Wednesday, January 30, 2013

U.S. Ruling on Investment Banker Liability in M&A

Last week, a jury in Boston rejected a claim against Goldman Sachs in its role as investment banker to the sale of Dragon Systems Inc. The deal involved a sale of Dragon to Belgian company, Lernout & Hauspie, in consideration for which Lernout & Hauspie issued its own stock to Dragon’s shareholders in an all-stock deal. The trouble was that the acquirer, Lernout & Hauspie, soon became mired in a fraud and then filed for bankruptcy leaving the selling shareholders with nothing of value from the deal.

Among others, Dragon’s founders sued Goldman Sachs, the investment banker on the sell side for breach of duties. However, the jury was not persuaded about the claim because the Dragon itself appeared to be keen to close the deal in a speedy manner and ignored some red flags.

More details and analysis of this verdict are available at:

This episode provides numerous lessons on M&A deal-making, including the process for appointment of investment bankers, negotiating the terms of the engagement and also running a tight ship while negotiating an M&A deal so that red flags are not missed that return to haunt a failed deal later.

Sunday, January 27, 2013

Inter Se Promoter Exemption for Takeovers: Computation of Holding Period

A few days ago, SEBI made public its informal guidance issued to Weizmann Forex Ltd. on October 25, 2012. In this case, the target company became listed only in 2011 due to a corporate restructuring process. The question was whether certain shareholders can avail of the exemption for inter se promoter transfer by taking into account the promoter holdings in the previous company from which the business was restructured into the target. Qualifying for the exemption requires that both the transferor and transferee should have been disclosed as promoters of the target company for at least 3 years. SEBI adopted a purposive interpretation to answer in the affirmative thereby making the exemption available in that case even though the parties did not technically satisfy the condition.


The relevant facts can be gathered from the company’s request to SEBI. Weizmann Forex Ltd., the target company was previously an unlisted company with the name Chanakya Holdings Ltd. As part of an overall restructuring of the Weizmann group, which involved many other legs that are not directly relevant for our present purposes, the forex business of Weizmann Ltd. (the demerged company), being a listed company, was demerged into Weizmann Forex Ltd. (the resulting company). As part of this restructuring process, Weizmann Forex’s shares were listed on the stock exchanges. The promoters of Weizmann Forex intend to transfer certain shares of Weizmann Forex among themselves and hence approached SEBI for informal guidance.

Under Reg. 10(1)(a)(ii) of the SEBI Takeover Regulations, there is an exemption from a mandatory open offer for transfer of shares inter se among qualifying persons being “persons named as promoters in the shareholding pattern filed by the target company in terms of the listing agreement or [the takeover] regulations for not less than three years prior to the proposed acquisition.”

In the present case, none of the proposed transferors of shares were able to satisfy the requirement of being named as promoters in Weizmann Forex as they acquired shares in that company only under the restructuring process. However, if their shareholding in the demerged company (Weizmann Limited) were taken into account for the purpose of computation of the 3-year period, they would satisfy the requirement. Similarly, the transferees too were unable to satisfy the 3-year period of being named as promoters in Weizmann Forex. While one of the transferees held shares for a 3-year period across the two companies (similar to the transferors), the other transferee did not satisfy the 3-year period across two companies (on a combined basis) either.

The issue for SEBI’s consideration was whether, given these facts, the proposed transfer of shares among promoter was exempt from the mandatory open offer requirements under Reg. 10(1)(a)(ii).

SEBI’s Informal Guidance

In interpreting the Takeover Regulations, SEBI considered the 3-year holding period of the transferors and transferees by looking at their holdings on a combined basis in Weizmann Ltd. and Weizmann Forex Ltd. even though they may not have satisfied the requirement strictly with reference to Weizmann Forex Ltd., which is the target company.

Moreover, as far as the transferees are concerned, SEBI’s guidance goes one step further. Even though one of the transferees has not satisfied the 3-year holding period requirement, the exemption has been made available to it. SEBI reasons as follows: “The condition of 3 years shareholding by the transferees prior to the proposed acquisition would be deemed to be fulfilled in case all the transferees collectively hold shares for a period of 3 years prior to the proposed acquisition provided the other conditions for availing the exemption are fulfilled.”


