Recently, the Registrar of Companies, NCT of Delhi & Haryana, in its extensive 63-page adjudication order[1] (‘Order’), imposed penalties against LinkedIn India Information Private Limited (‘LinkedIn India’/‘Company’) and its Directors along with Mr. Ryan Roslansky (Global CEO of LinkedIn) and Mr. Satya Nadella (CEO of Microsoft Corporation) for violating the provisions related to non-disclosure of Significant Beneficial Ownership (‘SBO’) under Section 90 of the Companies Act, 2013 (‘Act’).
Following its unique interpretation of the term ‘control’ other than by shareholding in Metec Electronics Private Limited[2] and Leixir Resources Private Limited[3], the Registrar of Companies (‘RoC’) has been investigating the SBO of companies, particularly those having holding companies. While interpreting the applicability, RoC has delved deep into the ‘corporate structure’ and definition of ‘control’, especially for those companies having a global presence with structural layers and top managerial personnel in control.
In this article, we have analyzed the jurisprudence behind the SBO and the RoC’s approach towards the Order.
Jurisprudence behind SBO
Firstly, the recommendations of the Financial Action Task Force (‘FATF’) in 2012[4] set out the essential measures that countries should have in place inter-alia on reporting transparency and beneficial ownership of legal persons. It sets out that the countries must ensure that their laws mandate the registered companies to procure adequate, accurate, and up-to-date information to identify the natural persons who are the beneficial owners and maintain a register to document the same. Following the FATF recommendations, the Report of the Companies Law Committee released in February 2016[5] recommended that a definition must be provided for beneficial ownership, the obligation of companies to obtain information on beneficial ownership from its members, and maintenance of a register of beneficial owners.
The Companies (Amendment) Act, 2017, was notified[6] wherein through Section 90 of the Act the concept of ‘significant beneficial ownership’ was introduced to mean an individual with an indirect shareholding of not less than 10% in the reporting company or exercises ‘significant influence’ other than by shareholding. The Companies (Significant Beneficial Ownership) Rules, 2018, clarifies that ‘significant influence’ shall mean the power to participate in the financial and operating policy decisions of the company either directly or indirectly.
In common parlance, ‘control’ is identified by shareholding. However, there are other aspects to measure such control. The Guidance on Beneficial Ownership for Legal Persons released by FATF in 2023[7] deals with beneficial ownership beyond ‘control through shareholding’ such as differential voting rights to certain shareholders, power to appoint a majority of senior management lying with an individual, control through debt instruments owing to the terms of a lending agreement, control held by natural persons through positions within an entity, control through informal means (such as personal connections, relatives, etc.).
Indian company law has incorporated the aforementioned by terming it as a ‘significant influence’ to a certain extent. However, it is practically difficult to identify an SBO wherein the control is not through direct holdings. It is for this reason that the ROC has adopted an approach by digging deeper into the overall shareholding and management structure of the companies with global presence to identify the natural persons in the position of control. This approach is mainly adopted to prevent the misuse of legal personality for criminal purposes and to implement transparency measures.
RoC’s Order
The RoC’s Order penalized LinkedIn India and its directors along with Mr. Ryan Roslansky and Mr. Satya Nadella, with a cumulative amount of INR 21.5 lakhs on the grounds that they failed to declare their SBO in LinkedIn India.
While adjudicating the penalty in the above matter, the RoC adopted the subjective route to understand whether any ‘control’ is being exercised by any natural person through ‘significant influence’. A detailed questionnaire was sent to the Company to examine the same. It was noted by the RoC that prior to LinkedIn’s acquisition by Microsoft, LinkedIn Corporation was reported as the ultimate holding company of LinkedIn India. Post-acquisition, this position was taken over by Microsoft Corporation however the same was not recognized in the financial statements of LinkedIn India. Further, in this regard, the Company failed to identify its SBO by sending notices in Form BEN-4, which is a violation of Section 90(4A) of the Act.
