Atul Chopra and Others vs Tecnotree Corporation and Others

J.R. Midha, J.—The Plaintiffs have filed this suit for declaration and permanent injunction against the Defendants. The Plaintiffs are seeking a declaration that the Share Purchase Agreement dated 14th December, 2008 is null and void on account of fraudulent misrepresentations made by Defendant No. 1 and its Directors/officers. The Plaintiffs are also seeking status quo ante as prevailing before Share Purchase Agreement dated 14th December, 2008 and consequential transfer back of the shares held by the Plaintiffs in the Indian Company. The Plaintiffs are also seeking a declaration that FIPB approval dated 20th April, 2009 granted by the Government of India, Defendant No. 18 is null and void.

The Plaintiffs were the shareholders of erstwhile company, namely, Lifetree Convergence Limited (hereinafter referred to as the "Indian Company") and are presently shareholders of Defendant No. 1. The Plaintiffs held 91.17% shares in the Indian Company and the remaining 8.83% shares were held by the public and International Finance Corporation (IFC). The Plaintiffs comprised of two categories, namely, Management Shareholders and Non-management Shareholders. The Non-management Shareholders were purely investors and were not part of the management and/or running of the Indian Company and they held 87.98% share out of the aforesaid 91.17% shares. The Management shareholders were technocrats and entrepreneurs who, apart from being shareholders of the Company, were involved in management and running of the entire business of the Indian Company and they held 11.11% shares in the Indian Company.

Defendant No. 1 is a Company incorporated under the laws of Finland and its shares are listed on NASDAQ OMX Helsinki Ltd. Stock Exchange. Defendant No. 1 is primarily engaged in the business of pre-paid charging and VAS platforms and has its customer base in Latin America, Europe, Asia Pacific and Middle East.

On 14th December, 2008, the Share Purchase Agreement was executed at Finland by which Defendant No. 1 acquired 67.5% Non-management Shares of the Indian Company at the rate of Eur 0.86 and swapped the remaining 34.3% shares held by the Management Shareholders, Non-management Shareholders and IFC with the shares of Defendant No. 1. The consideration by Defendant No. 1 for purchase of shares of the Indian company was fixed at Eur 30,304,513 in Clause 6 of the Agreement (page 80), out of which Defendant No. 1 paid Eur 19,904,100 in cash towards 67.5% shares and the remaining consideration of Eur 10,400,413 was paid in the form of swap shares of Defendant No. 1. The ratio for the swap was fixed as 3.885 shares of the Defendant No. 1 for each share of the Indian Company and 8.296 shares of Defendant No. 1 for each share of the Defendant No. 3.

In pursuance the said Agreement, Defendant No. 1 made an application in January, 2009 to Ministry of Finance, Government of India (Defendant No. 18) seeking FIPB approval which was granted on 20th April, 2009.

On 6th May, 2009, the Share Purchase Agreement dated 14th December, 2008 was closed in pursuance to which:

(i) Defendant No. 1 paid a sum of Eur. 19.904 mn (equivalent to approximately Rs. 120 Crores as per the statement made by Plaintiff''s counsel in Court) in cash for purchasing 65.7% shares held by Non-management shareholders. The remaining 34.3% shares were swapped and in turn 12,093,465 shares of Defendant No. 1 were issued to the said Management shareholders, Non-management shareholders and IFC. As a result, Defendant No. 1 acquired entire holding of the Indian Company by purchasing 65.7% shares in cash and swapping the remaining 34.3% shares with that of the shares of Defendant No. 1.

(ii) Plaintiff No. 1 was appointed as Director on the Board, COO and President of Defendant No. 1; and Plaintiff No. 3 was appointed as Group CTO of Defendant No. 1 for which separate employment agreements were executed between the parties.

(iii) Plaintiff No. 1 was also appointed as a Director on the Board of Directors of Defendant Nos. 2 and 3.

According to the Plaintiffs, Defendant No. 1 made certain representations and warranties in the Share Purchase Agreement which were conditions precedent for closure of the Agreement. One of the conditions precedent was obligation upon Defendant No. 1 to disclose any "Material Adverse Effect" on the financial or trading position of Defendant No. 1 to the Plaintiffs. Defendant No. 1 provided its audited accounts as on 31st December, 2007 and budged accounts of 2008 to the Plaintiffs and the business revenues for the next three years and the closure was effected by the Plaintiffs on the good faith and bonafide belief that all the conditions precedent have been complied with by Defendant No. 1.