In interpreting the Takeover Regulations, SEBI had adopted a purposive approach in making the exemption available to the parties, as opposed to a literal or technical approach that may have denied this facility to the parties. By taking into accounting the shareholding of the parties in the demerged company, necessary consideration has been placed on the demerger transaction, which is essentially a restructuring of businesses and shareholdings as opposed to a complete transfer or sell-out of the business. In other words, it is considered a purely internal group restructuring.

Such an approach is not unusual. For instance, the Income Tax Act, 1961 considers such demerger transactions (provided certain other conditions are satisfied) as a restructuring (rather than a pure sale) and confers certain benefits in terms of exemptions from capital gains tax. More specifically, for the purpose of computing the holding period, the period of shareholding by a shareholder in the demerged company will be considered at the time of sale of shares in the resulting company. The present interpretation of SEBI brings the holding period under the Takeover Regulations on par with such a regime, which is understandable in the context of restructuring transactions and the purpose of the holding period for purpose of exemption under the Takeover Regulations. The only difference is that the Income Tax Act expressly provides for such treatment, while under Takeover Regulations it is only by virtue of the interpretation adopted by SEBI in this case.

However, in the case of the transferee, to the extent that SEBI finds that all the transferees may collectively satisfy the holding period requirement, it is perhaps providing a fairly liberal reading. This seems to suggest that where there is a group of transferees, it might be sufficient if one or more of the transferees satisfy the holding period requirement, and it is not necessary for each one of them to satisfy it. This might provide greater options to structure transfers that may avail of the inter se promoter exemption. At the same time, it may be argued that this is too much of a stretch of the Regulations, and could be subject to potential misuse.

Thursday, January 24, 2013

Developments on the GAAR

The Shome Committee recently released its final report, which can be downloaded from this link. (We had discussed the recommendations of the earlier report on this blog, here.) Following this, the Ministry of Finance has clarified that some of the recommendations of the Committee will be implemented by means of suitable amendments to the provisions as presently enacted. It appears that the Government has decided that the implementation of the GAAR will be delayed, so that the provisions come into force from April 1, 2016. Among the other key decisions taken by the Government are the following:

The definition of an impermissible avoidance arrangement will be amended, such that only those arrangements will fall within the scope of the provision which have “the main purpose” (as opposed to “the main purpose or one of the main purposes”) of obtaining a tax benefit.

The Constitution of the Approving Panel has been modified, and the Panel shall consist of one retired High Court Judge, one IRS officer not below the rank of Chief Commissioner, and one expert academician or scholar having expertise in direct taxes, accounts or international trade.

Directions issued by the Approving Panel shall be binding on the assessee as well as the Income-tax authorities (as opposed to the current provision that the directions shall be binding only on the Income-tax authorities).

The Approving Panel will be permitted to consider, amongst other factors, “the period or time for which the arrangement had existed; the fact of payment of taxes by the assessee; and the fact that an exit route was provided by the arrangement.” These factors may be relevant but will not be sufficient to determine whether the arrangement is an impermissible avoidance arrangement.

Investments made before August 30, 2010 will be grandfathered, and protection is provided to FIIs and non-resident investors in FIIs

The implications of the Finance Ministry’s decisions have been discussed in several articles, including those in the Business Standard, and the HinduBusiness Line.

Wednesday, January 23, 2013

Legal advice privilege for tax advice given by non-lawyers

One of the striking changes in professional advice over the last two or more decades is the gradual erosion of the monopoly which members of the legal profession once had in giving legal advice. This, with the increasing importance of specialisation, has seen businessmen turn to members of other professions who are experts in particular fields that call for legal advice: for example, a chartered accountant advising a company about tax planning. In Indian law, section 126 of the Evidence Act recognises that legal advice given by a “barrister, attorney, pleader or vakil” is protected and it has been generally assumed (more below) that this privilege is not available to the same advice given by other professionals. Section 126, like many other Indian statutory provisions, is based on the common law in England.

