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| | ==Moot problem in 2010-11== | | ==Moot problem in 2010-11== |
| − | [http://www.nludelhi.ac.in/pdf/mootproblem.pdf] | + | 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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| − | 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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| − | | |
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| | {{Moots}} | | {{Moots}} |
