initiating proceedings.

Several decisions of the Supreme Court (see Northern Railway Administration v. Patel Engineering Co. Ltd), deal with situations where despite “named arbitrator” clauses, one party invokes Section 11 for “appointment” of an independent arbitrator. Based on the decision in Indian Oil Corporation case, in my view, the only situation where despite a “named arbitrator” clause, Court in a petition under Section 11 could appoint any other person as an arbitrator is where circumstances exist, giving rise to justifiable doubts as to the independence and impartiality of the named arbitrator and reasons will have to be recorded for ignoring the “named arbitrator” and appointing someone else. Mere allegations of bias and partiality of the “named arbitrator” merely because he is an employee of the government corporation are not sufficient.

Monday, April 28, 2014

Guest Post: State Consent vis-à-vis FDI in Multi-Brand Retail

[The following post is contributed by Sujoy Chatterjee who is an Advocate in New Delhi and an alumnus of the National Law University Jodhpur (’13)]

In the aftermath of the December 2013 State Assembly elections, the newly elected Governments of Delhi and Rajasthan expressed their intention to withdraw their consent from allowing foreign direct investment (FDI) in multi-brand retail trading (MBRT) in their respective States (See here and here). Union Commerce and Industries Minister Anand Sharma has strongly opposed this move by arguing that the policy decision taken by the concerned States in allowing FDI in MBRT is not a ‘revolving door’ and cannot be reversed. The topic raises some nuanced questions about the States’ policy-making powers vis-à-vis the Union in the context of FDI – questions which are distinct from a simpliciter policy change by a Government.[1]


The Union Cabinet had approved the proposal of the Department of Industrial Policy and Promotion (DIPP) for permitting FDI in MBRT on 24 November 2011. However, in light of immense political opposition, the implementation of the proposal was suspended till a broader consensus could be evolved on the subject.  On 14 September 2012, a press release by the Press Information Bureau announced that consultations with stakeholders (which included discussions with, inter alia, State Governments) indicated support for allowing FDI in MBRT and that the Union Cabinet had decided to implement its 24 November 2011 approval. Subsequently, the DIPP issued a press note on 20 September 2012 reviewing India’s FDI policy – the press note permitted FDI up to 51% in MBRT under the Government route and made relevant amendments to the Consolidated FDI Policy. The amended Consolidated FDI Policy clarified that the policy on FDI in MBRT was an enabling policy and that retail sales outlets for the same could only be set up in those States or Union Territories which had already agreed or would agree in future to allow FDI in MBRT. A list of States and Union Territories which had officially communicated their agreement to allow FDI in MBRT was provided in the Consolidated FDI Policy, Delhi and Rajasthan being among them. The Reserve Bank of India (RBI) also made corresponding amendments to the Foreign Exchange Management (Transfer or Issue of Security by Persons resident outside India) Regulations, 2000, which were notified on 30 October 2012.

The new policy allowing FDI in MBRT was challenged before the Supreme Court of India (SC) in Manohar Lal Sharma v. Union of India with a prayer for quashing the policy as unconstitutional and without any authority of law. A 3-judge Bench of the SC rejected the petition, inter alia, on the ground that Courts would not interfere with a policy decision “unless the policy is unconstitutional or contrary to the statutory provisions or arbitrary or irrational or in abuse of power” and that the policy on FDI in MBRT “does not appear to suffer from any of these vices.” Manohar Lal Sharma has settled the position on the legality of the policy permitting FDI in MBRT. However, this judgment does not (and indeed was not required to) address the issue of whether a State which had earlier given its consent for permitting FDI in MBRT can revoke such consent.

Conflicting Views

Solicitor General of India Mohan Parasaran has recently endorsed Anand Sharma’s ‘revolving door’ theory (See here). Mr. Parasaran argues, inter alia, that foreign exchange is the exclusive prerogative of the Union (Entry 36 of List I), implying that States do not legally have a say in decisions involving foreign investments in the MBRT sector and hence cannot back out of the one-time option which was provided to them by the Union. Per contra, former Solicitor General of India Gopal Subramanium has opined that the Union cannot prevent a State from opting out of the FDI policy on MBRT (See here). Mr. Subramanium justifies his view by relying on Entries 26 and 27 of List II and Entry 20 of List III – the argument is that since States have exclusive competence to determine their policy on trade and commerce (Entry 26 of List II) and production, distribution and supply of goods (Entry 27 of List II) within their respective boundaries, and also have a say in economic and social planning (Entry 20 of List III), they are within their rights to decide and even change their mind on whether to allow FDI in MBRT in their respective States.