In 2004, PricewaterhouseCoopers [“PwC”] developed a tax avoidance scheme in England and disclosed this to the Revenue (as it was required to do under the Finance Act, 2004). It advised one of its clients, Prudential plc, that it would benefit from using this scheme. HMRC ordered Prudential and PwC to disclose certain documents in connection with the scheme and the question was whether this could be resisted on the ground that the documents were protected by legal advice privilege [“LAP”]. On 23 January, 2013, the UK Supreme Court has declined an invitation (Lords Sumption and Clarke dissenting) to hold that the rationale for LAP makes it impossible to confine it to members of the legal profession. The lead judgment, given by Lord Neuberger (with whom Lords Hope, Mance and Reed agreed) recognises that there is a powerful case to be made in favour of extending LAP to members of other professions and indeed, that not doing so is difficult to defend in principle, but ultimately holds that this is a matter of policy that requires legislative intervention. The judgments of Lords Neuberger and Sumption repay careful study and this post does no more than summarise their reasoning, before describing the position of law in India. The issue is of considerable importance to companies, since it is not by any means uncommon, especially in areas like tax advice, to turn to eminent experts who are not members of the legal profession.

It is convenient to begin with the dissenting view. Lord Sumption makes a characteristically powerful case for jettisoning the widely held view that LAP is confined to members of the legal profession. In summary, he gives three reasons: (1) the rationale for LAP is not the status of the adviser, but his function. The classic judgments on the subject (notably that of Lord Brougham LC in Greenough v Gaskell) demonstrate that the privilege is recognised because a person should be able to obtain legal advice with absolute confidence that his disclosures to his adviser remain private. That the privilege has traditionally only protected advice given by a lawyer is a result of history, not concept: legal advice was rarely given by professionals who were not members of the legal profession; (2) the supposed justification for the contrary view—that lawyers are subject to stricter professional obligations and are more closely regulated by the courts—is unpersuasive, because the source of LAP is neither professional rules nor court supervision but candour in communication and (3) LAP has already been extended to salaried lawyers and foreign lawyers, which can be justified only on a functional approach to LAP. The obvious question is: does this mean that legal advice received from any person whatsoever is privileged? The answer is that it does not. Lord Sumption demonstrates that LAP is confined to advice received from a professional “whose profession ordinarily includes the giving of legal advice”: in other words, was the legal advice incidental to something else (for example, planning advice given by a builder) or was the legal advice itself the subject of the professional relationship? Thus, tax advice from a chartered accountant is privileged but legal advice received from a surveyor about planning rules may not be.

The majority of the Court differed less for reasons of principle than for the fundamental change Lord Sumption’s proposal would introduce into the law of privilege. Lord Neuberger held that the change involves a policy decision that is best left to Parliament, particularly because Parliament has already enacted legislation on the assumption that LAP is confined to lawyers. To Lord Sumption, Parliament’s assumptions about the common law are irrelevant unless the legislation is unworkable in the absence of the assumptions: which arguably it was not. Lord Neuberger also pointed out that the proposed qualification “profession which ordinarily includes the giving of legal advice” replaces a hitherto clear (if not entirely logical) rule with considerable uncertainty, because a court would have to establish what constitutes a profession, and whether to ascertain its ordinary activities at the level of the profession or the particular member of the profession. It is possible that these criticisms are somewhat overstated, especially if one accepts Lord Sumption’s answer that the difference lies in the purpose for which legal advice is given.