To analyze the subjective route, the RoC focussed on three factors/tests to identify the concerns of SBO:
SBO through holding subsidiary relationships
LinkedIn India has reflected in its financial statements that LinkedIn Corporation, USA, is its holding company despite its presence in the upstream entities. As understood, ‘control’ can be exercised even otherwise through shareholding, and in the present case, significant influence was exercised over the board of directors of LinkedIn India. It was noted that the same directors are in both LinkedIn Corporation and LinkedIn India hence the same set of persons cannot control themselves therefore the control has to be seen elsewhere. RoC proceeded to understand the role of Mr. Ryan Roslansky, CEO of LinkedIn Corporation, USA, in exercising significant influence over the Company. It is noted that his role is subject to review and oversight of the Board of Directors of LinkedIn Corporation, USA, and Microsoft Corporation, USA. However, certain incidents were observed to evidence the exercise of control by Mr. Ryan Roslansky such as announcing the global layoff of employees, involvement in R&D activities in LinkedIn India, and enjoying overall leadership roles of which LinkedIn India is a part. Accordingly, in the absence of directors, Mr. Ryan Roslansky has been regarded as the leader of the LinkedIn Corporation, USA, and therefore a Significant Beneficial Owner of LinkedIn India.
It was noted that Mr. Ryan worked under the senior leadership of Mr. Satya Nadella and reports to him. The bylaws of Microsoft Corporation, USA provide that the CEO of Microsoft Corporation has general charge and supervision of business and the designation of duties by the CEO to the Directors would remain in full flow. Thus, Mr. Satya Nadella was also considered as an SBO of LinkedIn India.
SBO through Reporting Channel tests
RoC noted that the employees in Microsoft Corporation, USA, holding significant positions have also taken the position of Directors in LinkedIn India, and Microsoft Corporation, USA enjoys a ‘right to reject’ the directorship of its employees in LinkedIn India. This gave rise to the argument that such employees can act as nominees of Microsoft, USA in LinkedIn India to represent its interests and exercise significant influence. It was noted that the Directors of the Company were appointed with no remuneration as they were remunerated from Microsoft, and the same Directors were appointed at most of the other entities of Microsoft globally, and the Directors of LinkedIn Corporation and LinkedIn India were the same after LinkedIn’s acquisition, etc. These would infer that the reporting channels in the entire structure run up to Mr. Ryan Roslansky or Mr. Satya Nadella who has the right to exercise significant influence unless decided otherwise through their Board.
SBO through Financial Control tests
The treasurers of LinkedIn India including operating signatories and bank guarantee signatories are employees of Microsoft Corporation, USA. The Company adopted a resolution that any decision of its Board of Directors shall not override the decisions of the Treasurer of Microsoft Corporation in relation to financial control. This clearly demonstrated the financial control in the hands of Microsoft, USA. Further, the treasurers are not subject to the supervision of LinkedIn India hence it is evident that the control is being exercised by Microsoft, USA.
Our analysis
The RoC in the present Order has examined the extreme end of the reporting structure of LinkedIn India by questioning the minutest gaps possible. In the present case, the SBO could not be identified through shareholding hence the RoC tried the subjective route to investigate the authority of Mr. Ryan Roslansky and Mr. Satya Nadella over the Company. In doing so, the RoC challenged the very nature of the responsibility of global CEOs towards their group. It examined the acts of providing direction for the future vision and leadership, announcements for global layoffs, and overviewing the operations as a whole for LinkedIn Corporation, as acts of exercising significant influence over LinkedIn India.
The RoC has outlined the parameters such as control over the Board of Directors, financial control with the upstream entities, control through contractual agreements, Directors of the subject company holding top positions in the upstream entities, and power of the top managerial personnel through bylaws of the upstream entities as criteria to determine control through ‘significant influence’.
Conclusion
The views of the RoC in the Order as also in the other adjudication orders issued prior to this Order and that followed it under Section 90 of the Act would now determine the responsibility of such individuals who actually or rather beneficially own the company to disclose their interest. Recently, the RoC in its adjudication order dated 12 June 2024 penalised Samsung SDI India Private Limited along with its directors and KMP on the grounds that proxy control was being exercised over the subject company. In light of the above, companies with global corporate structures, need to relook at the requirement of reporting the SBO in the companies.
[The authors are Partner and Associate, respectively, in Corporate and M&A practice at Lakshmikumaran & Sridharan Attorneys, Hyderabad]
[4] Recommendations of FATF are here.
[5] Report of the Companies Law Committee is here.
[6] Companies (Amendment) Act, 2017 is available here.
[7] Guidance on Beneficial Ownership for Legal Persons released by FATF is available here.
