Financial investors’ veto on strategic decisions is control

By Kunal Chandra and Gautam Chawla, Trilegal

Under the Competition Act, control is broadly and vaguely defined to include control of the affairs or management by: (i) one or more enterprises, either jointly or singly, over another enterprise or group; (ii) one or more groups, either jointly or singly, over another group or enterprise. On account of this definition, private equity investors and other financial investors in the past have often sought to benefit from the relaxation under entry 1 of Schedule I of the Combination Regulations on the grounds that their veto rights do not afford them control of the target.

The relaxation provides that if less than a 25% shareholding is acquired solely as an investment or in the ordinary course of business without acquisition of “control”, it ordinarily is not likely to have an appreciable adverse effect on competition and so notice need not normally be filed.

Recent case

Recently, the Competition Commission of India (CCI), in its order approving the proposed acquisition of a 17.3% stake of Standard Greases & Specialties Private Limited (SGSPL) by Alpha TC Holdings (Alpha) and Tata Capital Growth Fund (TCGF), dispelled any doubts that there may have been on what constitutes strategic matters and that a veto on such matters including in favour of a financial investor will be viewed as control by the CCI.

Kunal Chandra
Kunal Chandra

Alpha and TCGF, in their notice to the CCI, stated that their rights were in the nature of investor protection rights with no control over strategic commercial decisions of SGSPL and sought to avail of the benefit of the entry 1 relaxation.

The CCI held that “the Reserved Matters for which consent of the Acquirers is required include strategic commercial decisions of SGSPL and the same, therefore, cannot be considered as mere minority protection rights, as also observed by the Commission in its earlier orders. In view of the foregoing, it is observed that the Investment Agreement envisages Acquirers’ joint control over SGSPL and therefore, the proposed combination does not fall under Item I of Schedule I to the Combination Regulations.”

In the investment agreement, Alpha and TCGF had a veto on the following matters: (i) appointment and removal of the managing director and the chief financial officer of SGSPL; (ii) increasing or decreasing the number of directors on the board or any of its committees other than as set out in the investment agreement; (iii) approving, adopting, amending or modifying the annual budget and business plan (including any capital expenditure budget, operating budget and financing plan); (iv) payment of emoluments/bonuses to promoters or directors, except as agreed in their employment contracts; (v) any amendment to the memorandum of association or articles of association of SGSPL.

Gautam Chalwa
Gautam Chalwa

Past decisions

The CCI held that affirmative veto rights amount to control in its earlier orders approving the proposed acquisition of: (a) shares of Multi Screen Media Private Limited by SPE Mauritius from Grandway Global Holdings and Atlas Equifin; (b) a stake in Pipavav by SAAB; (c) joint control of Century Tokyo Leasing by Tata Capital Financial Services.

In these cases, the acquirers did not appear to be pure financial investors. In view of this, financial investors have speculated on the extent of veto rights in the context of control in the hope of benefiting from the entry 1 relaxation. After the order in the SGSPL case, such speculation by financial investors is unlikely to persist.


Some may argue that veto rights do not provide any ability to steer the activities of the company and only afford the power to block decisions to protect a minority interest. Without commenting on this debate, the CCI appears to be guided by the European Commission’s position on control in competition regulations. Under article 3(2) of EC Regulation No. 139/2004, control is “constituted by rights, contracts or any other means which, either separately or in combination and having regard to considerations of fact or law involved, confer the possibility of exercising decisive influence on an undertaking, in particular by … (b) rights or contracts which confer decisive influence on the composition, voting or decisions of the organs of an undertaking”.

In conclusion, the order may go some way in clearing the confusion that existed (on account of different definitions of control adopted by different Indian regulators) in the minds of private equity and financial investors while structuring their transactions and negotiating investment agreements. Irrespective of whether a financial investor has control within the meaning of foreign exchange regulations or the Takeover Code for listed companies, if the financial investor has negative control on strategic decisions, it will be control for the purpose of Indian merger control regulation.

Kunal Chandra is a counsel at Trilegal and Gautam Chawla is an associate. Trilegal is a full-service law firm with offices in Delhi, Mumbai, Bangalore and Hyderabad.



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