The position in India is not different. The courts have generally held that section 126 of the Evidence Act, 1872 and the provisions that follow are limited to members of the legal profession. In Vijay Metal Works AIR 1982 Bom 6, the Bombay High Court held that salaried employees are also covered, although they cannot be described as solicitors, barristers, vakils etc. In UK Mahapatra (2008) 2 OLR 970, the Orissa High Court held that client documents deposited with a chartered accountant are not privileged for the slightly odd reason that there is no “communication” by the adviser. However, the Law Commission recognised the problem in the 69th Report and recommended the insertion of a clause extending the provision to “legal practitioners” which could potentially include other advisers. Unfortunately, the Law Commission proposed to define this expression as those who are entitled to appear before the courts (thus, with respect, confusing the “candour” rationale for legal advice privilege with the forensic process of litigation) and the proposal was in any event never implemented. Even if the Indian courts are inclined to accept Lord Sumption’s analysis of the rationale for LAP, it is likely that any change would require legislation, especially since the Indian rule, unlike the English rule, is codified.

SEBI Investment Advisers Regulations – an overkill?

In continuation with earlier post on the recently notified SEBI(Investment Advisers) Regulations, 2013 (“the Regulations”), the following further points are worth noting.

1)     The Regulations apply to all Investment Advisers giving investment advice. They are required to register themselves with SEBI.

2)     The term investment advice has been defined to cover advice relating to securities and investment products. This covers a very wide range of products. Investment products may also cover even real estate, gold, etc., i.e., non-financial products. It appears from the Scheme of the Regulations though that the intention may not be to cover such non-financial products. However, every form of securities/investment products, including even bank deposits, national savings certificates, company deposits, etc. would be covered, apart from shares, derivatives, insurance products, mutual fund units, etc.

3)     The investment advice needs to be rendered for consideration in cash or in kind. It is not clear whether the intention is to cover only those Investment Advisers who accept consideration from their clients. From the wording of the Regulations, it appears that the consideration may flow from any person. If this is not the intention, then it will need clarification since otherwise many persons would inadvertently get covered by the definition of Investment Advisers.

4)     A person rendering such investment advice for consideration (in cash or in kind) is an Investment Adviser. However, there are several exclusions.

a)     Insurance brokers/agents registered with IRDA are excluded, provided they offer advice solely in investment products. Same for pension advisers. It is common to see advisers offering advise on a range of products and insurance, pension, etc. are part of such products.

b)     Distributors of mutual funds, stock brokers, sub-brokers, etc. are excluded provided that they give investment advice incidental to their respective primary activity.

c)      Similarly, professionals like CAs, CSs, ICWAs and lawyers are excluded if they given investment advice incidental to their respective professional service/practice. However, considering the wide definition of investment advice, professionals who specialise in financial advice generally may have to consider whether they are covered.

5)     Since the exclusions are specific, any other person who acts as investment adviser, whether full time or part time and whether gives advice generally even incidental to the financial products that he is distributing would be covered. Concern thus arises for persons who act as agents for small savings, company deposits, etc.

6)     Considering the fairly broad definition of Investment Advisers and the limited exclusions, it would appear that perhaps lakhs of persons operating in the financial markets as agents and the like may also get covered. However, it appears, from the history of these Regulations that the intention does not seem to cover persons already regulated by other authorities such as IRDA, etc. In particular, the intention may be to cover only those Investment Advisers whose primary or sole business to render investment advice for consideration. This, however, has not been brought out and a clarification is needed.

7)     Small investment advisers may face the elaborate requirements of registration and compliance of various requirements particularly cumbersome and costly. The Investment Advisers are required to obtain annual a certificate of compliance of Regulations. There are numerous other requirements/procedures some of which are similar to codes of conducts and some involve heavy documentation.

a)     The requirements of disclosure and documentation are so elaborate so as to be unrealistic, even if well intended. KYC documents of each client have to be obtained and kept. Risk profiling and risk assessment of every client has to be maintained in writing. The investment advice provided and rationale for it has to be documented. And so on. These requirements are quite unrealistic and even extraordinary. Even professionals like CAs, lawyers, etc. give various types of professional advice for consideration but they are not required to maintain such records in writing. It may be different if there are a few large clients for whom certain infrequent large transactions are advised on. For small and medium sized clients, this may be meaningless and they may end up implementing in a cursory/summary way.