The contrasting views discussed above boil down to a question of why an option was given to States regarding FDI in MBRT in the first place – was it merely political expediency or were there legal considerations as well. Mr. Subramanium suggests that the decision to leave the States free to opt in for FDI in MBRT was taken in light of, inter alia, Entries 26 and 27 of List II and Entry 20 of List III.

Some Missing Links

If indeed the Union decided to give the States an option regarding FDI in MBRT because of our Constitutional mandate, it is curious that a similar option was not provided to the States for FDI in single-brand retail trading (SBRT), or for that matter FDI in wholesale trading (WT). There is hardly a case to be made that MBRT affects (i) trade and commerce, (ii) production, distribution and supply of goods, or (iii) economic and social planning, whereas SBRT or WT does not. Of course, economists may argue on the degree of MBRT’s impact in comparison to SBRT or WT, but that would be a question of to what extent rather than whether at all.

Interestingly, the policy on FDI in WT does state that “requisite licenses/registration/permits, as specified under the relevant Acts/Regulations/Rules/Orders of the State Government/Government Body/Government Authority/Local Self-Government Body under that State Government should be obtained”, thereby recognizing the States’ competence to some extent. However, this is most likely a reference to municipal licenses and labour welfare registrations (for example, a trading license under the applicable Municipal law or a registration under the relevant Shops and Establishments Act) – something which is expressly provided for in the FDI policy on MBRT as well and is impliedly required even for FDI in SBRT. It not akin to saying that the FDI policy itself is merely enabling and that the States have a choice in this regard. Taking Mr. Subramanium’s argument to its logical conclusion would then imply that there are serious Constitutional defects with the FDI policies on SBRT and WT.

Even the other justification relating to ‘foreign exchange’ leaves much to be desired. While it is true that the FDI policy is intrinsically involved with the flow of foreign currency, as reflected by the manner in which the RBI and the Department of Economic Affairs are closely involved in all FDI-related developments and activities, it is difficult to appreciate how the FDI policy on MBRT, which provides for, among others, investing in back-end infrastructure, compulsory local sourcing and first right of procurement can be categorized solely as a ‘foreign exchange’ issue.

A Moot Question?

The DIPP had sought the opinion of the Union Ministry of Law and Justice on whether States that had initially decided to allow FDI in MBRT can opt out at a later stage. Unfortunately there is no information in the public domain on whether a formal opinion has been issued by the Ministry of Law and Justice or the justifications, if any, for its opinion. Additionally, in the build-up to the 2014 General Elections, a political party which is widely perceived as the front-runner for forming the next Union Government has stated in its manifesto that it is opposed to FDI in MBRT. The entire debate surrounding withdrawal of a State’s consent regarding FDI in MBRT would be rendered infructuous if the next Union Government scraps the policy altogether. However, keeping investor sentiment and political considerations aside, a legal showdown on this issue is bound to throw up some interesting propositions on the position occupied by FDI in our federal scheme.

[1] The position of law on whether a policy change by a Government can be challenged and on what grounds is quite settled and has been aptly summarized in Union of India v. Government of Tamil Nadu. The Supreme Court is once again seized of such a matter in Indian Oil Corporation v. Kerala State Road Transport Corporation [Transfer Petition (Civil) No. 894/2013] and other connected petitions, which can be followed for current developments on this point.

Friday, April 18, 2014

SEBI Announces the Specifics of Revised Corporate Governance Norms

It was nearly a decade ago in October 2004 that the Securities and Exchange Board of India (SEBI) announced substantial revisions to the corporate governance norms contained in clause 49 of the listing agreement that applies to all public companies listed on an Indian stock exchange. The revisions, however, took effect only from January 1, 2006. Since then, there have been some specific amendments to the norms but very little substantial change so as to alter the philosophy of governance mechanisms in India.

