RoC imposed a penalty on LinkedIn India for Misidentification of Significant Beneficial Owners (SBO)

In the matter of 

M/s LINKEDIN TECHNOLOGY INFORMATION PRIVATE LIMITED

M/s Linkedin Technology Information Private Limited (“The Company”) has done following 2 non-compliances:

1. The registered Violation of Section 89 of Companies Act, 2013

• The registered owner, i.e. LINKEDIN TECHNOLOGY UNLIMITED COMPANY and the beneficial owner, i.e. LINKEDIN IRELAND UNLIMITED COMPANY did not gave declaration as required under Section 89(1) and (2) of the Companies Act.

2. Violation of Section 90 of Companies Act, 2013

• Mr. Satya Nadella and Mr. Ryan Roslansky are the SBOs in relation to the company and are liable to a penalty under section 90(10) of the Act, due to their failure to report as per section 90(1). 
• The company and its officers has failed to take necessary steps as per section 90(4A) to identify the SBO in relation to the company.
• The company and its officers failed to even send a notice as per rule 2A (2) of the Companies (Significant Beneficial Owners) Rules, 2018 leading to a contravention of section 90(5) for which penalty has been provided under section 450. 
• All the officers, including the non-executive directors are liable for this violation due to the presumption of clear knowledge on part of each of such directors about the holding structure of the company. 

Accordingly, penalty is imposed on the Company and other persons for non-compliance of provisions of Section 89 and 90 of Companies Act.

1. Non-compliance of Provision of Section 89 of the Companies Act, 2013

1.1 Brief Facts of the case

• M/s Linkedin Technology Information Private Limited (“The Company”) is registered with registered office located in Delhi.
• The Company filed form MGT-6 (Declaration with respect to beneficial interest in shares) on 29th January, 2024 declaring that:
  • Registered Holders: LinkedIn Technology Unlimited Company
  • Beneficial holder: LINKEDIN Ireland Unlimited Company

With respect  to 1 share of the subject company. Further, the Company reported the date of creation of beneficial interest as 11.01.2024.

• Whereas, as per Financial statements filed by the company vide AOC-4 for FY 2022-23, the company mentioned that with respect to 1 share of the company, LinkedIn Technology Unlimited Company, a company incorporated under the laws of Ireland is a nominee shareholder.
• Therefore, declaration given by the company in Form MGT-6 is incorrect.
• Further, the company was already aware of the fact that the registered owner and the beneficial owner w.r.t one share is different. 
• Thus, form MGT-6 filed by the company is also not compliant with section 89(6) of the Act as the creation of beneficial interest predates 11.01.2024. 
• Thus, there is non-compliance of section 89. 

1.2 Contention of the Company

The Company submitted that:

• The beneficial ownership of 1 equity share held by Linkedln Technology Unlimited Company vests and always vested with Linkedln Ireland Unlimited Company.
• The same was also disclosed at the time of merger.
• Rationale behind filing Form MGT-6:
  • Form MGT-6 was filed on the side of caution. However, the date of creation has erroneously been shown as January 11, 2024, since the declaration(s) were submitted on the said date. 
  • Such holding has always been in existence, as disclosed in the annual filings. 
  • Filing of MGT-6 was not required, therefore, the company stands to withdraw the Form MGT-6.
  • Both, Linkedln Ireland and Linkedln Unlimited, owing to abundance of caution and the language of Section 89, submitted declaration.
  • The information given in financial statements filed for FY 2022-2023 and previous financial years are correct where Linkedln Ireland is the beneficial owner of One (1) equity share held by Linkedln Unlimited.
  • LinkedIn India opted for a cautious approach and reaffirmed the beneficial ownership interest in favour of LinkedIn Ireland Unlimited Company, due to section 89 (2) of the Companies Act 2013, which uses the phrase “every person who hold consequently”, the LinkedIn India filed form MGT 6 to prevent any confusion. 
  • The Company has not committed a non-compliance under Section 89 as stipulated under the SCN.

