Chapter C5
Rule 5 - Planning for Stalemates
How risk averse are you? Will you swim the Chambal knowing there are crocodiles in there because there is a pot of gold waiting for you on the other side? Will you stake your fortune on a single stock market punt in the hope of earning enough to retire on? Will you risk COVID and walk into Bombay in the middle of its 2021 lockdown if you could make a big business deal?
I would assume that different people will provide different answers. That’s not true of this book. There is only one answer: nothing is worth losing everything for. If you do not gain this “everything”, life will still go on. But if you lose everything, life as you know it will disappear. This is a basic rule of legal wars. It doesn’t matter if you gain a big victory or not: you must first make sure that you do no lose spectacularly. The good news is that this is usually possible. You have the power to plan your strategy in a way where whatever else happens, you do not lose the war.
This brings us to the essence of this rule. You can make sure that you do not lose the war but this does not mean that you can ever guarantee your enemy will lose it! Losing the war depends on you, winning it depends on the failings of your enemy! Between these two extremes lies the stalemate, the situation where neither party wins or loses. To appreciate the nature of stalemates, let us look at this issue in the context of a game of chess.
On a chessboard, before the first move is made, parties are at complete equilibrium. They are in all respects equal. Assume that you have the white pieces and you are to make the first move. On a quick look, it is possible to assume that because both parties are equal and you have the first mover advantage, you would start the match. But this is not true according to the rules prescribed in this book. In my view, you should not move unless you have something greater than a first mover advantage. I would advise you to do nothing. Now, let us look at the game during play. As it proceeds, fortunes may shift back and forth a number of times. More likely, between two equal players, no one will ever gain a significant advantage. Eventually, the game will get to a point where most intelligent chess players can see that the game will very likely end in a draw. That happens a lot in legal wars too. What should a litigating party do then?
The answer to this question also comes from chess. Where stalemate seems inevitable, chess players immediately shift to a low risk holding strategy. Players jockey for position but they make no speculative and dangerous moves. They don’t fight to win any longer: they fight to make sure they continue to hold their stalemated position. There are two morals to this story then.
First, every chess player knows this: if it looks like you are headed for stalemate, you should support it, even encourage it. It is a new equilibrium and other things remaining the same, an equilibrium is better than instability. In a sense, this is obvious, and completely consistent with everything else this book says. As we examined issues around the decision to fight or not (Section A, Chapters A1 to A5), we reminded ourselves constantly that we shouldn’t fight unless we know we will win. The same thinking applies when you face a stalemate. It is now obvious that you have miscalculated. Thank God your miscalculation was not more even more drastic. You should be grateful you haven’t ended up losing, or dead. Now that the writing is on the wall, it makes perfect sense to immediately change tack and actively pursue a continuation of the stalemate.
Second, the moment you know you are headed for a stalemate, you must immediately switch to a low-risk strategy. This means that you take no great exposure, and focus instead on putting together the most defensive game you are capable of it. You need to appreciate that stalemates are not best preserved only by not being aggressive. You can choose to not be aggressive, but if your opponent gets aggressive, he may yet overwhelm your defenses and win the war. When you think about preserving the stalemate, it is by doing it, not by doing nothing. You have to aggressively pursue a strategy that keep everything in stalemate. You have to think about what you will do that will ensure that no matter what your opponent does, you will still have a stalemate. You have to anticipate all possible attacks and protect yourself against them. In short, a stalemate is your active strategy, not your inactivity.
Let us go back to the Metro Cable case and see how Metro dealt with what looked like a stalemate.
The Metro Cable case
We have looked at how Metro Cable secured its joint venture AP Cable, seized AP Cable’s finances and unearthed its partners defalcation of funds, stabilized its customer base and gained full operational control over the company.
At that point it was clear that theoretically, Reddy had an almost infinite capacity for court action. He could go on pushing Metro indefinitely, filing case after case, for so long as he could prevent Metro from effectively exercising its initial control over AP Cable. This is a feature of litigation in India. A determined litigant has an almost infinite capacity to keep suing his enemy in court after court. Indian courts do not give penal damages to a defendant against a mischievous plaintiff. Litigation is cheaply fought in India is you don’t care about winning the case any time soon. In this kind of environment, Metro had to ask itself this question: What were Metro’s objectives now that it had AP Cable under control?
Metro’s answer was consistent with our principles. Metro wished to stonewall Reddy, retain the status quo and all gains made so far and keep control of AP Cable. Okay, this was clear enough but it still begged the further question: how was the status quo to be preserved?