While the 2004 reforms to corporate governance were markedly stringent compared to the previous position, those norms operated under significant constraints. One of the criticisms of that approach that some of us had raised (e.g. in this paper) was that the corporate governance norms in India were largely adopted from the Western markets such as the US and the UK, and that those norms were inadequate to deal with the specific governance problems in Indian companies where shareholding was concentrated among the controlling shareholders (or promoters). The Indian situation necessitated a mechanism that provided greater protection to minority shareholders in public listed companies. Although initially there did not seem to be sufficient momentum to bring about radical changes to corporate governance mechanisms in India, the intervening governance scandals such as Satyam provided the necessary impetus for a paradigm shift. This was aided by the enactment of the Companies Act, 2013 that introduced sea change in governance norms.

It is in this context that SEBI yesterday announced new corporate governance norms through a replacement of clause 49 of the listing agreement that will become effective from October 1, 2014. These revisions bring the SEBI norms in line with the requirements of the Companies Act, 2013.

The new clause 49 represents an important milestone in the evolution of corporate governance norms in India. It essentially (perhaps for the first time) confronts the type of governance problems that are prominent in India, i.e. where minority shareholders require protection in the backdrop of the dominance of promoters in companies. Several examples abound in the new clause 49: (i) express recognition of the role and protection of minority shareholders; (ii) greater participation of shareholding in the process of corporate democracy; (iii) stringent regulation of related party transactions, including by requiring a “majority of the minority” voting process.

Finally, one might even say that SEBI’s corporate governance norms have truly become “Indianized”, thereby offering the potential for more effectively enhancing governance norms and practices with the result that the Indian markets would be in a position to command a better governance premium and enable more efficient capital raising by Indian companies. If successful, the new corporate governance package introduced in India might very well be the harbinger of governance reforms in several Asian economies that suffer from the same corporate governance problems as India due to concentration of shareholding. 

Of course, at this stage, it is only possible to glean the broad approach and philosophy of the new corporate governance norms. They mandate a closer analysis of the specifics, which will follow in due course. More importantly, however, substantive regulation is only as good as the effectiveness of its enforcement (or lack thereof). It is likely that the more reputable companies do not require regulation to follow enhanced governance practice – they might commit themselves to higher standards nevertheless. The true test will lie in the ability of the regulation and its enforcement to ensure compliance (both in letter and spirit) by the entire cross-section of listed companies. This, only time will tell.

The implementation of the provisions of the Companies Act, 2013 and the new clause 49 (commencing October 1, 2014) over an initial period of time will certainly provide an important framework for empirical studies (both qualitative and quantitative) to be conducted in determining the effectiveness of these revised norms as well as their implementation.

Monday, April 14, 2014

Further Tax Scrutiny of Mergers

In the last few years, mergers of companies (undertaken through schemes of arrangement that require the approval of the High Court) have been subject to greater scrutiny by the tax authorities. One example of a merger that was strongly objected to by the tax authorities is the case involving Vodafone Essar Gujarat Limited (discussed here), although the scheme was sanctioned on appeal to a division bench of the Gujarat High Court.

More recently, the manner of raising objections before the court have been streamlined through a circular of the Ministry of Corporate Affairs (MCA) dated January 15, 2014, which provides that the Regional Director (RD) functioning under the MCA ought to consolidate all objections from various governmental authorities that may have a view on the scheme. A specific mention has been made to the Income Tax Department (ITD) whereby the RD is required to notify the ITD of a scheme and to incorporate the ITD’s comments in the report filed before the court considering the scheme. However, the MCA circular specifically states that “if no response from the [ITD] is forthcoming, it may be presumed that the [ITD] has no objection to the action proposed …”.

In order obviate any doubt and to ensure that the ITD’s voice is heard by the court, the Central Board of Direct Taxes (CBDT) has issued a letter dated April 11, 2014 requesting all Chief Commissioners of Income Tax to ensure that the ITD places all comments relating to a scheme before the court, especially when schemes have adverse tax implications to the revenue. Referring to the receipt of notice from the RD, the letter emphasizes the role of the ITD:

It is emphasised that this is the only opportunity with the Department to object to the scheme of amalgamation if the same is found prejudicial to the interest of Revenue and therefore, it is desired that the comments/objections of the Department are sent by the concerned CIT to Regional Director, MCA for incorporating them in its response to the Court, immediately after receiving information about any scheme of amalgamation or reconstruction, etc.