1.3 Analysis of Non-compliance of Section-89

The RoC has analysised that:

• As per submission, the Linkedin Ireland Unlimited Company was always the beneficial owner of 1 share of the company and Linkedin Technology Unlimited Company was registered owner.
• Thus, the duty of the beneficial owner and the registered owner to make declarations arose after the incorporation of the company in 2009. 
• The registered owner and the beneficial owner ought to have made filings in accordance with the provisions of section 187C of the Companies Act, 1956 in Form 22B.
• As submitted, the date of creation of beneficial interest has been erroneously declared in the Form MGT-4 and Form MGT-5 by the registered owner and the beneficial owner as 11.01.2024. 
• There is no question of withdrawal of the e-form as the company was supposed to file this e-form as per the requirements of law. 
• However, the declarations filed by the registered owner and the beneficial do not abide by the requirements of Section 89(1) and (2), insofar as the timelines for filing the declarations have not been met and the date of creation of beneficial interest is also erroneous. 
• Section 89(5) provides for penalty against the registered holder and beneficial holder if the declarations is not made as required under the law. 
• By incorrectly disclosing the date of acquiring the beneficial interest, the provisions of Section 89(1) and (2) have not been met. 
• The date of default is being reckoned subsequent to the period of decriminalization of the provision w.e.f. 21.12.2020 and upto the date of issue of SCN on 15.02.2024. 

2. Non-compliance of Provisions of Section 90 of Companies Act

2.1 Brief facts of the case

• The RoC issued a Show Cause Notice stating that Microsoft Corporation, USA, the ultimate holding company, is regularly filing statements of changes in beneficial ownership of securities with Security & Exchange Commission (SEC).
• However, the company has not filed any eform BEN-2 on MCA 21 portal as required under Section 90 of the Act and rules made thereunder.

2.2 Contention of the Company

The Company contended that:

• Section 90 of the Companies Act applies to cases:
  • when an individual directly or indirectly holds 10% of the shares of a company;
  • when the shares of a company are held by a body corporate, whether there exists an individual who holds majority stake in the member, being a body corporate, or holds majority stake in the ultimate holding company of the member of the company. 

• However, In our case, there is no individual who is a shareholder of LinkedIn India.
• Further, the ultimate holding company is Microsoft Corporation, USA, a listed body corporate, where it is publicly reported that no individual holds a majority stake.
• Accordingly, the Company has not any compliance specified under Section 90 of the Companies Act considering the same is not applicable to the company.

2.3 Analysis of non-compliance of Section 90

• The Company contended that there is no individual who holds a majority stake in the ultimate holding company, i.e., Microsoft Corporation. Thus, the company does not have any SBO. 
• SBO is identified through the test of control or significant influence. 
• As per Rule 2(1)(h) of the Companies (Significant Beneficial Owners) Rules, 2018 for identification of a SBO where the individual has right to exercise, or actually exercises, significant influence or control, in any manner other than through direct holdings alone. 
• Despite the mandatory provisions under rule 2A(2) of the Companies (Significant Beneficial Owners) Rules, 2018, the company did not send the notice as per Form BEN-4 to Linkedln Ireland Unlimited Company [member of the subject company which holds its entire share capital].
• It has lead to contravention of section 90(5) for which penalty has been provided under section 450. 
• Also, the company and its officers failed to take necessary steps to identify its SBO leading to a violation of section 90(4A) of the Act, for which penalty is provided under section 90(11).

1. Beneficial ownership test through holding subsidiary Relationship
   1. Holding structure submitted by the Company does not indicate any holding by the Linkedin Corporation, USA, either on its own or through others.
   2. However, the Company till date reports Linkedin Corporation, USA, as its holding company in the financial statements.
   3. In such a situation, LinkedIn Corporation, USA can only be regarded as a holding company under section 2(87)(i) of the Act, i.e. on account of its ability to control the Board of Directors of the subject company. 
   4. If LinkedIn Corporation, USA, did not have the ability to control the Board of Directors of the company, it should have been disclosed as fellow subsidiary and not the holding company in its financial statements. 
   5. Linkedin Corporation, USA, has 2 directors, namely Mr. Keith R. Dolliver and Mr. Benjamin O. Orndorff, and such directors hold directorship in the company as well among other directors. Thus, the Board of LinkedIn Corporation does not control the Board of the company and the control has to be seen elsewhere.
   6. The senior most officer of the LinkedIn Corporation is Mr. Ryan Roslansky who is the CEO and the President as per the records. 
   7. Whereas, Mr. Keith R. Dolliver and Mr. Benjamin O. Orndorff have been shown as Vice-Presidents of LinkedIn Corporation, besides being shown as directors. 
   8. As per bylaws of the Linkedin Corporation, USA, the President is the highest officer of LinkedIn Corporation.
   9. In any case, the website of the LinkedIn Corporation itself regards Mr. Ryan Roslansky as its leader. Therefore, if LinkedIn Corporation is to be regarded as a holding company of the company, the same can only be due to the exercise of control on the composition of the Board of the subject company. Necessarily, LinkedIn Corporation has to exercise this control through some medium.
   10. Therefore, Mr. Ryan Roslansky is a significant beneficial owner[SBO] of the company under section 90 of the Act on account of his ability to exercise control on the Board of Directors of the company, which is evident from the declaration of the company that LinkedIn Corporation is its holding company. 
   11. Further, as per information available on company’s website, Mr. Ryan Roslansky reports to Mr. Satya Nadella and is part of the Microsoft’s senior leadership team
   12. Therefore, Mr. Ryan Roslansky is part of Microsoft’s senior leadership team is corroborated from the annual report of Microsoft Corporation. Thus, Mr. Satya Nadella is also a significant beneficial owner [SBO] of the company under section 90. 