The Plaintiffs'' grievance started in July, 2009 when the Board Meeting of Defendant No. 1 was held in which the business results of second quarter of 2009 were disclosed and there was a major decline in the sales figures as compared to the budged projections/results of 2008. The actual net sales of second quarter of 2009 were lower by 45.5% than the actual results (net sales for the same period of 2008). The Plaintiffs made enquiries about the first quarter business results of 2009 and found that they were also lower to the extent of 35% as compared to the budgeted results/projections of 2008. The Plaintiffs'' grievance is that the said decline was within the knowledge of Defendants No. 4 to 14 at the time of closure of the Share Purchase Agreement and they were obliged to disclose the same to the Plaintiffs.

On 22nd September, 2009, the Board Meeting of Defendant No. 1 was held in which decisions were taken to marginalize the powers of Plaintiff No. 1 and to transfer the business/profits of Defendant No. 2 to Finland.

In December, 2009, a presentation was made by CF Os of Defendant No. 1 in which it was disclosed that Defendant No. 1 had made a default in a service contract of Mobicom resulting in payment of compensation of 3 lac Euros to Mobicom which resulted to loss/damage to the Plaintiffs to the tune of 4 mn Euros.

In February, 2010, the financial results of the Defendant No. 1 for the year 2009 were declared which were 46% less than the projections presented by Defendant No. 1 prior to the execution of the Share Purchase Agreement. According to the Plaintiff, Defendants No. 4 to 14 must have been aware of the decline in business much prior to the Share Purchase Agreement. The Plaintiffs sought clarification from Defendant No. 1 in this regard.

From April to August, 2010, the Defendants made efforts for transferring the IP rights as well as cash reserves of Defendant No. 2 which was objected by Plaintiff No. 1 and Mr. Pal whereupon Defendant No. 1 decided to remove both Mr. Pal and Plaintiff No. 1. Defendant No. 1 has directed CFO of Defendant No. 2 to call an EGM for removal of Mr. Pal as Director of Defendant No. 2.

On 9th September, 2010, Defendant No. 1 constituted an independent Committee on the ground that there was a conflict between the position of Plaintiff No. 1 as President and CEO of Defendant No. 1 and its position as Director and significant shareholder and Plaintiff No. 1 was called upon to appear before the said Committee.

The Plaintiffs have also become aware that Defendant No. 1 has a liability of US$ 1.5mn raised by Brazilian authorities which was not disclosed by the Defendants.

The Plaintiffs claim to have suffered in the following manner in para 4.1 of the plaint:

(i) Loss of control and management of the Indian Company.

(ii) Value of shares of Defendant No. 1 allotted to Plaintiffs have considerably diminished and have reduced almost 40 per cent due to poor performance of Defendant No. 1.

(iii) The Plaintiffs have lost the benefit of entire business/profit earned by Indian Company apart from loss on account of ESOP and Bonus.

According to the Plaintiffs, the shares of Defendant No. 1 have turned out to be paper shares (para 4.8).

Clause 12.14 of the Share Purchase Agreement provides that the Agreement shall be subject to exclusive jurisdiction of Courts of England only and no other Court shall have jurisdiction and Clause 12.13 provides that the Agreement shall be a contract under the laws of United Kingdom and for all purposes shall be governed, construed and enforced in accordance with the laws of United Kingdom. However, the FIPB permission granted by the Government of India contains a clause that the governing law shall be the Indian law which was accepted by Defendant No. 1 but there is no clause providing for jurisdiction of Indian Courts in the FIPB approval.

According to the Plaintiffs, Indian Courts have jurisdiction in respect of disputes under the Share Purchase Agreement as no part of the cause of action has arisen in England and English Courts cannot apply Indian Law. The reliance is placed on the judgment of the Hon''ble Supreme Court in the case of A.B.C. Laminart Pvt. Ltd. and Another Vs. A.P. Agencies, Salem, . However, in the case of Man Roland Druckimachinen AG Vs. Multicolour Offset Ltd. and Another, , the Hon''ble Supreme Court observed that when the parties have agreed on a particular forum, the Courts will enforce such agreement. This is not because of a lack or ouster of its own jurisdiction by reason of consensual conferment of jurisdiction on another Court, but because the Court will not be party to a breach of an agreement. Such an agreement is not contrary to public policy nor does it contravene Section 28 or Section 23 of the Contract Act. In Laxman Prasad Vs. Prodigy Electronics Ltd. and Another, , the agreement between the parties contained a clause that the laws of Hong Kong Special Administrative Region shall apply. The Hon''ble Supreme Court held that merely because laws of Hong Kong Special Administrative Region have to be applied according to the agreement, does not mean that the suit can be instituted only in Hong Kong and not any other country. The territorial jurisdiction of a Court is different from applicability of law. In Agreements of Jurisdiction and Choice Of Law, by Adrian Briggs, the Author is of the view that the English Courts can apply the rules of foreign law in cases having international elements. The relevant portion of the book is reproduced hereunder:

In any case having international elements, which is brought before the English courts, it is possible that the issue raised for decision should be dealt with by applying the rules of a foreign law.