Although this new development is largely procedural in nature, it represents an effort on the part of the ITD to ensure that its objections are properly placed before the court. From an M&A structuring perspective, the taxation aspects would therefore have to be dealt with clearly so as to withstand scrutiny by the tax authorities, as Lubna Kably also analyzes.

Further, as previously discussed, this procedural position may change substantially under the section 230(5) of the Companies Act, 2013 once that provision is brought in force because it requires the company to directly provide notice of a scheme to various government departments (including the income tax authorities) without requiring any intermediation on the part of the RD.

Sunday, April 13, 2014

A Study on Ownership Concentration in Indian Companies

The shareholding pattern of Indian companies has been the subject matter of academic studies, which have consistently shown that Indian companies are controlled substantially by controlling shareholders (or promoters) who hold a significant percentage of shares in public listed companies. The promoters range from business families to the state and to multinational corporations (MNCs). For a sampling (only) of previous studies, please see Rajesh Chakrabarti, Shaun Mathew and George Geis.

A more recent study examines the ownership concentration levels over the last decade. In their paper “Ownership Trends in Corporate India 2001-2011: Evidence and Implications” (available on the NSE Working Paper Series or on SSRN), Professor Bala N. Balasubramanian and Mr. R. V. Anand undertake a detailed empirical survey. The abstract of their paper is as follows:

The first decade of the new millennium saw dramatic changes in the ownership patterns in major listed corporations in India. Two developments were striking: promoters, especially in the domestic private sector, bolstered up their holdings to ensure continued entrenchment; and institutional investors significantly increased their holdings, especially in the private sector management-controlled companies segment. In both cases, these increases were achieved at the cost of retail non-institutional shareholders, whose holdings correspondingly recorded a steep fall. This paper documents this evidence, seeks to identify their underlying rationale, and assesses their implications for corporate equity investment and governance in the country.

The findings in this paper are important. On the one hand, SEBI’s efforts have been focused on creating a diversification of shareholding in the markets. Its regulations on mandating a minimum public float of 25% (10% for government-owned companies), which it has stringently enforced, is representative of this regulatory approach. More generally, the continued strengthening of the regulatory framework (both substantive law and its enforcement) has been with a view to enhance investor protection so as to enable more investors to participate in the stock markets. However, the empirical findings in the above paper point in the diametrically opposite direction. Ownership levels are becoming more concentrated than diffused, thereby defying the theory that better investor protection will result in greater dispersed shareholding by a larger number of investors. Moreover, retail investors do not seem to have gathered the requisite confidence in increasing their direct participation in the stock markets. While these findings are focused on ownership concentration trends in Indian companies, they may have a broader story to tell about the effectiveness of securities regulation, investor protection measures and corporate governance.

Saturday, April 12, 2014

Companies Act, 2013: Directors’ Duties and Liabilities

The NSE Centre for Excellence in Corporate Governance (CECG) has issued its most recent quarterly briefing titled “Directors’ Duties and Liabilities in the New Era”. The executive summary is as follows:

- Since directors and the board play a pivotal role in corporate governance, the law foists duties and liabilities on them;

- The Companies Act, 2013 has brought about a paradigm shift by considerably enhancing directors’ duties and liabilities;

- The directors’ duties are now codified and extend to considering the interests of stakeholders other than shareholders;

- Directors are, however, entitled to various protective measures in the form of mitigating factors either conferred upon them by law or through practical mechanisms they may establish.

This would not have been possible without the excellent inputs and suggestions received from members of the CECG at various points in time during the drafting process.

Thursday, April 10, 2014

Enhanced Disclosure of Mutual Fund Voting Policies

Generally, shareholders of a company may exercise their voting rights in any manner in which they deem fit. They are not even obliged to exercise their corporate franchise and may instead choose to abstain rom attending and voting at company meetings. This legal position may engender passivity and shareholder apathy, which have been prevalent in Indian companies for several decades.

While law or regulation cannot compel shareholders to exercise their votes on companies, they can be exhorted to do so. In this vein, SEBI in 2010 required mutual funds (which subject to registration with SEBI) to disclose their voting policies. By introducing transparency in mutual fund voting, the idea is that such investors cannot simply adopt a passive attitude and must decide whether or not to vote and, if so, how.

