Widening The Scope Of SBO Rules; A Lesson From Linkedin India And Samsung

Joseph George & Shrenitha Anantula

11 July 2024 10:30 AM GMT

  • Widening The Scope Of SBO Rules; A Lesson From Linkedin India And Samsung

    Samsung Display Noida Pvt Ltd ('Samsung Noida') and Linked InTechnology Information Pvt Ltd ('LinkedIn India') recently found themselves in a legal bind after the Registrar of Companies ('RoC') penalized them in separate rulings for active non-compliance in disclosing Significant Beneficial Ownership of their companies. These rulings were particularly noteworthy in that the penalty...

    Samsung Display Noida Pvt Ltd ('Samsung Noida') and Linked InTechnology Information Pvt Ltd ('LinkedIn India') recently found themselves in a legal bind after the Registrar of Companies ('RoC') penalized them in separate rulings for active non-compliance in disclosing Significant Beneficial Ownership of their companies. These rulings were particularly noteworthy in that the penalty was imposed not only on the company but also on senior officers, including CEOs, chairman, and non-executive directors of parent companies.

    Section 90 of the Companies Act, read with the Companies(Significant Beneficial Owners) Rules ('SBO Rules') mandates companies to disclose their significant beneficial owners ('SBO'). Rule 2(1)(h) of the SBO Rules mandates that any individual holding more than 10% shareholding or having the authority to exercise significant influence or control in a company is an SBO for all purposes under the Companies Act. Additionally, Rule 2(1)(i) also extends the scope of the rules to include anyone exercising significant influence i.e., having direct or indirect power to participate in the financial and operating policy decisions of the reporting company. To this extent, the reporting company (the company which is required to report its SBOs) is required to file the BEN-2 form and update the same whenever there is any change in the status of SBOs of the company.

    This article aims to evaluate whether the Ministry of Corporate Affairs ('MCA') intends to broaden the ambit of the current SBO Rules. The article will first examine the ruling against Samsung Noida and LinkedIn India, followed by a discussion of the position in the United States and finally, an analysis of the whether MCA may be broadening the scope of the erstwhile SBO Rules.

    LinkedIn India

    In May 2024, the RoC at NCT of Delhi, passed an order imposing penalties against various senior officers of LinkedIn India and other senior officers of Microsoft Corporation and LinkedIn Corporation, for non-compliance with SBO disclosure requirements. LinkedIn India claimed that no individual held significant shares in its company; thus, no disclosures were required to be made. However, the RoC held that LinkedIn India failed to disclose LinkedIn Corporation as its beneficial owner, which is ultimately owned by Microsoft Corporation.

    LinkedIn India contended that they did not attract any of the various provisions under Section 90 or Rule 2(1)(h) of the SBO Rules because no individual held more than 10% of the shares directly. However, the adjudicating officer rejected this argument, noting that the section's scope is broad enough to include any individual exercising 'significant control' over the reporting company either directly or indirectly, thus going beyond mere individual shareholding percentages.

    In the order, the adjudicating officer primarily used two tests to identify an SBO – the Objective Test and the Subjective Test. The Objective Test involves determining whether an individual holds more than 10% of shares. The Subjective Test on the other hand, considers whether an individual exercises significant influence or control over the company. In this case, Microsoft Corporation's ultimate control over LinkedIn India was established via its byelaws. As per the RoC, under the byelaws of Microsoft Corporation, the CEO has power to supervise and give directions to officers of LinkedIn India; thus, constituting significant beneficial ownership.

    Accordingly, the RoC viewed the term 'significant influence' under Rule 2(1)(i) to include Ryan Roslansky, CEO of LinkedIn Corporation (parent company of LinkedIn India and subsidiary of Microsoft Corporation), and Satya Nadella, CEO of Microsoft Corporation, thereby classifying them as SBOs. The adjudicating officer concluded that despite having a complex ownership structure, Microsoft Corporation exercised significant influence over LinkedIn India and had ultimate control under the subjective test.