It is submitted on behalf of the Plaintiffs that the part of the cause of action arose at Delhi inasmuch as the Agreement on Representation of Technomen Lifetree OYJ (at page 206), Executive Agreement (at page 221), Executive Agreement (at page 237) and Executive Agreement (at page 250) were executed at Delhi. However, perusal of the said Agreements reveal that the Executive Agreement at page 221 was executed at Espoo (at page 231), the Executive Agreement at page 237 was executed at Gurgaon (at page 245) and the Executive Agreement at page 250 was executed at Espoo (at page 258).

Clause 11.2 of the Share Purchase Agreement provides for an arbitration under the Rules of Singapore International Arbitration Centre. It is submitted that on account of fraud committed by Defendants on the Plaintiffs, the Share Purchase Agreement is void and, therefore, the arbitration clause being vitiated by fraud is not enforceable. The reliance is placed on the judgment of the Hon''ble Supreme Court in the case of India Household and Healthcare Ltd. Vs. LG Household and Healthcare Ltd., .

The Plaintiffs have pleaded the occurrence of "Material Adverse Effect" in terms of financial health of Defendant No. 1. "Material Adverse Effect" is defined in Clause 1.1.38 of the share purchase agreement. The clause further provides that in the event of the parties being unable to agree upon occurrence of "Material Adverse Effect", reference shall be made to one of the two firms, namely, Deloitte and Grant Thronton, whose determination shall be final and binding. The Plaintiffs have not shown whether such a reference/determination has taken place in terms of Clause 1.1.38.

The Plaintiffs have pleaded in para 4.1 of the plaint that the value of the shares of Defendant No. 1 allotted to the Plaintiffs have reduced by almost 40% due to poor performance of Defendant No. 1. However, no material has been placed on record to show what was the value of the shares of Defendant No. 1 at the time of closing of the Share Purchase Agreement and the present value.

The Plaintiffs have further pleaded in para 4.1 of the plaint that they have suffered loss of control and management of the Indian company and have also lost the benefit of entire business/profits earned by Indian company apart from loss on account of ESOP and bonus. Defendant No. 1 is the owner of the entire shareholding of the Indian company having paid in cash for 67.5% shares and having swapped the remaining 34.3% shares of the Indian Company with the shares of Defendant No. 1. In that view of the matter, the Plaintiffs claim over the management, control and profits of the Indian company appears to be doubtful.

Clause 10 of the Share Purchase Agreement anticipates the breach of representations and warranties and also specifies the liabilities of the parties. However, for reasons best known to them, the Plaintiffs have not invoked Clause 10 of the Share Purchase Agreement.

In para 4.8 of the plaint, the Plaintiff has alleged that Defendant No. 1 is a paper company. However, no material has been placed on record to substantiate the same.

The Share Purchase Agreement was closed on 6th May, 2009 when the entire share holding of the Indian company was taken over by Defendant No. 1 by making cash payment of the Plaintiffs in respect of 65.7% shares and swapping the remaining 34.3% shares with the shares of Defendant No. 1. Simultaneously, Plaintiff No. 1 was appointed as Director on the Board, COO as well as President of Defendant No. 1 and Plaintiff No. 3 was appointed as Group CTO of Defendant No. 1 and they would have become aware of the financial health of Defendant No. 1. It is also admitted in the plaint that in the Board meeting in July, 2009, Defendant No. 1 became aware of the financial results of Defendant No. 1. The Plaintiffs rely on the financial report dated 4th February, 2010 for the period 1st January to 31st December, 2009 to show that the net sales in 2009 were significantly lower than in the previous year. The report mentions various reasons including global financial crisis for the lower results. The Plaintiffs expressed their concern in their e-mails dated 25th February, 2010 which were replied by Defendant No. 1 on 2nd March, 2010. The Plaintiffs thereafter did not make any communication till September, 2010. At no point of time, the Plaintiffs made no allegation or charge of fraud upon the Defendants. As per para 3.21 of the plaint, the Plaintiffs became aware that Defendant No. 1 intended to transfer cash reserves and intellectual property rights of the Indian company in April, 2010 and again in August, 2010.

It is not disputed that the swapped portion of the transaction relates to 34.3% of the shareholding of the Indian company whereas the Plaintiff has not quantified its relief to the extent of such percentage.

In the facts and circumstances of the case and considering the issues relating to both jurisdiction as well as facts, it would be appropriate to issue notice to Defendants No. 1 to 17. However, prima facie case for grant of ex-parte ad-interim injunction is not made out.

Issue summons in the suit and notice in the application to Defendants No. 1 to 17 by ordinary process, registered A.D. post as well as dasti, returnable on 21st February, 2011.

The observations made hereinabove are prima facie and nothing herein stated shall be considered as the expression of opinion on the merits of the case.