In a more recent development, SEBI has issued a circular making the disclosure of mutual fund voting policies more stringent. The key matters encompassed in the circular are as follows:

1. Asset management companies (AMCs) must record and disclose specific rationale supporting their voting decision (for, against or abstain) with respect to each vote proposal.

2. AMCs must publish summary of the votes cast across all its investee companies and its break-up in terms of total number of votes cast in favor, against or abstained from.

3. AMCs must make disclosure of votes cast on their website (in spreadsheet format) on a quarterly basis, within 10 working days from the end of the quarter. Further, AMCs shall continue disclosing voting details in their annual report. A revised format for disclosure has been prescribed.

4. Further, on an annual basis, AMCs must obtain Auditor's certification on the voting reports being disclosed by them. Such auditor's certification shall be submitted to trustees and also disclosed in the relevant portion of the Mutual Funds' annual report & website.

5. Board of AMCs and Trustees of Mutual Funds shall be required to review and ensure that AMCs have voted on important decisions that may affect the interest of investors and the rationale recorded for vote decision is prudent and adequate. The confirmation to the same, along with any adverse comments made by auditors, shall have to be reported to SEBI in the half yearly trustee reports.

These measures will certainly enhance more responsible exercise of voting rights by mutual funds. In fact, SEBI’s circular explicitly states that mutual funds/ AMCs must be encouraged “to diligently exercise their voting rights in the best interest of the unitholders”. This is representative of the dual agency problem prevalent in the case of institutional investors. On the one hand, the investee company managers ought to manage their companies for the benefit of their shareholders. Where a shareholder is an institutional investor (as in the case of a mutual fund), such investor must in turn manage its investment for the benefit of the unitholders who are the ultimate investors. This explicit recognition of unitholders’ best interest imposes a significant onus on AMCs and their managers to act cautiously and responsibly in exercising voting rights on investee companies, and it is not longer possible to adopt a passive attitude when it comes to corporate voting.

Such responsible voting decisions would also enhance activism among institutional shareholders, a phenomenon that has become altogether real in the Indian context. Although SEBI’s circular applies directly only to mutual funds, the attitude adopted by mutual funds may also influence other institutional investors as to the manner of their exercise of the corporate franchise. The rapid development of the proxy advisory industry has already begun to further aid institutional activity in corporate meetings and voting.

Wednesday, April 9, 2014

Compensating Investor Losses in India

Posted on SSRN is a new working paper titled “The Protection of Minority Investors and the Compensation of Their Losses: A Case Study of India” that I have authored.

The abstract is as follows:

Any legal system may potentially deploy two separate but related models to ensure the accuracy of disclosure in the capital markets. First, it may possess legal institutions in the form of regulatory bodies with power to make regulations regarding disclosures and to enforce those regulations through powers of sanction conferred upon them. Second, it may adopt the model that relies upon the courts to grant remedies to investors who are victims of inaccurate or misleading disclosures thereby suffering losses.

This paper tests the efficacy of the two models in their application to India. The exploration of India is interesting and helpful because India’s capital markets have witnessed exponential growth in the last two decades. At first blush, it might be simple to attribute this to India’s legal system through civil liability and its enforcement through the judiciary. Counterintuitively, though, India’s common law legal system operating through the judiciary has not played a vital role in the development of the capital markets through a rigorous civil liability regime. Delays in proceedings due to alarming pendency levels in litigation before Indian courts and skyrocketing costs in initiating litigation are some of the factors that have disincentivized investors from relying upon the civil liability regime for enforcing their compensation claims.

At the same time, other factors have been at play. India’s capital markets regulator, the Securities and Exchange Board of India (SEBI) has been instrumental in formulating policies and regulations governing capital markets, and its actions have been rapid and dynamic to suit the needs of the changing markets, by operating through the power of sanctioning various market players.

The paper concludes with the finding that while the general approach in most common law markets is for courts to play a significant role in the development of the capital markets through the process of compensating investors for losses, the success of India’s capital markets growth has hinged upon the regulatory process rather than the courts.

This paper represents the legal position as of February 2014, and does not include subsequent developments such as the notification of further sections of the Companies Act, 2013 with effect from April 1, 2014 and also the re-promulgation of the Securities Laws (Amendment) Ordinance, 2014. These developments, however, do not affect the principal outcomes discussed in the paper.