8)     If, as expected, a very large number of Investment Advisers are covered and have to apply for registration, it will be a mammoth job for SEBI to register them, to keep track of them and to ensure that they comply with the elaborate requirements. And, as it is quite likely, there will be numerous non-compliances, small and big, and SEBI will have to spend time and energy in taking action. The question will whether such effort will be worth it and effective.

a)     There is a strong case for exempting Investment Advisers earning income below a certain limit. Else, assuming that the definitions are broadly applied, thousands of Investment Advisers may simply have to close down shop.

9)     There are valid complaints against many Investment Advisers. That they give biased advice to favor products where they get larger commission/fees directly or indirectly, that they take positions conflicting to their advice, that they act negligently without carefully considering what the client needs/risks. And so on. Thus, some sort of regulation was quite overdue. However, it appears that placing such elaborate but often vague requirements/formalities creates disproportionate costs and efforts on one hand but not being able to control such mal practices on the other hand.

10)   The requirements of basic qualification and specialized training/qualification are fair and it is obviously a must that only qualified, knowledgeable and trained people enter this field. Though not wholly clear, it appears that apart from the basic qualification, an additional certificate in the finance field is also required. A two year period is given for those who do not have such certification.

11)   Body corporates and firms who act as Investment Advisers need to appoint a compliance officer who would be responsible for compliance of the Act, these Regulations, etc.

It seems that SEBI will need to interact much more with Investment Advisers in the field and make a realistic assessment of the field, before bringing these Regulations into effect. 

Monday, January 21, 2013

Widely framed Investment Advisers Regulations released

SEBI has released today the SEBI (Investment Advisers) Regulations, 2013, to come into effect from the ninetieth day of their publication. While a more detailed post will follow, here are some first impressions.

SEBI has cast a very wide net, almost amounting to an overkill. 

Every Investment Adviser, as defined, will be required to register with SEBI to carry on business of providing investment advice. What constitutes investment advice has been widely defined to mean, "advice relating to investing in, purchasing, selling or otherwise dealing in securities or investment products, and advice on investment portfolio containing securities or investment products, whether written, oral or through any other means of communication for the benefit of the client and shall include financial planning".

There are several exceptions to the term Investment Advisers. Insurance Agents/brokers who offer investment advice solely in insurance products and registered with IRDA are not covered. Similar exemption for Pension Advisers is granted. Mutual Fund distributors are also given exemption subject to certain conditions. Professionals CAs, CSs, ICWAs and Advocates providing investment advice incidental to their professional services are also not covered. 

Still, even considering these exemptions, the number of investment advisers is likely to be huge.

Each of such advisers will have to apply and obtain registration. Existing Investment Advisers have 6 months from the Regulation coming into effect to apply and if they do not, they will have to discontinue their activity. New Investment Advisers will have to apply for and obtain registration as a pre-condition of carrying on such activity.

There is no minimum threshold limit of advisory fees or similar for applying for registration. Every such Investment Adviser will have to apply. SEBI thus has taken upon itself this massive job of scrutinising every such application and granting (or rejecting) registration. And this is only the starting. After granting registration, it will have to monitor each of such Advisers as to whether they follow the Regulations/Code of Conduct (again very widely framed) or not. There will expectedly be a large number of allegations of non-compliances - some arising out of SEBI's own inspections, investigation and information and many arising out of investor complaints. SEBI will have to process each of these and take action. This would perhaps have scared any regulator already burdened otherwise. 

Each such Investment Adviser will need to have prescribed qualifications/training and also the minimum net worth.

One-time application fees and recurring registration fees will also have to be paid.

A follow up article will discuss some more aspects of these Regulations.

SEBI’s Recent Securities Markets Announcements

Last week, SEBI took certain decisions in the form of minor reforms to the securities markets, both primary and secondary.

As part of a process that began nearly 3 years ago, SEBI has further liberalized the process for dilution of promoter shareholding in listed companies, since a deadline of June 2013 has been set to ensure minimum level of public shareholding in listed companies. This time, some measures have been adopted to make the “offer for sale through stock exchange mechanism” more efficient. While such measures may make such options more attractive, it is not clear if SEBI’s objective can be achieved within the timeframe given that several companies are yet to comply with the minimum public shareholding norms. It looks likely that SEBI’s enforcement mechanism and its determination in ensuring compliance will be put to rigorous test in a few months.