    Samsung Display Noida Pvt Ltd

    Similar to the LinkedIn India order, the RoC imposed penalties on Samsung Noida for its failure to adhere to the SBO disclosure requirements despite repeated communications. The RoC found that the reporting company Samsung Noida was a wholly owned subsidiary of Samsung Display Corporation Ltd ('SDC'), but failed to disclose that they are wholly owned by SDC, which is in turn owned by Samsung Electronics Corporation ('SEC Korea'), and Samsung SDI Corporation, Korea ('SDI Korea'). Ultimately, the RoC, by rejecting Samsung Noida's arguments that there is no identifiable individual who comes under the category of SBO, pointed out that the family of Late Mr. Lee Kun Hee, being the largest shareholder of SEC, would be an SBO. The RoC observed this since the Board, on the recommendations of its chairman and other independent directors, appointed Mr. Lee's son Mr. Lee Jae-Yong as its executive chairman despite him not holding majority shares.

    Applying section 90 of the Act, the SBO Rules, the objective and subjective tests, the RoC concluded that Mr. Lee, along with his family, exercised indirect control over SEC. Therefore, the reporting company should have reported him as an SBO. Mr. Lee Jae-Yong was bestowed by the Board of SEC Korea with unbridled power to make decisions despite the company having a chairman as per the articles of association. This shows a form of proxy control vested through a legally remote mechanism and therefore, enough control to influence the managerial decisions of the SEC irrespective of the individual micro shares held by Mr. Lee.

    Position of SBO Disclosures in the United States

    The disclosure of significant beneficial ownership in the United States is governed by the Corporate Transparency Act ('CTA'). Under the CTA, a beneficial owner is any individual having 2% or more equity in the reporting company, as opposed to 10% in the Indian jurisdiction. However, the CTA is similar to the Indian position in that it includes within its ambit, any person exercising authority to appoint a majority of the directors in the reporting company.

    Another key difference in these jurisdictions lies in the expansive definition of 'substantial control'. Though the term is not defined in the CTA, the Financial Crimes Enforcement Network ('FinCEN'), in its guidance report, defines substantial control as:

    1. Any individual being a senior officer (CEO, CFO, CTO, etc.);
    2. Any individual with authority to appoint majority directors in the reporting company;
    3. Any individual being an important decision maker in the reporting company; or
    4. Any individual having any other form of 'substantial control' as defined by the FinCEN.

    Unlike the Indian position, the CTA also covers within its ambit, any senior officer in the reporting company. While many criticize the CTA's scope as being too broad to include all senior officers as SBOs, the FinCEN has defended the law claiming that is well within its scope and that the purpose behind the act is to tackle money laundering, drug trafficking, corruption, terrorism funding, and even potential national security threats.

    Analysis – Whether the RoC is expanding the scope of SBO Rules

    Drawing from the LinkedIn India case, under the subjective test, Satya Nadella, and Ryan Roslansky, acting as CEO of Microsoft Corporation and LinkedIn Corporation respectively, were deemed to be SBOs of LinkedIn India. Consequently, they were penalized for non-disclosure of their status as SBOs. When strictly reading the law, under the Indian jurisdiction, an SBO (other than by way of shareholding) must exercise significant control or influence over the reporting company. In this regard, a CEO must be declared as an SBO only in cases where they are a member in a Pooled Investment Vehicle ('PIV'). Though Nadella and Roslansky were merely employees of the company; and despite both the companies not being a PIV, the scope of powers and the hierarchy of the CEOs in their respective companies did give them the authority to exercise control or significant influence within the meaning of the SBO Rules. Similarly, the Samsung Noida case set a broad precedent by including any form of proxy control being within the ambit of the SBO Rules. These instances hint that the inherent ambiguity in the term 'participate', and the definition of the term 'control' were taken by the RoC to be broadly interpreted and classify senior officers of parent companies or other individuals exercising some form of substantial control over the reporting company, as an SBO.

    Looking at LinkedIn India and the Samsung Noida case, the RoC's interpretation of the erstwhile section 90 read with the SBO Rules reflects a broad interpretation of the law. The RoC used the subjective test to derive the significant control being exercised by CEOs of parent companies on LinkedIn India, despite such parent companies not being PIVs. Assumably, this broader interpretation of the SBO Rules comes in light of the increasing instances of financial crimes being committed in the country, and the difficulty in investigating them; thus, calling for tightening the noose on disclosures by companies. The interpretation, though debatable, is in line with the object and purpose of Section 90 in that it ensures corporate transparency and good governance. However, the interpretation is yet to stand the test of judicial review. If the interpretation passes the test of judicial review as well, this position will increase the degree of compliance for numerous companies across India. Though this may be a tedious task for companies, in the long run, it opens doors to a higher degree for corporate transparency in India, ensuring that India's corporate economy grows higher with a more solidified and sound foundation.

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