Guest Post: CCI Amends Merger Control Regulations

[The following post is contributed by Karan Singh Chandhiok, Head of Competition Law and Dispute Resolution, Chandhiok & Associates, Advocates and Solicitors; and Vikram Sobti, Senior Associate with the firm. The authors may be contacted at and respectively]

On 28 March 2014, the Competition Commission of India (CCI) issued a notification amending the existing merger control regulations in India, namely the Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Regulations, 2011 (Combination Regulations).

The latest set of amendments is the result of an annual exercise that is undertaken by the CCI to update the merger control regulations. 

Some of the important amendments introduced are set out below:

a.         CCI to look at the substance of transactions: The antitrust regulator in India has tightened the screws on mergers and acquisitions to ensure that the parties do not avoid seeking mandatory premerger approval by adopting innovative and complex structures to their transactions. The amendment clarifies that the requirement of filing notice with the CCI shall be determined by the “substance of the transaction” and not by the structure of the transactions.

b.         Notification of transactions taking place outside of India: Schedule I to the Combination Regulations provides a list of transactions that normally do not require prior notification and approval from the CCI; and are treated as not having an appreciable adverse effect on competition in India.  Entry 10 to Schedule I of the Combination Regulations, which exempts transactions that take place “entirely outside India with insignificant local nexus and effect on markets in India”, has now been deleted. This follows from the regulator’s practice of requiring parties to make a premerger notification where the combining parties satisfy the turnover or assets thresholds set out in the Competition Act, 2002 (the Competition Act) and the transaction does not benefit from the target based exemption.[1]

c.         Amendment to Form I and Form II:

i.          Form I (short form filing): The amended short form filing with the CCI now requires wider disclosure of any horizontal overlap or vertical relationships between the business of the parties to the transaction. Previously, this information was sought only in the context of horizontal overlaps or vertical relationships that are arising post-merger. Moreover, the parties will now have to provide details of merger filings made by the parties in other jurisdictions, along with the status report of such filings.

ii.         Form II  (long form filing) requires the parties to provide the details, in terms of value of assets and aggregate of turnover, as per the audited annual accounts of immediately preceding two financial years, instead of the immediately preceding financial year.

d.         Increase in filing fee: The fee for filing Form I under the Combination Regulations has been increased by 50% from INR 1,000,000 (~USD 16,667) to INR 1,500,000 (~USD 25,000), whereas the fee for filing Form II has been enhanced by 25% from INR 4,000,000 (~USD 66,667) to INR 5,000,000 (~USD 83,000). This is the second time that the CCI has raised its filing fees and are amongst the highest charged by any regulator in India.

e.         Right of appeal: The CCI has now deleted regulation 29 that allowed parties to the proceedings before the regulator to prefer an appeal against an order of the CCI relating to combinations to the Competition Appellate Tribunal. This regulation was unnecessary given the statutory right to appeal provided under section 53B of the Competition Act. The statutory right to appeal is not restricted as the erstwhile regulation 29 to a “party to the proceedings”, instead, section 53B confers a right on any person to appeal against an order of the CCI in respect of combinations. However, the Competition Appellate Tribunal in a recent appeal has limited the scope of this right by introducing the concept of ‘locus standi’. 

Whilst the majority of these amendments are on procedural matter, their immediate impact will be to clear the air on issues that repeatedly caused confusion and may have led to transactions going unreported with the commission. The ‘substance over form’ amendment demonstrates this approach of the CCI. In essence, this should mean that in any transaction where there is a change of control or one party is able to influence the strategic decisions of the other through contract or otherwise, such transactions should be notified to the CCI. Another example of transactions that would be captured by this amendment would be where one party is acquiring shares over time, but the manner of such a staggered acquisition has already been documented. 

The most important amendment, however, remains the deletion of entry 10 in schedule I. The “local nexus” entry had raised false expectations amongst stakeholders on the scope of the exemption; and it is not unthinkable that several transactions may have gone unreported to the CCI with the parties being in the mistaken belief that their transaction could benefit from the exemptions. Given the regulator’s strict view on compliance and its penchant for imposing high penalties, the latest set of amendments will lead to better regulatory compliance, even though they will add to deal timings and cost.

