Chapter B3

Rule 3: The Occupation of the Field

If you are fond of war movies, you know it doesn’t take too many men to defend a hilltop. There are two reasons for this. First, your enemy is shooting up and you are shooting down meaning that at worst, you may have to duck from time to time but you can blow his brains out! The main thing though is that he doesn’t get to see you till you peek over the side. You can see him crawling up all the time and he is far more exposed than you.

There is another second reason too: you control the battle. What do I mean by that? He can keep shooting but if you decide not to stick your head out over the side, all his bullets are completely useless. On the other hand, when you start shooting down, he has the lead flying all over the place no matter how much he grovels behind the rock. This means that you can start or stop shooting whenever you want and there’s not a lot he can do about it but cower behind cover. For this reason, the first fundamental objective of every soldier has always been to quickly occupy the ‘commanding heights’ of the battlefield as battle preparations begin. This is also true of legal wars.

Let’s take a simple case. In the civil court, a great many cases begin with an attempt to get an ‘ex parte stay order’. What’s that you may ask? Ex parte is a sexy Latin gobbledygook way of saying that the court doesn’t hear the other side before giving you the order you want. Stay order means some sort of orders restraining your opponent from doing something or not doing something. In short, the court hears your story, believes you and passes the order stopping your opponent’s plans in its tracks. Now, your opponent can come and convince the court that you weren’t telling the whole story or that the court should have had some other consideration in mind when it passed that ex parte order.

How does this work out in practice? I agreed to sell you my house for Rs One Crore. You pay me Rs Ten Lakhs advance and sign an agreement with me. Meanwhile, I find someone else willing to pay a higher price. I try to return your money. Alarmed, you rush to your lawyer. If your lawyer doesn’t do something immediately, I will sell the property to this third party and then you can spend the next 20 years trying to get your money back from me. Very likely, your lawyer goes to the court and gets a stay order stopping me for selling the property to someone else. It’s true that stopping me from selling to someone else doesn’t mean that you get my property or your money back immediately. The law will still take its own course and a long lazy course that is too, lazy like a boat trip to China.

The main thing to understand here is that before you go to court, I hold the high ground. I have the property and your money, and all you have is an agreement that will take you 20 years to enforce through a court. I can sell my property to a third party and use your advance of Rs. 10 Lakhs to pay my lawyer to fight any case you may file against me. As the situation would stand at this point, you would have financed my defense of the litigation against yourself! Clearly, you are on really low ground.

But if you go to court and get a stay order, everything changes. Now I have the property but I can’t sell it to anyone else. I have your money its true but because I can’t sell the property to anyone else, what you’ve done is “booked” the property for the price of the advance. So your stake in the property is ten lakh and my stake in it is One Crore.  You don’t have to do anything for the next twenty years! Even if the court asks you to deposit the total sale price in court, you still earn interest on the deposit while the case goes on. If I am determined not to sell the property to you, we really could end up in a situation where the property price will keep rising and neither of us will be doing anything except fighting a very slow-moving case. Meanwhile property prices will rise exponentially. My original aim was to sell the property but I can’t sell it now and all I have to show for it is Rs. 10 Lakhs and one case. You can say that I am not sitting on high ground any longer. On the contrary, you are on higher ground.

Consider what happens next. After the excitement of the first few months or maybe some years from now, you and I will be fed up and will have a conversation. I will probably say to you “Look you agreed to purchase the property for One Crore. The property is now worth five Crores. How about you taking two Crores from me and giving up your claim”. On the other hand, you may say to me “I purchased it for one and its worth five so how about you selling it to me for three Crores?” If we can’t agree, I am stuck with a property I can’t sell and you have me on hot coals on an investment of Rs. 10 lakhs and your lawyer’s fees. This kind of situation is pretty common.

So, to close the loop on this point, getting an ex parte stay order is the same as occupying high ground and becoming the “master of the terrain”. The rule that flows from this is simple enough. At the start of every fight, both guys in the fight must race to get the natural advantage of “higher ground”. If you manage to get to the higher ground, your enemy will do everything in his power to dislodge you a.s.a.p.: it’s your job to hang on to it as best you can. This principle applies to simple cases as well as complex corporate battles. For instance, if two shareholders are fighting for control of a large company, the case can be won or lost depending on who is in control of the company when the case begins. If you control the company, you decide what the company does as the shareholders fight for it. You also decide what is written into the records of the company. In this way, you ‘control’ the records of the company. To control records is to control history. History decides what happens to a case. If you control the company, you win the battle.

