[Ayush is a student at Hidayatullah National Law University.]
The Registrar of Companies (ROC) of Delhi and Haryana on 22 May 2024 in the matter of LinkedIn India Technology Private Limited (LinkedIn India) passed an adjudication order against LinkedIn India for the violation of the statutory compliance under Sections 89 and 90 of the Companies Act 2013 (Companies Act) with regard to non-declaration of beneficial owners and significant beneficial owners (SBO). The ROC imposed a penalty against the Microsoft Chairman and Chief Executive Officer (CEO) Mr Satya Nadella and the CEO of LinkedIn Corporation Mr Ryan Roslanksy or violation of the SBO norms under Section 90(1) of the Companies Act. The order has been a subject of heavy discussion in the legal fraternity because of the approach of the ROC to widen the net of the SBO to include the global CEOs of all professionally managed group companies, that is companies that are not promoter/ founder run, within the ambit of the SBO.
This order while lauded by many experts in the legal industry has certain considerations which require attention vis-à-vis the requirement for SBO declaration under Section 90 of the Companies Act besides having consequences for all professionally managed group companies. In this article, the author seeks to critically analyse the aforementioned ROC order and highlight the consequences that it may have on the such companies operating in India.
Factual Matrix in LinkedIn India
As per Section 90 of the Companies Act read along with Rule 2(h) of the Companies (Significant Beneficial Ownership) Rules 2018 (SBO Rules), an individual, whether acting alone or together or through one or more persons or trust, holds indirectly or together with any direct holdings not less than ten percent of shares or voting rights in shares or the right to receive not less than ten percent of dividend in a financial year or has the right to exercise or actually exercises “significant influence” or “control” over the company is considered to an SBO and is required to make a declaration to the company within 30 days of acquiring such interest. Additionally, as per Section 90 (4A), a company is also required to take necessary steps to identify an individual who is an SBO in relation to the company and cause him to comply with the provision of Section 90.
The ROC had raised issues in relation to the failure of LinkedIn India to declare its SBOs, but LinkedIn India contended that it did not have any SBO since no individual holds a majority stake in the Microsoft Corporation which is the ultimate holding company of LinkedIn India.
Understanding the RoC Order
The ROC applying the subjective test of the right to indirectly exercise significant influence or control stated that the CEOs of LinkedIn Corporation and of Microsoft Corporation have the right to exercise significant influence and control over the affairs of LinkedIn India. The ROC based its findings on majorly three grounds:
Holding-subsidiary relationship
The ROC stated that LinkedIn Corporation by the virtue of being the holding company of LinkedIn India as stated in its financial statements has control over the composition of the board of directors of LinkedIn India. Additionally, the ROC in its enquiry found there are two common directors of LinkedIn India and LinkedIn Corporation who apart from being the directors in these two companies are officers in LinkedIn Corporation and hence these two common directors would come under the control of its senior most officer i.e., the CEO.
Reporting channels
As per the findings of the ROC, majority of the directors in LinkedIn India were either the employees of the Microsoft Corporation or the LinkedIn Corporation and their reporting would ultimately end up with the CEO of either Microsoft Corporation or the LinkedIn Corporation. Further, the ROC stated that after the acquisition of LinkedIn Corporation by Microsoft Corporation, the CEO of LinkedIn Corporation would ultimately report to and come under the control of the CEO of Microsoft Corporation.
Financial control
The ROC citing the board resolution passed by LinkedIn India by which it authorized the Chief financial officer, treasurer and assistant treasurer of Microsoft Corporation to operate the bank accounts of LinkedIn India, leading to the conclusion that there is plausible financial control exercised by Microsoft Corporation over LinkedIn India and hence, CEO of Microsoft Corporation was in a position to exert financial control over LinkedIn India.
The ROC ultimately concluded that the two CEOs would be the SBO of LinkedIn India and imposed a monetary penalty of two lakhs rupees each for the failure to comply with the provisions of Section 90(1) of the Companies Act.
Casting a Net Too Wide
While the ROC expanded the scope of SBO to include a professional CEO who is an employee of the Corporation, the author understands that the ROC may have cast a net too wide in this regard.
Firstly, it is important to understand the impetus behind incorporating the concept of SBO under the Companies Act 2013. The concept’s inception can be traced to the Financial Action Tak Force (FATF) recommendations 24 and 25 which state that “countries should ensure that there is adequate, accurate and up-to-date information on the beneficial ownership and control of legal persons that can be obtained or accessed rapidly and efficiently by competent authorities”. Further, the Companies law Committee of February 2016 (Company Law Committee) highlighted the need of identifying and preventing the “misuse of corporate vehicles for the purpose of evading tax or laundering money for corrupt or illegal purposes, including for terrorist activities.”
The ROC’s interpretation of provisions under Section 90 of the Companies Act to identify the two CEOs as SBO in LinkedIn India is not in line with the objective witnessed in the Companies Law Committee report and FATF recommendations. On the contrary, the intention rather appears to be the inclusion of the CEOs of the professionally managed group companies under the ambit of SBO.
Secondly, the ROC concluded that the directors of LinkedIn India in their capacity as officers of LinkedIn Corporation are reporting to the CEO of the latter and at the same time, being the employees of both Microsoft Corporation and LinkedIn Corporation, are acting as nominee directors in LinkedIn India. However, as per Section 166 of the Companies Act, the directors of a company are duty bound to exercise an independent judgement in their duties and to act in good faith for the benefit of the company. Additionally, as held in AES OPGC Holding (Mauritius) v. Orissa Power Generation Corporation Limited “if a director is placed in a situation where there is a conflict between the interests of two or more persons/entities to whom the director owes allegiance, then he is duty bound to take the decision which would be in the interest of the company, failing which he would be in breach of his fiduciary duties. It is more so in case of nominee directors when there is a clash of interest between the company and their nominators.” It fortifies the checks and balances which prevent the directors from acting under any sort of influence from any officer (CEO in this case) of the company. Moreover, it also adds emphasis on the fact that the duty of independent judgment as a director supersedes any other obligation which a director may have as an employee of the company.
Lastly, the ROC relied on news articles and videos wherein Mr Ryan Roslanksy spoke inter alia about plans with regards to operations in India. However, as stated by LinkedIn India, he spoke in his capacity as global CEO of LinkedIn Corporation, and further, any decision in relation to the operations of LinkedIn India are subject to the approval of the board of directors of LinkedIn India and Mr Ryan Roslanksy lacks the authorization from the board of LinkedIn India to issue any such direction. The ROC, based on media coverage as evidence, contended that the LinkedIn Corporation CEO has control and significant influence over LinkedIn India, but the author understands that it should have relied on the minutes of the board meetings which, as per the Secretarial Standards on Meetings of the Board of Directors, act as evidence of the board meeting, for verifying whether he was authorised by the board of LinkedIn India to control its operations.
Conclusion
The ROC’s interpretation to include global CEOs of professionally managed group companies would always result in a situation where Indian subsidiaries having a CEO at group company level would be considered as SBO in relation to its Indian subsidiary that runs counter to the very object of the SBO declaration and identification. The ROC order has possible ramifications for multinational companies operating in India in terms of increased compliance. Additionally, it goes against the business-friendly environment that the government is trying to create by promoting ease of doing business in India. The existing business will also have to reevaluate their existing process of board appointments and delegation of authority. As stated by LinkedIn India spokesperson, the order is currently under review, and hence, we can expect an appeal against this ROC order.