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==Moot problem in 2010-11==
 
==Moot problem in 2010-11==
The moot problem for the Competition can be found on the University website or may be downloaded from [http://www.nludelhi.ac.in/pdf/mootproblem.pdf here].
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[http://www.nludelhi.ac.in/pdf/mootproblem.pdf]
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BEFORE THE COMPANY LAW BOARD BENCH, NEW DELHI
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(Company Petition No. 2005 of 2010)
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In the matter of:
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Mr. Nandan Shah ……… Petitioner No. 1
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Mr. Ashok Kumar and other minority shareholders ……… Petitioner No. 2
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Versus
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Mr. Akhil Rao and other nominees of EBIL …….. Respondent No. 1
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Tropical Formulations Limited …….. Respondent No. 2
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Facts:
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1. Tropical Formulations Limited (TFL) is a company limited by shares, incorporated under the
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Companies Act, 1956 on January 17, 1999 and having its registered office at No. 14/1,
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Business Arcade, KJ Road, New Delhi – 110 007. TFL is listed on the Bombay Stock
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Exchange (BSE) and the National Stock Exchange (NSE), where its stocks are frequently
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traded. The main realm of its operations consists of the manufacture and sale of fruit juices
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packaged in tetra-packs, plastic bottles and cans (Business), under the brand-name ‘Surreal’.
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TFL engaged several famous cine actors, sports persons and models to endorse its products,
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and annually distributed about 50,000 units of its products to orphanages and destitute homes
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as part of its obligations under corporate social responsibility. Surreal was increasingly
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getting popular among the youth and adults alike, and as a result, TFL had the largest share in
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the Indian food and beverage market segment.
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2. TFL was broadly and substantially controlled by 2 (two) groups of shareholders, who were
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also the promoters of the company (Promoters) – Mr. Nandan Shah alongwith relatives
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(collectively, Shah Group) and Mr. Akhil Rao alongwith relatives (Collectively, Rao Group)
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– jointly holding around 58% of the equity share capital in the company, in equal proportion.
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These 2 groups had entered into and executed a mutual collaboration agreement (MCA) in the
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year 2002, pursuant to which 3 individuals nominated by each of the parties were appointed
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to the board of directors of TFL (Board), in addition to the independent directors as required
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under the BSE Listing Agreement. The provisions of the MCA were duly incorporated in the
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articles of association of TFL (Articles).
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3. Under the terms of the MCA, Mr. Nandan Shah was appointed the Managing Director while
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Mr. Akhil Rao was elected to act as the Chairman of TFL. In addition, the parties to the MCA
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had agreed as follows:
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Section 11: From and following the expiration of the closing hereof, the Shah Group shall not
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transfer any of the shares held by them in TFL without first offering such shares (ROFR
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Shares) to the Rao Group, by giving them an advance notice (ROFR Notice) at a price per
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share set out therein, which shall be the higher of a mutually agreed upon price or the price
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determined in accordance with the applicable law (ROFR Price). The Rao Group or its
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representative/ nominee shall remit the ROFR Price to the Shah Group which shall
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simultaneously transfer the ROFR Shares to Rao Group or such representative/ nominee.
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Subject to the receipt of all requisite approvals under the applicable law, the sale and delivery
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of the ROFR Shares shall be consummated within 15 days from the receipt of the ROFR
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Notice, subject to the provisions under the applicable law.
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The aforesaid process shall apply mutatis mutandis to a transfer by the Rao Group, vis-à-vis
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the Shah Group.
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Section 17: Until such time that any party’s equity shareholding in the company does not fall
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below 14%, the decisions by the Board in the following instances shall be passed by a
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majority of directors; provided however that, such majority comprises of the affirmative vote
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by at least 1 (one) nominee of each of the parties:
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(a) Any single item of capital expenditure by the company, beyond Rs. 50,00,000/-;
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(b) Any transfer of equity interests of 5% or more of the company’s paid up capital to any
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third parties and the terms and conditions thereof;
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… Among others.
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Section 25: This Agreement shall automatically terminate upon a change in control of the
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company.
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4. EffBee Limited (EBL) is another company limited by shares, incorporated under the [Irish]
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Companies Act, 1963 on April 18, 2001 and having its registered office in Dublin. EBL is
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known world-over for its food and beverage products, sold under the common chain-name of
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‘HungerKiller’. In the month of January 2010, the management of EBL noted that the
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company had a considerably low profit margin in the Indian market, where although its
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products were marketed with the help of leading national entities, the revenues did not match
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the desired levels. A full-fledged survey accompanied with a commercial due diligence was
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undertaken, as a result of which it was revealed that the Indian consumers were more inclined
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to purchase the locally manufactured products. Accordingly, EBL set up a wholly-owned
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subsidiary in India under the name of EffBee India Private Limited (EBIL), with its registered
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office located at No. 27/D, The Wave Plaza, Noida (U.P.) – 201 301. The main objects under
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EBIL’s memorandum of association comprised manufacture, storage and supply of biscuits,
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preserved cakes and other related confectionary items. EBIL’s market for its products,
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distributed under the brand name ‘Biscakes’ was fairly widespread in India and was
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concentrated among the school children. EBIL deployed several advertising campaigns with
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the fair use of copyrights owned by producers of famous cartoon characters world over.
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5. To improve its profit margins and deploy its surplus distributable reserves, EBL decided to
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buy a substantial stake in TFL through EBIL by way of downstream investment, and
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consequently executed a share purchase agreement with the Promoters (SPA) on April 20,
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2010, pursuant to which EBIL would buy shares representing in the aggregate 32% of equity
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share capital of TFL, from the Promoters (out of which 18% would be purchased from the