Why is controlling the Company critical? Once you have your company by the scruff of the neck, you control what is ‘officially’ said at a board meeting and what decision is taken by management and under what circumstances. You control what is filed with the government and the regulator as the ‘truth’. The fate of the company is also now in your hands. This control allows you to expand the equity of the company, to take a ‘controlling’ interest in the equity, to appoint additional directors and so forth. At its absurd limit, once you have ‘control’ of the company records, you have the ability to completely change the ownership of the company, the constitution of its management and the Board of Directors. Doubtless, the other side will challenge these moves. I am not suggesting your enemy is half-witted and will all but roll over and offer you his soft underbelly for that fatal bite. The point is that in theory, all this is possible, which tells us why it is important to seize ‘control’ of the commanding heights.

Now, if I am the shareholder not in control of the company, my single biggest agenda has to be to find a way to get some sort of control on the company. Most of my energy will be spend on finding a way and if I can’t find a way, I would be smart to put off the fight till I’ve figured it out. As it turns out, there are cases where the fight begins when one party decides to occupy the high ground. Recall that in the property sale case, the court case begins with your lawyer getting a stay order preventing me from selling the property to someone else. The key learning here is this: the circumstances of the case decide whether you occupy high ground before the case begins or as a first move in the case. Either ways, occupying high ground is the key to successful litigation.

Let me summarize the story so far. Before setting out to start a war, you must ask yourself if you occupy the high ground. If you do, you are at a material advantage and you can start your much beloved brawl. If you do not control the terrain, you then have to find a way to do so. You can do it either before the fight begins or as the first action in the fight but either ways, just do it. I don’t need to rub it in, but I may as well say this too: if you don’t have the high ground and don’t know how to grab control of it either, you really are sitting on the poop heap and need to bail out.

Let us now look at a simple case where the guy who started the fight occupied ‘controlling terrain’ even though he was agitating a pretty poor case.

The Michael Jackson case

Michael Jackson was a brilliant InfoTech entrepreneur, with a great career record.  He claimed back in 1991 to have first thought-up the idea of setting up a direct satellite based mobile phone system.  This system could bypass the cellular telephone network of any country by bouncing messages directly off a satellite from one mobile to another at reasonable cost. He had the credentials to put together a project of this type and he personally knew the people who manufactured all the bits and pieces that went into the project.

Sometimes in late 1991, Jackson claimed to have discussed this idea with an Indian businessman, a certain Mr. Raut. He claimed that he had sold the idea to Raut and they had agreed to go into business together. At some point, Raut double crossed him after stealing his idea, technical data and business plans.

It is true that Raut was at this time actively pursuing the same idea. Raut was a pretty dynamic guy and had been leading from the front with several ITES ventures for at least ten years. Early in 1992, Raut signed a deal with an American telecom manufacturer and service provider for the construction of a telecommunication satellite of this type. He also signed some deals for a ground support network that linked mobile phones via satellite. I can add that this may not be conclusive on the point: ICO Global and Iridium were on to the same thing too at the same time using pretty much the same vendors. But the others were different.

Three features of Jackson’s system stood it apart. Unlike Iridium, Raut expected his handset to look like a mobile phone, rather than Iridium’s ‘suitcase’. Second, Raut ordered a geostationary satellite. Geostationary satellites sit much further away from the earth, and while this increases the gap between the time a speaker speaks and the listener hears the speaker speak, it substantially reduces cost. Theoretically, it is possible to cover the Earth’s surface with only four geostationary satellites, while systems such as Iridium, which opted for low earth orbit satellites, needed 60 or more satellites to perform the same task. Third, Raut ordered a satellite with on-board switching, meaning that all the connections were made up there in space and not from a switching office somewhere on planet earth. So every call is a single ‘hop’ from caller to satellite to listener, not a double hop from caller to satellite to switching system on earth to satellite to listener.