- Karan Singh Chandhiok & Vikram Sobti

[1] In March 2011, the Ministry of Corporate Affairs of the Government of India introduced a ‘Transaction Based Exemption’ which exempted transactions where the target whose control, shares, voting rights or assets are being acquired has either assets of the value of not more than INR 2.5 billion (~USD 41.5 million)  in India; OR  turnover of not more than INR 7.5 billion (~USD 124 million) in India.

Tuesday, April 8, 2014

Delaware Standard for Controlled Company Mergers

Delaware courts have long been considering disputes pertaining to mergers between companies and their controlling shareholders. Not only do such mergers involve related party transactions but they are also used as a means to squeeze out the minority shareholders of the target who are cashed out as part of the merger. In one of the first decisions that permitted minority shareholders to bring fiduciary duty class actions in such transactions, the Delaware Supreme Court applied the “entire fairness” standard that is quite onerous on the controlling shareholders (see Weinberger v. UOP, Inc., 457 A. 2d 701 (Del. 1983)). Subsequently, the court adopted a more nuanced approach in Kahn v. Lynch Communication Systems Inc., 638 A. 2d 1110 (Del. 1994).

After some lapse of time, the issue was reconsidered by the Delaware Chancery Court last year in In Re MFW Shareholders Litigation, 67 A. 3d 496 (Del. Ch. 2013), which applied the more deferential “business judgment rule” standard so long as the transaction was subject to certain precautionary measures that ensured sufficient protection to the minority shareholders. Last month, this ruling of the Chancery Court was upheld by the Delaware Supreme Court in Kahn v. M&F Worldwide Corp., which represents the settled legal position on the issue.

In this case, through a merger, MacAndrews & Forbes Holdings, Inc. (“M&F”), a 43% shareholder of M&F Worldwide Corp. (“MFW”) sought to acquire the remaining shares of MFW thereby effectively taking the company private. Two protective conditions were included as part of the transaction process, i.e. that (i) the merger be negotiated and approved by a special committee of independent MFW directors (the “Special Committee”), and (ii) the merger be approved by a majority of shareholder not affiliated with M&F (i.e. non-controlling shareholders).

The importance of the question presented before the Delaware Supreme Court is evident from the following passage:

This appeal presents a question of first impression: what should be the standard of review for a merger between a controlling stockholder and its subsidiary, where the merger is conditioned ab initio upon the approval of both an independent, adequately-empowered Special Committee that fulfills its duty of care, and the uncoerced, informed vote of a majority of the minority stockholders. The question has never been put directly to this Court.

After considering the legal position in these circumstances, the court affirmed the availability of the business judgment standard of review. This standard is summarised as follows:

To summarize our holding, in controller buyouts, the business judgment standard of review will be applied if and only if: (i) the controller conditions the procession of the transaction on the approval of both a Special Committee and a majority of the minority stockholders; (ii) the Special Committee is independent; (iii) the Special Committee is empowered to freely select its own advisors and to say no definitively; (iv) the Special Committee meets its duty of care in negotiating a fair price; (v) the vote of the minority is informed; and (vi) there is no coercion of the minority. [footnote omitted]

Although this standard appears deferential to boards and controlling shareholders, it is available only if the precautions set forth above are exercised carefully (which is subject to scrutiny by the courts). In establishing this standard, the court appears to have introduced a fair amount of certainty that corporations and their advisors can rely upon while structuring controlled company mergers and squeeze out transactions. As noted on the Delaware Corporate & Legal Services Blog, the decision “is an important milestone in Delaware corporate jurisprudence, providing definitive guidance on how a company can structure a going-private merger so that, in the event of a lawsuit brought by shareholders against the board of directors, the court applies the deferential business judgment rule to the board’s decision and not the more stringent entire fairness standard.”

Although the Delaware position represents a significant contrast to the manner in which squeeze out transactions are regulated in India, some lessons may be useful. The use of a committee of independent directors, which has hitherto been rare in India, is beginning to gain some prominence and may be utilised effectively for squeeze out transactions. Similarly, a “majority of the minority” (MoM) vote is now recognised for related party transactions under section 188 of the Companies Act, 2013. Although a plain vanilla squeeze out transaction may not necessarily fall within the definition of a related party transaction for that purpose, the use of an MoM vote will certainly enhance minority shareholder protection. The regulation of squeeze outs in India has received limited attention under the Companies Act, 2013, and is likely to continue to vex the companies, shareholders, regulators and courts alike.