Some changes have also been suggested to SEBI’s Takeover Regulations that were promulgated in 2011. Several of them are clarificatory in nature or intended to address discrepancies or the lack of clarity that was experienced ever since the new regulations came into effect. However, one of the long standing critiques of the Takeover Regulations pertaining to their lack of appropriate fit with the delisting process has not been addressed in this round despite assurances from SEBI to relook at this issue.

Another announcement that came last week relates to the implementation of the curbs imposed on acquisition of shares by employee trusts in the secondary markets. SEBI’s decision and rationale were analyzed previously (here). Therefore, now any form of employee stock option or share purchase scheme must necessarily involve the issue of new shares from the company.

Thursday, January 17, 2013

Service of Notice on Parties to an Indian Arbitration

In Benarsi Krishna v Karmayogi Shelters, the Supreme Court has decided that the word “party” in section 34 of the Arbitration and Conciliation Act, 1996, does not include a party’s agent. This, it is respectfully submitted, is incorrect or, at best, too widely stated. The important practical consequence of this proposition is that the period of limitation does not begin to run from the date of service on counsel. Since it is well-known that a Court has no power to condone a delay beyond the limit imposed by section 34 and its proviso, the exact date on which the period of limitation begins to run is of immense significance in arbitration law.

First, the facts: the claimant in the arbitration instituted proceedings for the breach of a collaboration agreement and obtained a successful award from a single arbitrator. This award was served on counsel for the respondent on 13 May, 2004. An application was filed to set aside this award on 3 February, 2005—plainly time-barred, if the date of receipt of the award was the 13th of May. Accordingly, a single judge of the Delhi High Court dismissed the petition. The Division Bench set aside this order, relying on the judgment of the Supreme Court in Union of India v Tecco Trichy Engineers, on the basis that service of the award had not been properly effected.

In considering this problem, it is important to carefully distinguish between two arguments: first, that the word “party” in section 34 excludes agents; and second, counsel has neither actual nor apparent authority to accept service. The first is a point of statutory construction, but the second calls for the application of well-known (if contentious) principles of the law of agency. The Supreme Court has, with respect unfortunately, accepted the first submission. In other words, it has held that the word “party” is defined as one who is party to an arbitration agreement and, as a matter of construction, does not include counsel. The following observations of the Court should be studied closely:
The expression "party" has been amply dealt with in Tecco Trechy Engineer's case (supra) and also in ARK Builders Pvt. Ltd.'s case (supra), referred to hereinabove. It is one thing for an Advocate to act and plead on behalf of a party in a proceeding and it is another for an Advocate to act as the party himself. The expression "party", as defined in Section 2(h) of the 1996 Act, clearly indicates a person who is a party to an arbitration agreement. The said definition is not qualified in any way so as to include the agent of the party to such agreement. Any reference, therefore, made in Section 31(5) and Section 34(2) of the 1996 Act can only mean the party himself and not his or her agent, or Advocate empowered to act on the basis of a Vakalatnama.
[emphasis mine]
With respect, it is submitted that this conclusion contains two errors. The first is the contrast between an Advocate acting “for” the party and an Advocate acting “as” the party. This is a distinction without a difference unless one concludes that the word “party” in section 34 contemplates personal service—which was the issue before the Court. In other words, the first reason cannot be a reason for the conclusion that the word “party” excludes agents: it begs the question. The second reason given is that the word “party” is not qualified by Parliament to exclude agents. This, with respect, is a questionable proposition of law: the general rule of law is that a principal is bound by the acts of an agent and, with in relation to notice requirements, has been codified in the Companies Act and the Code of Civil Procedure. It is difficult to imagine that the Court intended every use of the word “party” in the Arbitration Act to refer to the party excluding its agents and yet the language in which its conclusion is expressed makes it difficult to resist this inference. Nor is this a surprising rule: when banks, for example, pay our electricity bill in accordance with a standing instruction, our debt to the Electricity Department is discharged because the law of agency treats the bank as our agent in relation to third parties, although it is our debtor with respect to the money it holds. For the same reason, a payment to our bank discharges a debt owed by any third party to us: the bank is our collecting agent. If a statute used the word “party” or “person” and defined certain legal consequences, it is therefore difficult to suppose that the word was intended to exclude agents.