When Jackson learnt of Raut’s contract with the satellite supplier, he immediately moved an Indian High Court to restrain Raut from implementing the project. Jackson claimed that he had met Raut in Hong Kong and revealed his satellite hand set telephony system for India to Raut. He showed that he had confidentially disclosed the essential technical parameters and the business plans. He claimed that Raut had taken his idea, and his business plans, and created his own business model based on Jackson’s Intellectual Property Rights and Confidential Information. He said Raut was always free to pursue this business but he couldn’t use Jackson’s disclosures to do it.  He asked the court to stop Raut from proceeding. The court was sympathetic. It restrained Raut from “proceeding with the contract between Raut and the satellite construction company based on Jackson’s ideas”. Since no one knew where Jackson’s ideas, business plans, IPRs and Confidential Information ended and Raut’s ideas, business plans, IPRs and Confidential Information began, Jackson basically shut Rout’s project down.

In getting this injunction, Jackson immediately occupied the commanding heights of the battlefield, prevented Raut from proceeding and in effect held him to ransom.

Raut was quick to file his defense. He rubbished the whole verbiage about confidentially communicated top-secret idea and business plans. He said that half of the space communication community had been talking about such a project. The ‘confidential information’ was all in the public domain. He said that he had hired Jackson to help with this project but Jackson had run off and joined a competitor. Finally, he argued that the idea, or whatever it was that Jackson claimed ownership of, could not be protected because there was no IPR in it.

Raut was right on the law. Jackson’s case was pretty thin. Jackson structured his case mainly to look good in court and get his stay order. First, Jackson claimed that what he sought to protect was his right under a contract, not an IPR. He argued he had a right because Raut promised confidentiality with the intention that the two will be in business together. Raut should now be prevented from using the confidential information by himself. Second, he based his case on a theft of ‘technology’. To impress the court that it was a ‘technology’, he gave it a name and described it in terms of some 20 unique and new ‘features’. It was all incredibly ingenuous. Everyone knows that the air and space industry has got to a point where individuals simply do not develop ‘technology’ any more. It was fuzzy stuff but Jackson didn’t care about that. He was trying to throw a heavy technology steal plea at the court to confirm a court order because he knew that at this early stage, a court would be reluctant to question whether this technology was technology at all. He wasn’t trying to win the case. He just wanted to hang on to ‘controlling’ terrain till Raut got frustrated and settled. He succeeded.

The moment the court informed Raut of the stay order, Raut found himself stone walled. Since no one knew what Jackson claimed as his technology, Raut could not proceed with his project because he did not know what he was allowed to do and what he was not. The stay lasted a year and in all this time, Raut made no progress at all. Occupation of the heights was the only reason Jackson was able to keep this charade going with no case and no strategic strength at all.

Everyone talks about law’s delays but not everyone talks about how this has changed the way lawyers practice law. Today, no one expects to learn how to conduct a proper trial in court. Cross Examine witnesses? You must be joking! Business horizons are way shorter than legal horizons. If you want the court to do something for you, you have to find a way to get a stay order. That is often the only criterion on which lawyers judge the strength of a case. Put another way, a case is only as good as the stay order you can get on it. It doesn’t matter very much if it’s a great case you can win. If you can’t get a stay order, you can’t get a decision in your lifetime anyway so who cares how good it is? Besides, if there is no pressure point, the other guy isn’t going to settle with you either. Conversely, it doesn’t matter how bad a case is so long as you can get a stay order. In such circumstances, the other guy is going to settle with you or leave his litigation as part of his estate to his children.

As an aside, we now have two kinds of lawyers practicing in Indian courts: those who can get stay orders most of the time, and everyone else! This is also why every court has a very small and select band of ‘successful’ lawyers who are raking it in when all other lawyers are scratching a modest living out of their profession. So next time you want to say something harsh about a lawyer you know, do remember that success isn’t only about knowing the law!