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Rao Group) for a mutually agreed upon consideration (Consideration). In addition, as
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required in terms of the provisions of Securities and Exchange Board of India (Substantial
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Acquisition of Shares and Takeovers) Regulations, 1997, as amended, EBIL would conduct a
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public open offer for Twenty-Five per cent (25%), conditional upon the acquisition of at least
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22% of the issued and paid-up equity share capital of TFL, at a price determined in
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accordance with the applicable law. Other salient points as contemplated under the SPA are
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set forth below.
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As part of the Conditions Precedent to the Closing:
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Section 4.5: The Promoters shall have executed and delivered all such consents as may be
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required under its charter documents and taken all such actions to allow EBIL to nominate its
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representatives for appointment to the Board in accordance with law, once EBIL has
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deposited 100% of the consideration in the Designated Escrow Account.
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Section 4.9: There shall not have been or occurred any event, change, occurrence or
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circumstance that, individually or in the aggregate with any other events, changes,
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occurrences or circumstances, has had or could reasonably be expected to have a Material
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Adverse Effect.
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In respect of the aforesaid, “Material Adverse Effect” would mean an effect on: (1) the value
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of the Business, such that the value is reduced by an amount equal to or more than 15% of the
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Consideration; or (2) the Business, such that either the prospects or the future cash flows of
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the Business are affected by an amount equal to or more than 15% of the Consideration,
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including, but not limited to, for example, in the event that TFL is blacklisted by any
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governmental authority.
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As part of the Mutual Covenants:
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Section 7.1: The Promoters shall cause their nominees to vote in favour of the resolutions
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tabled before the Board at the first and the second Board meetings in respect of appointment
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of the EBIL nominees to the Board, among other matters.
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Section 7.5: For a period commencing the closing date and until the fourth anniversary
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thereof, the Promoters shall not, directly or indirectly through any other person, own, manage,
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operate or control or participate in the ownership, management, operation or control of any
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business, whether in corporate, proprietorship or partnership form or otherwise) any business
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that competes with the Business in India or abroad. The parties specifically acknowledge and
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agree that a remedy under applicable law for any breach of the foregoing will be inadequate
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and that EBIL, in addition to any other relief available to it, shall be entitled to temporary and/
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or permanent injunctive relief without the necessity of proving any actual damage.
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In addition to the above, the Letter of Offer stated that the acquisition will not result in
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change in control of the company.
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6. Following the closure of the public offer and consummation of the transactions contemplated
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under the SPA, EBIL held 56% of the equity capital in TFL. On June 4, 2010, TFL passed
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certain board resolutions by majority: one ratifying a supplemental letter agreement (SLA)
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pursuant to which certain additional shares held by the Rao Group (representing in the
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aggregate 6% of the paid up capital of EBIL) would be transferred in favour of EBIL and Mr.
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Akhil Rao would be appointed as an additional director in EBIL; and the other pertaining to
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disposal by sale and conveyance of certain immoveable properties (land, building and
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permanent fixtures thereon) owned by the Rao Group to EBIL, whereby EBIL could achieve
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economies of scale and scope by investing in and utilizing TFL’s existing infrastructure for
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expansion of its business. The nominees of the Shah Group negatively voted in respect of
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these resolutions.
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7. Mr. Nandan Shah filed a company petition before the Hon’ble Company Law Board at New
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Delhi (CLB) on August 25, 2010, challenging the legality of the resolutions passed at the
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meeting of the Board, as aforesaid. He further alleged fraudulent practices and breach of
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fiduciary duties by certain directors on the Board, particularly the nominees of Rao Group and
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EBIL. In addition and shortly thereafter, as the SPA came into operation and EBIL began
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taking an active role in the operations of TFL, Mr. Ashok Kumar alongwith certain other
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individual shareholders in TFL (collectively holding 11% of the paid up capital of TFL),
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complained of oppression and mismanagement in TFL, and also challenged the validity of the
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MCA as also the transfer of shares by Promoters in favour of EBIL, consequent to the SPA.
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8. The CLB, in view of common issues involved in the aforesaid 2 (two) petitions, decided to
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club them up and called for evidence on submissions advanced by Mr. Nandan Shah and Mr.
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Ashok Kumar. A written statement was filed by Mr. Akhil Rao, and after several hearings, the
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matter has now been posted for the final hearing on [November 27, 2010]. The petitions
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contained averments which include but are not limited to, the following:
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 Section 7.1 of the SPA was not permissible under the Companies Act and therefore,
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the board resolutions passed on June 4, 2010, were non-est and did not bind TFL;
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 TFL was not bound to register the transfer of additional shares by the Rao Group, in
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terms of the board resolution passed on June 4, 2010;
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 The provisions of the SLA were in breach of section 7.5 of the SPA;
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 The MCA had automatically terminated owing to change in control of the company;
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 The nominees of the Rao Group and EBIL had not acted in the best interests of TFL,
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and were consequently in breach of their fiduciary duties;
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 Section 11 of the MCA was in violation of the Companies Act.
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Based on the above, the petitioners have prayed for appropriate direction(s) and/or order(s) be
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issued in respect of the above. Further, the petitioners have requested that the Respondents
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herein be declared guilty of mismanagement and oppression in TFL, and that the TFL open
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offer be re-conducted.
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{{Moots}}
 
{{Moots}}

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