2. Beneficial owner through Reporting Challan test
   1. Employees of Microsoft and LinkedIn who have served on the Board of the company have not taken any remuneration from the company. 
   2. The said directors do not take any remuneration from the subject company, these directors will resign from the company once they exit from the parent entity.
   3. There can be no doubt that they represent the interests of Microsoft Corporation and thus nominees.
   4. Further, the majority of the directors of the subject company are employees of LinkedIn Corporation or Microsoft Corporation whose reporting channel would end up to Mr. Ryan Roslansky or Mr. Satya Nadella. 
   5. The extant rules cover the scenario of “right to exercise” of significant influence or control in any means other than through direct holdings alone. Actual exercise of control or significant influence is not required to be proved. 
   6. Through the layers of reporting channels discussed above, the “right to exercise” of control of the majority of the directors of the subject company by Mr. Ryan Roslansky or Mr. Satya Nadella has been affirmed.

3. Audacity of the Penalty

1. Violation of Section 89 of Companies Act, 2013

• The registered owner, i.e. LINKEDIN TECHNOLOGY UNLIMITED COMPANY and the beneficial owner, i.e. LINKEDIN IRELAND UNLIMITED COMPANY have not given their declarations as required under Section 89(1) and (2) of the Companies Act.
• Therefore, they are liable for a penalty provided under section 89(5) of the Act. 
• The date of default is being reckoned subsequent to the period of decriminalization of the provision w.e.f. 21.12.2020 and upto the date of issue of SCN on 15.02.2024. 

2. Violation of Section 90 of Companies Act, 2013

• Mr. Satya Nadella and Mr. Ryan Roslansky are the SBOs in relation to the company and are liable to a penalty under section 90(10) of the Act, due to their failure to report as per section 90(1). 
• Mr. Ryan Roslansky was appointed as the global CEO of LinkedIn Corporation on 1st June 2020 and started reporting to Mr. Satya Nadella. Thus, the period is being reckoned 30 days after his appointment i.e. w.e.f 01.07.2020 onwards till the issuance of the SCN under section 90, which was issued on 15.02.2024. 
• The company and its officers are liable for action under section 90 (11) of the Act for its failure to take necessary steps as per section 90(4A) to identify the SBO in relation to the company.
•  Also, the company and its officers failed to even send a notice [which was mandatorily required to be sent] as per rule 2A (2) of the Companies (Significant Beneficial Owners) Rules, 2018 leading to a contravention of section 90(5) for which penalty has been provided under section 450. 
• All the officers, including the non-executive directors are liable for this violation due to the presumption of clear knowledge on part of each of such directors about the holding structure of the company. 
• The period is being reckoned from 01.07.2020 onwards till the issuance of the SCN under section 90, which was issued on 15.02.2024.

4. Penalty Imposed

Following amount of penalty is imposed:

Voliations	Penalty Imposed
Violation of Section 89(1) of Companies Act(LINKEDIN TECHNOLOGY UNLIMITED COMPANY  and LINKEDIN IRELAND UNLIMITED COMPANY )	5,60,800
Section 90 (1) of the Act penal provision 90(10) of the Act. (Mr. Satya Nadella (Significant Beneficial Owner)  and Mr. Ryan Roslansky (Significant Beneficial Owner))	4,00,000
Section 90 (4A) of the Act, penal provision 90 (11) of the Act.	12,00,000
Section 90 (5) of the Act, penal provision Section 450 of the Act.	5,50,000