In addition, one is bound to ask: what of legal entities? It is well-established law that a company acts through the deeds of human beings some of which are treated, by primary or secondary or other rules of attribution, as the acts of the company. In an outstanding judgment in Meridian Global, Lord Hoffmann explained that it is therefore misleading to talk of the company in anthropomorphic terms: the correct analysis is that the acts of certain persons are treated as the acts of the company by virtue of rules of law. These rules of law include rules of attribution and rules of agency. It is, in other words, impossible for a company to act (in the eyes of law) except through the acts of human beings whose acts are, by virtue of applicable rules of law, treated as its acts. It is difficult to reconcile this with the Supreme Court’s conclusion that service on the “party” excludes service on its agents. No doubt it will be suggested that there is a difference between “external agents” (like lawyers) and the company’s own agents (like the legal manager or CEO). That suggestion would be incorrect, because there is no difference at all in the eye of the law between external agents and internal agents: both are agents, albeit constituted differently and with different levels of authority.

The question, ultimately, is not whether the word “party” can include agents, for it plainly does, but whether the agent had authority to accept service. The authority of solicitors and counsel has always proved troublesome, generally in the context of settlement: in Waugh v HB Clifford and Sons [1982] 1 Ch 374, the defendant builder, who had instructed solicitors to settle a dispute with his customers by purchasing their houses, withdrew those instructions and told them not to settle. Unfortunately, this information did not reach the solicitor handling the case until after he had (subject to the question of authority) concluded a binding contract of settlement. Brightman LJ held that a solicitor have apparent authority to settle a dispute provided the terms of the settlement do not involve anything “collateral” to the dispute for which he was instructed. This, with one exception, echoes the analysis of a leading Indian decision: Surendra Nath v Tarubala Basi AIR 1930 PC 158, where the Privy Council held that a counsel has implied and apparent authority (arising from knowledge of implied authority) to compromise suits, but expressly declined to rule on whether this is the case where the agency is created by a written instrument, such as a vakalatnama.

The important question in this case—which was unfortunately not decided—was the scope of a counsel’s authority to accept service of an award. The question falls to be decided by asking the two usual questions: was there actual express/implied authority? If so, the matter ends there. If not, was there apparent authority? This would ordinarily arise from the existence of implied authority but would exist even if the implied authority did not exist in the particular case (for example, because of a prohibition not communicated to a third party). The added complication is the question of whether the claimant in the arbitration is entitled to ostensible authority with respect to an award sent to the defendant’s counsel by the arbitral tribunal, and whether authority, if any, exists after the arbitration is concluded. The Court records that one of these contentions was raised, but did not, in the result, have to rule on any because of the view it took on the meaning of the language of section 34(4).

The final point that should be made is about the reliance on Tecco Trichy: that was a case in which Lahoti CJ held that service on an unknown clerk in a large Government office does not constitute effective service. This conclusion can be ascribed to the traditional authority-based reasoning: such an employee is unlikely to have actual or ostensible authority to accept service. It should not be treated as authority for the general proposition that service excludes all agents, whatever their authority.

Tuesday, January 8, 2013

Dismissal of Suit Against Satyam Directors

Last week, there was coverage in the financial press about the dismissal of a securities law suit by a New York court against the independent directors of Satyam. Now, a copy of the order dated January 2, 2013 issued by Judge Barbara Jones of the Southern District of New York is available through D&O Diary, which also carries a detailed analysis of the opinion.

