Chapter E1
Rule 1 - The orthodox and the unorthodox
Thousands of cases are filed across the country every day. The best legal minds bring their experience and wisdom to the fight, day after day. Both sides have a strategy, and both sides understand what tactics can be used to win the war. In this face-off between two highly skilled warriors, who is likely to win? Given the strategy that the two contenders have, what kind of tactics should they use to project their strategic power onto the theatre of battle? As you can well imagine, you cannot have a comprehensive list of available tactics, and if you do, it would take more than one volume of a book to list them out. Some are orthodox and predictable while others are unorthodox and unpredictable. Which ones should you use in your legal wars?
To apply this rule, let us first understand what we mean by these terms. Wars, and litigation, have been fought since time immemorial. This wealth of human experience has created an orthodoxy, which prescribes the rules by which litigation is fought. Orthodoxy encompasses all that is conventional, accepted, traditional, mainstream, conformist, standard, established… in effect, what is known to the domain experts, if not to all. These tactics are in themselves of wide applicability. There is no quarrelling with the value of these rules but the greatest weakness of these rules is that everyone knows everything about them.
As opposed to this orthodoxy, it is possible to conceive of a wide variety of tactics that are little known and even more rarely used. Yet, when they are properly applied in the right circumstances, they devastate the enemy and bring spectacular results. These tactics are unconventional, non-conformist, unusual, revolutionary. even counter intuitive… Their value lines in the difficulty of predicting them, which really means if you can’t predict then, you can’t pre-empt them. Deploying them on the field brings surprise, and by the time your enemy has fashioned a response, it is too late. Bear in mind that unorthodox tactics do not come out of a secret magic box, nor are they some special gift of the gods given to only the few. Unorthodox tactics emerge from orthodox situations: they are an unfamiliar way of perceiving the familiar, an alternative interpretation of what seems obvious.
The question is, what tactics should you ordinarily use?
If you are an agile, inventive mind, you may find it tempting to conclude that you should always use unorthodox tactics. If you make the same stock market purchases everyone else does at the same time everyone else does, wouldn’t you be the golden mean in a zero-sum game. Similarly, if you use the same tactics everyone else does, where will you end up except in the same place as everyone else. How would you be any better off? What would be the point? But is it really true for instance that only those who operate in an unorthodox way end up making money on the stock market?
I would think not. I broadly divide people into the Percentage Guys and the Windfall Guys. The Percentage Guys are the value investors, conservative people with a limited risk appetite who do orthodox things most of the time. Windfall Guys on the other hand are always taking wild punts and looking for the next big kill. In the end, what you do frequently comes down to who you are, but that’s not the same thing as saying that who you are is the only way to be! There is an optimal way to fight legal wars.
In legal battles, there is room for both kinds of tactics. Orthodox tactics are tried and tested and their very value lies in their proven quality. You know it works much of the time and only fools try to reinvent the wheel or fix things that aren’t broken. The great thing about orthodox tactics is that they usually offer very few downside risks, and the risks they do offer don’t carry large damage bills. When you step out of orthodoxy and try wild and weird stuff, the risk profile changes completely. Unorthodox tactics may destabilize your enemy and bring you victory but at the same time, you can end up on the wrong end of a crushing defeat because you gave up on basic common sense! It takes courage, and a certain risk appetite, to go where no one has been before.
The proper thing to do in a legal war is to employ a mixture of orthodox and unorthodox tactics. While the proportion of the orthodox and the unorthodox may vary in any given tactical situation, it is important that you use at least a lot of the orthodox and a bit of the unorthodox. That said, how are you to decide on what to use where? In my experience, this is not a difficult decision. You use mainly orthodox tactics to deal with orthodox situations and you use selective unorthodox tactics to deal with unorthodox situations or to achieve spectacular results where the risk is manageable.
It is clear why this is so. When I joined law practice 40 years back, my senior at the time added to my growing list of mind-numbing cliché by telling me that ‘advocacy was 10% inspiration and 90% perspiration’. That about sums it up. Orthodox tactics are valid and necessary when you array for battle, when you engage your enemy, when you deploy your forces, when you set up supporting logistics and when you roll out your defense. When you are doing the same old things, everyone knows that the same old ways are the best way to do the same old things. This is the perspiration side of law practice and the less creative you get, the more energy you will save and the more efficient your labors will be. In the bargain, you will have a proven and more or less failsafe defensive stance which will also give you opportunity to go on the offensive should circumstances arise. What orthodoxy doesn’t give you is the ability to win. Orthodox defenses are established based on orthodox offensives because those are the attacks that are known so it’s possible to plan a defense against them. How can anyone possible set up a well know defense to stop an unknown form of attack?