To answer this question, Metro examined its perception of Reddy’s priorities. Reddy would fight for the business by fighting for the control of AP Cable. In his mind, AP Cable was the business. What if it wasn’t? AP Cable was a business vehicle, but the business was AP Cable’s customers. If AP Cable’s customers were separated from AP Cable, did Metro care whether Reddy grabbed AP Cable back or not? Better still, Metro could keep Reddy engaged in an aggressive battle for control of AP Cable. While Reddy’s attention focused on this prize, Metro could maneuver to migrate all of AP Cable’s customers to another company. Reddy would then engage in shadow play over an empty vessel while the cheese moved out of his grasp. This is how events played out.
On seizing physical and corporate control of AP Cable, Metro appointed lawyers at all local courts and waited for the inevitable flood of litigation to come. Reddy’s lawyers took two days to file a case. He asked the local court to injunct Metro in a variety of ways. Reddy asked for management control, he asked for executive powers, he asked for the power to operate banks, and he asked that all company assets be delivered into his custody. Metro’s lawyers warned Metro against too much optimism. Given local loyalties and Metro’s ‘highhandedness’, the local court could will give Reddy what he wanted.
Legally speaking, Metro had a good case. It had done everything by the book and besides, it had proof to show that Reddy was a crook. Who would put a thief back in charge of the jail? Still Metro was unwilling to take a chance. It decided to strip all assets away from AP Cable, leaving a shell. This was easy to do. Metro picked a paper company from the friendly neighborhood chartered accountant, terminated all Cable Operator contracts, signed up fresh contracts with this new paper company, terminated the AP Cable Head End lease with Metro, executed a new Head End lease with this new paper company, and started work on moving the Head End to a new location. By the time the case came up for hearing, three days had passed since the takeover drama. Already, Reddy was fighting for nothing.
Metro’s lawyers picked up on Reddy’s new filing within minutes of it reaching the court registry. When Reddy’s lawyers appeared in court to argue for urgent interim orders, Metro’s lawyers were there to resist. The court adjourned the case for three days to give Metro time to file its reply. The extra time didn’t help. As predicted, local loyalties won out. The judge didn’t want to hear about the law: he didn’t like Metro’s corporate coup. He put Reddy back in control with immediate effect.
Metro immediately filed an appeal, but that didn’t help either. The appeal court was unsympathetic. Obviously, emotional factors were at play. While all this was playing out in court, Metro physically moved the Head End to its new location. Reddy heard about this, but then didn’t know what to do about it. He assumed – wrongly – that this was no problem as it was only a matter of moving the entire Head End out of the new premises and back to the old.
From a tactical perspective, Metro had a different problem. Metro was allowing Reddy to take the initiative. If nothing new were done, Reddy would continue to fight from the front foot, progressively leaning on Metro as it yielded ground. It was time to redefine the playing field once again.
AP Cable’s Board of Directors now issued a notice for an Extraordinary General Meeting of its shareholders. The Agenda of this EGM included an item to confirm the reconstitution of the Board. It asked for the new MD’s appointment to be ratified by shareholders. It wanted Reddy to be removed as director. If these agenda items were approved, Reddy’s entire litigation would be redundant. What is a court to say if the owners of a company decide they want a different management?
This move put Reddy in a difficult situation. He needed to stop this EGM from being held. He filed another case and as you would expect, the local court obliged him again with blanket orders. It was clear that local sensibilities could not be matched: no matter what Metro did or didn’t do, local courts would interfere. Metro had to find a way to get this dispute out of the jurisdiction of the local courts.
As it turned out, this was not hard to do. Metro filed a case before the Company Law Board (what is now NCLT) claiming mismanagement and defalcation of funds. It asked CLB to appoint its own nominee to AP Cable’s Board of Directors. CLB heard Metro out but decided to take it slow. It passed on immediate order but it asked Reddy to file his reply. This changed the game again. Reddy now stopped worrying about the asset stripping of AP Cable. Instead, he focused on holding on to management control of AP Cable. But AP Cable was already a hollow shell. As the weeks wore by in hearing after court hearing, the battle degenerated into an endless squabble on highly technical points of legal interpretation. The commercial issue was lost in all this legalese and while this charade played out, Metro meanwhile consolidated the business in the new Company. In six months, all of AP Cable’s old business had been secured in this new entity, the revenue base was stable, the business was back on its feet, By then, Reddy had run out of steam.
It is a common experience in court to find oneself on the side of a good case and yet find itself in an unwinnable litigation. AP Cable was just such a case. Metro took control of AP Cable but successive courts were inclined to interfere with this control. What was Metro to do? Metro had doubtless gained an initial advantage. Its real strategic choice was to secure this initial gain and then secure a stalemate. To do this, it moved the cheese out of AP Cable and then allowed Reddy to keep his attention firmly focused on the hollow shell it left behind. It used an active inventive strategy to create a stalemate situation and then did everything in its power to secure that stalemate. This takes great foresight and very mature planning. That is what every one fighting a legal war needs to do.