Chapter B6

Conclusion: Litigating to win

As the first section of this book comes to an end, you may find yourself going back to the questions you asked at the beginning:

(a)     Am I capable of fighting a war with my enemy?

(b)     Am I going to be fighting a winnable war?

How do you go about answering these questions? We have run through five tests that help you make these decisions. These rules are: the balance of internal power, the governing environment, the occupation of the field, the leadership, and organization and management. We have also seen that if you come up short, you can either find a way to pass the tests or you can back off and disengage. Throughout this whole process, you cannot forget that you want to fight a winnable war, not a war you can fight but not win.

We need to nuance this. What do I mean by winning? Do I mean that in every case, you should get handed down a judgment saying you are right and your enemy is wrong? Of course not! Litigation has to be judged by the objectives you set for it. When you set out to recover money someone owes you, you haven’t won till you have been paid. The objective then is what the case says it is. On the other hand, if you fight a war to keep living in a rented house, surely you don’t hope to live in it forever. Your objective can only be to drag things out till you have found another place to live. Similarly, if you file a criminal case against someone who has your property, your aim is not to get him to jail: it’s to settle with him on terms that works for you.

In a majority of cases, the objective of litigation is frequently not what it appears to be. At least half the time, the objective is stonewalling. In this situation, if you meet your stonewalling target, you win, even if you lose in the end. This is as true for individual cases and it is true for each small case in a big complex litigation.

Let’s now go back and illustrate this principle in the cases already discussed. Let us also in that context discuss possible options that were offered to the client but not taken because they did not meet the larger objective, or were not cost beneficial, or were partial solutions or were high risk solutions.

The Weizmann case

When Weizmann discovered Gupta’s accounting fraud, Gupta had three nominee directors out of ten, four if you count the one he had fallen out with. The Board also had one BIFR and one Lender director. Both should have been neutral but they were not. These directors knew Gupta for a long time and they didn’t know Weizmann at all. If you were a director of a company run by Gupta for decades, how would you feel about a foreigner coming along and kicking Gupta out in a board coup? You may have known that Gupta was not the best manager on earth but how would you know that Weizmann was not worse? If you were a parochial type, thoughts of the British East India Company may well be in your mind. In this situation, would you stay neutral merely because you were an independent director? I would think not. 

Look at the situation from Weizmann’s standpoint. As a majority shareholder with huge technology and business skills, you would expect it to be upset to be faced with hostility at the Board level. You would understand that it needed the market and the factory – notably the workmen – to acknowledge that there was a new boss in town. Inevitably, Weizmann asked its lawyers to find a way to reconstitute the Board. To put it bluntly, it wanted to kick out one or more independent directors from the Board of a publicly listed company supervised by BIFR so that it could be in the majority!

Now how are you going to do that under Indian law without making a huge spectacle of yourself? A director once appointed is hard to remove. You have to go to shareholders and this is a public company. The director you want to remove has the right to defend himself, He can make a speech at the shareholders meeting. How long will it be before you become the bum of the month in India’s frenzied media circus? That apart, if you do this, any shareholder can go to any town in India and get a stay order. How would you control the fall out?

While we are on the topic, what about BIFR? The BIFR Rehab scheme envisaged a Board structure. BIFR had a nominee director on the Board. Lenders had a nominee director on the Board. Who precisely would you try and remove? You can’t muck around with the BIFR scheme without opening a Pandora’s Box of charges and counter charges. Any which way Weizmann looked at it, this fight was not winnable because the objectives of removing any, leave alone all, of these directors could not be achieved.

As Weizmann thought about it, it questioned its need to do this. Gupta had already been cut to size when he was stripped of his executive powers. All the employees could see this. This did not require protracted compliance with the Companies Act, shareholder approval or BIFR approval. It was a winnable battle and it was done. As we have seen, it also served substantially the same purpose.

The main thing to understand in litigation is that on any given set of facts, the strategic possibilities are practically limitless. The same facts can be twisted this way and that in the same way that the same battle-ground can support a variety of ground attacks. Litigation cannot be fought on the basis of inflexible standard form tactics. You have to think outside the box, and decide if the standard form is a winnable form.

Let us look at another example of a standard form strategy which, if employed, would have ended in disaster. Here is another case where a road was not walked because it was not winnable.

The Hargear case

Recall that Hargear was a relatively small Indian company ‘captured’ by an Italian shareholder. Hooda, its promoter, had been dealing with the same chartered accountant for years. When the fight started, the chartered accountant recommended an oft used strategy. This strategy consists of calling for a Board meeting without actually issuing a proper notice to the enemy, holding it only “on paper”, expanding the capital of the company and calling up the money. The Company then fakes another courier receipt, does not actually call for the capital but proceeds to dilute the enemy so that Hooda ends up with an absolute majority of shares.

Hooda checked this back with his lawyers. They advised him to drop the idea. This ‘methodology’ has been done to death in India and every court knows what goes on. If Lerion showed up before the Company Law Board with these facts, it would get a stay order without hesitation. In such a dispute situation, CLB could well appoint its own director or observer to the Board. It could order that all Board decisions be subject to its approval. It could order that video records of the Board meetings be filed in court. All of this would further tie Hooda’s hands.

Hooda clearly understood that the only solution to the Hooda-Lerion fight was for one shareholder to buy out the other. Left to fend for itself, Lerion would struggle to chuck out Hooda. On the other hand, if this buy-sell process was supervised by CLB, the playing field would be way more level. It was no part of Hooda’s plan to exit the company. He was fighting for control, not for extracting the value of his shareholding. Lerion had already run down the value of the company by denying it practically all its foreign business. Hooda needed to squeeze Lerion out at a commercial level without creating a court case where he was the culprit.

As we have seen, Hooda did this successfully. He created conditions where they could not run the business. He vitiated the Governing Environment and in this, he achieved complete success.

Every legal situation throws up multiple strategic options. Some of these options will be winners, some not. The trick is to pick the option that meets the objective.