One of the main learning of the Michael Jackson case is that very often, one party may have a natural advantage but it makes no attempt to occupy the battlefield. If the case is headed for war, this is a big mistake. What do I mean? Raut was going ahead with the project. He had his supplier contract in place. The key element of the terrain here was the IPR or Confidential Information or whatever it was that Jackson was talking about. Raut was vulnerable. Jackson had nothing to lose and could attack Raut at any time. Still, Raut did nothing. If he had decided early that war was coming, he have gone on the attack. He could have asserted his ownership of the Confidential Information and projected Jackson as an employee, possibly a thief. He could have refused to settle Jackson’s account after he left and demanded that he return all company Confidential Information. He could even have sued Jackson and tried to restraining him from disclosing his project secrets to third parties. I am not blaming Rout for real and imaginary failings or lack of strategic foresight. Not everyone runs his business expecting to be sued every minute of the day. I am merely pointing out that if a battle is coming, he who occupies the controlling terrain has all the advantage. The learning then is merely that if you know a war is coming, you better move first and occupy the high ground. If you don’t or can’t occupy the high ground, someone is going to start shooting down at you!

At this point, I’d like to go back to the Weizmann case and look at it from the terrain viewpoint. In that case, no one occupied the high ground on the eve of the battle and it was not clear who could. There’s a learning here that will follow our review.

The Weizmann case

First a quick recap. The Weizmann case exploded because an incoming foreign shareholder discovered a huge accounting fraud days after taking over the management of a publicly listed Indian company. The company was sick, the Board of Industrial and Financial Reconstruction (‘BIFR’) had approved the new ‘scheme’ and the scheme had been recognized in the Joint Venture Agreement. After BIFR approved the scheme, Weizmann appointed six of its directors to the board of directors. It is true that Gupta, the Indian promoter, was still the Managing Director but the entire Board was vulnerable because if the accounts of a listed company are toxic: you have to either tell the world about it or run the risk of someone accusing you of being complicit in the fraud. Weizmann decided it had no choice but to go public with this fraud. Gupta would not appreciate this. Litigation was inevitable.

At this time, Weizmann had serious problems with three key elements of the terrain: management, Board and shareholding. The position was clear enough in the Joint Venture Agreement but the paper deal did not translate into effective control on the ground. Weizmann had several expats working in the company but the executive management had Gupta as Managing Director and his nominee as the finance director. That apart, the entire middle and lower management was loyal to Gupta. As long as everyone in the company saw him as the local tiger, everyone would do what he wanted. The tiger had to be taken down and that was the key to occupying the management terrain.

Weizmann also had incomplete control of the Board. It had nominated six of twelve directors and Gupta had four but the other two were professional outside directors, one nominated by lenders and the other by BIFR. The outside directors knew Gupta, they did not know Weizmann but mainly, their attitude would be to avoid rocking the boat. Weizmann could not do anything without getting at least one outside director to vote on its side and this was impossible. The Board element of the terrain was a standoff.

Finally, Weizmann also did not have control of the shareholder terrain. To do many things, it needed 75% of the shareholders to vote in favor of its proposals. In a listed company, that was a heavy hill to climb: most outsiders would think a foreigner had come in and promptly started a demolition derby.

How was Weizmann to occupy these three elements of the terrain? Weizmann needed to do some inspired scheming and maneuvering. Let me tell you what happened next.

First, let’s deal with this business of management control. For so long as Gupta and his finance directors were in charge of the day-to-day management of the company, this piece of the terrain could not be controlled. These guys had to go. How to do it? Weizmann could start some sort of legal process but it would take years to prove such allegations. It needed a confession. To get this confession, a Weizmann honcho met Gupta and persuaded him that no European shareholder will agree to perpetuate the fraud. A disclosure to public shareholders just had to be made. It was the Satyam story twenty years before Satyam, and the issues were the same. Gupta understood that he was free to pick the language but the declaration of guilt had to be drafted. Unlike Satyam’s owner Raju, Gupta framed disclosures that spend as much energy on ‘justifying’ as they did on ‘disclosing’. To Weizmann, it made no difference. Once the cat was out of the bag, it would chew up Gupta for lunch. In two days, Gupta and his finance director had signed and delivered their own company exit plan!

How to action the exit plan? Weizmann needed a Board resolution to kick them out. A Board meeting was coming up the following week. It was perfectly obvious that Weizmann could not set down an agenda item asking the Board to consider terminating the services of Gupta and his finance director. They couldn’t possibly go to a Board meeting with an agenda item suggesting expulsion of two executive directors. It would take Gupta one minute to get a court order against that kind of resolution. Subversion was necessary.