The shareholder suits failed on two counts, one procedural and the other substantive. On the procedural count, it was found that on an analysis of the principle laid down by the US Supreme Court in Morrison, the plaintiff shareholders’ claim is to fail because they either bought shares on an Indian stock exchange or exercised employee stock options which was said to have taken place in India. In other words, the New York court was unable to exercise jurisdiction. On the substantive count, it was found that the shareholders’ claim against the independent directors of Satyam was not sustainable because the claims concern an “intricate and well-concealed fraud perpetrated by a very small group of insiders and only reinforce the inference that the [independent directors] were themselves victims of the fraud.”

Although the evidence of successful personal actions against independent directors even in the US is limited, this court ruling would provide some source of comfort to independent directors who are usually concerned about personal liability for actions that are beyond their control. 

Monday, January 7, 2013

SEBI’s Proposal to Overhaul Corporate Governance Norms

SEBI has issued a consultative paper that reviews corporate governance norms in India with a view to overhauling them considering developments in the Indian corporate sector over the last few years. The paper is quite detailed and is expected to generate a great amount of discussion, which would be considered by is SEBI before implementing any revised norms. Suggestions are due on the consultative paper by January 31, 2013.  The purpose of this post is not to consider the detailed recommendations in-depth, but to simply provide some broad observations that would set out the context for a more detailed analysis.

Clause 49 of the listing agreement has been the mainstay of corporate governance in India for more than a decade. Although such norms are expected to be dynamic in nature and consistent with the ever-changing corporate scenario, clause 49 was previously subject to detailed review way back in 2004, even though the revised norms came into effect only in January 2006. Since then, despite significant developments such as the Satyam corporate governance scandal, there was no review of clause 49, and no concentrated efforts were undertaken by SEBI. However, most of the changes or proposals came from the Central Government. Notable among them are the Ministry of Corporate Affairs’ voluntary guidelines of 2009, and substantial insertions on corporate governance issues in the Companies Bill, 2011, which has been approved by the Lok Sabha and is awaiting consideration by the Rajya Sabha. There has been a fear that such a multiplicity in the regulatory process would cause considerable inconsistency between the various regulations regarding corporate governance that have been issued by different regulators.

Given this background, SEBI’s proposals seek to achieve two broad objectives: (i) to bring the provisions of clause 49 on par with the proposals made in the Companies Bill, 2011; and (ii) to make additional recommendations that impose a more stringent regime for listed companies.

On the first count, the consultative paper sets out a detailed comparative analysis of clause 49 and the Companies Bill, 2011, and makes proposals for ensuring parity in the two regimes. It also contains a detailed comparative table, which provides a useful tool to understand the various corporate governance norms in India. Of course, on certain matters the proposed changes go beyond the Companies Bill in the case of listed companies, which is understandable given the large shareholder population in such companies. The proposals, however, proceed on the assumption that the Companies Bill will become operational soon. In case there is any delay on the passage of the Bill, it is necessary to ensure that SEBI’s proposals will be given effect to nevertheless.

On the second count, the consultative paper makes some additional recommendations, which are welcome. As some of us have argued in the past, the current governance norms in India have been borrowed from Western jurisdictions where the corporate structure consists of diffused shareholders with no concentration of shareholding. However, the corporate structure that is predominant in India consists of controlling shareholders.  Given the mismatch of corporate structures, it was argued that the current governance norms do little to protect the interests of the minority shareholders. This critique has been given the required attention in the current round of reforms, with proposals specifically being made to address the corporate structure that is replete in Indian companies. Examples of these proposals include minority shareholder participation in the election of independent directors, detailed treatment of related party transactions, and the like. The proposals on this account are fairly radical, and it remains to be seen how much of it will actually be accepted given that there is likely to be tremendous resistance to greater power to minority shareholders to the diminution of power of the controlling shareholders. The novelty of these proposals lies in the fact that this issue has now emerged to the forefront for discussion and deliberation.

There is certainly a lot in the consultative paper, and if accepted, many of these proposals could result in significant change in the manner in which companies are governed. At the same time, it is important to note that such norms would become effective only if they are properly implemented and enforced by the regulatory authorities.