Weizmann settled on a surreptitious way to do it. Weizmann prepared a resolution on “consideration of accounts of the Company”, and added this confession as an “explanation” to the consideration of these accounts. The die was cast.

Weizmann lucked out with attendance at the Board meeting. One of Gupta’s nominee directors did not show up. Eleven directors attended the meeting, of which six were Weizmann nominees. When these accounts came up for consideration, the lender director abstained. Weizmann had hoped that the BIFR nominee would be neutral as well but it was not to be. He wanted nothing done without BIFR approval. Anyway, six for, four against and one abstaining was all that Weizmann needed. Given the confession of fraud, a Weizmann director proposed that Gupta and his finance director be stripped of their executive powers. The resolution was carried. Weizmann seized complete management control in a single masterstroke.

How about the second element of the terrain:  control of the Board itself? In the days immediately after this crucial board meeting, the missing Gupta director sent in his resignation. He disclosed that he was now in litigation with Gupta and could not continue as a director. There was nothing to be done: Weizmann now had Board control. Weizmann did not accept this resignation, concluding that this was a no-lose situation. If this director did not come to Board meetings, Weizmann had numerical advantage. If he did show up and voted against Gupta, it still worked well for Weizmann.

Not that Weizmann was lulled into any complacency. Although Gupta had already made an enemy of one of his own nominee directors, Weizmann still wanted to remove one more Gupta director, just to be sure. Weizmann kept fishing around for a way to do this. Those employee loans were one option. Recall that Gupta had syphoned money out of the company to bring it back as promoter equity. He did this by allowing his trusted employees to take out loans which they then delivered to him in cash. The law did not allow a director to directly or indirectly take out a loan without government approval. If a director did that, he could be removed from his Board seat.

This solution has its problems of course. You can’t remove a director without giving him a chance to defend himself. You have to produce all the evidence, to a legal standard, and only then can you act on it. Getting confessions out of Gupta’s trusted employees was another kettle of fish. Weizmann didn’t go looking for a confession, it simply spread the rumor that Gupta had disqualified himself as director. Gupta figured he was in trouble. He calculated that while he may be personally disqualified, he still had the right to nominate directors. It made sense for him to put his young student son in his place. Sure enough, he sent in his resignation and nominated his son for appointment. That played right into Weizmann’s hands. At the next Board meeting, Weizmann accepted Gupta’s resignation but refused to appoint his son to the Board. It was a defensive decision. A bankrupt publicly listed company needs mature board guidance: it can’t be run by students perpetuating dynasty rule. Weizmann got what it wanted.

That left only the last of the terrain questions: shareholding control sufficient to pass special resolutions. How was Weizmann to get 75% of the voting power? Weizmann was not going to put more money into the company. It made more sense to persuade the lenders to support its moves. This was easy to do. Once the bankers understood what Gupta had done, they came out on Weizmann’s side and this problem solved itself quite easily.

Thus, in one fell swoop, on one single day, at one single Board meeting, Weizmann decisively occupied the high ground and became the master of the terrain. Events cascading out of this key trigger then worked to further strengthen Weizmann’s position. How it then used this position of advantage is a question we will study in subsequent chapters.

Thus, we see that in any conflict situation, who occupies the high ground is never preordained. One day before hostilities started, Gupta ran the management, he had a split board and the shareholding pattern made any kind of aggression difficult. Yet, he signed one piece of paper and this allowed Weizmann to charge up hill, dig itself it and start shooting down at Gupta. It could have been the other way around. Gupta could have gone to court the moment he heard that Weizmann planned to make a disclosure. Instead of signing a confession, he should have been signing a lawyer’s powers of attorney. One stay order would have been the difference between keeping control of the company and getting booted off the Board.

So where are we on the moral of the story? To my mind, the main moral here is that in many circumstances, both parties to a fight have the ability to occupy controlling terrain. It’s the warrior who has the brains and foresight to do it that comes out ahead by a mile.

The other thing to bear in mind is that you must not start a war till you have occupied controlling terrain, unless it’s a war the first move of which is to occupy controlling terrain. This activity must occur before the battle has begun because this occupation determines who wins. Seen in this way, it is clear that most battles are won and lost before they begin.