This is the key to a brilliant legal war! You use orthodox tactics to establish and hold your defensive line and manage your risk. Conversely, you use unorthodox tactics to flummox your enemy and surprise him enough to have a chance of decimating his defense. It is possible that he may yet be nimble on his feet and is able to quickly come up with a quick counter. More likely, he will collapse in confusion and you will carry the day. The trick of course is to manage your risk. When you use unorthodox tactics, you potentially open yourself out to a counter attack. To be overwhelmingly strong in one place is to be vulnerable somewhere else. If you do not manage this vulnerability very well, you may well snatch defeat from the very jaws of victory!
Here is an interesting example of a case where one party was able to win spectacularly only because it was able and willing to use unorthodox tactics as a key part of its offense.
The Rolland Case
Although India had changed by the time we got to Y2K, some foreigners still feel uncomfortable operating in it without a local partnership. This was true of Rolland, a leading global engineering major. When they decided to enter the Indian market at the dawn of the new century, they approached a number of large Indian business houses looking for a joint venture. It was much too late. Indian engineering businesses did not believe they needed either technology or money to compete in the market and did not see any value in joint venturing in this business segment. Rolland was not to be deterred. They scaled down their ambitions, searched for smaller business houses and in time found Kamath, a dynamic new entrepreneur. Kamath’s company was a bit player in the engineering business and was looking to expand. He could do with some capital and technology support.
The problem was that neither side wanted to be the junior partner. In time, they agreed to a 50-50 joint venture but with Kamath holding nomination rights to the majority of the Directors on the Board. Rolland thought that ultimate power flowed from shareholding, not the Board of Directors, and this was a matter of little consequence. With that decided, the parties set to the task.
Allow me a short digression here. The JV Agreement between parties was long and very legalistic. As events turned out, one of those standard indemnity clauses (which no one but lawyers understand) came to hold center stage as the story unfolded. It provided that should the JV company suffer any losses because of a willful default of the Kamath group, the Kamath group shall indemnify Rolland. It was indeed a strange clause. How do you actually collect cash from a co-promoter if a business suffers a loss? Rolland extracted a clause by which Rolland could force Kamath to sell his entire shareholding to Rolland if its claim remained unpaid. To add to the confusion, the JV Agreement did not allow arbitration on the question whether a loss had occurred, how much loss had occurred and who was responsible for this loss. This entire decision was entrusted to an agreed expert from one of the “Big Five Accounting Firms” (as the expression was then understood). Once the expert had finished calculating both the amount of the loss and the value of the Company’s shares, the Board would transfer shares according to the expert’s calculation.
Let us now take a quick peak at the structure of the Board. Rolland was entitled to nominate two out of five directors while Kamath nominated the rest. Kamath’s shareholding was substantially held by his immediate family: wife, son and an inexperienced younger brother. Since the business plan proposed the induction of substantial debt, not to speak of a hazily discussed IPO at some uncertain date, Kamath said he didn’t want his family to be members of the Board. Instead, he nominated two highly networked and credible professional directors to the Board, the theory being that the Company needed the contacts. Rolland in turn nominated two senior managers from its Head Office.
In practice, Rolland’s directors were very busy people and India was very far away. Rolland’s nominee directors turned up for at most a day for a Board meeting, or not at all. Most Board Meetings were held with four or fewer directors of which one was usually a resident Indian alternate to a Rolland nominee director. In turn, the CEO was an external professional, but he did not have a Board seat, so Kamath more or less told him what to do. This was consistent with Rolland’s general attitude to India. They didn’t buy into the ‘India opportunity’ story and had taken a position in India on the long-term view that when India’s time case, they would step up their game too. As business rolled out, Rolland pretty much handing over all operating responsibility to Kamath, far beyond what had been agreed.
By 2004, it was clear that Kamath was not up to the task. The company had lost money, its market share was negligible, most products had not been launched and Rolland was getting increasingly frustrated. The CEO claimed he was not allowed any autonomy. He declared that the only reason he had not quit was because he believed Rolland would, at some point, wake up and take ownership of its company. If Kamath was indeed the driver of the bus, he said, someone in Rolland had to talk to Kamath.
Rolland saw his point. Eventually, Rolland’s India head opened a dialogue with Kamath. Kamath didn’t like the ensuing conversation. He was in complete denial, probably obstructive too. He offered no solution and didn’t want to either step down or sell out. He seemed to believe he owned the Company and Rolland was some kind of passive investor, which in a way was true. Rolland went looking for a lawyer.
To being with, Rolland needed to find out exactly what was wrong with the JV Company. Kamath wasn’t going to tell them. What ruse should Rolland use to get inside the accounts of the Company? Rolland persuaded Kamath to appoint a consulting firm to investigate the underperformance and come up with a plan to turn the company around. Kamath had no problem with the idea, but he did keep a very watchful eye on what data was shared with the Consultants. As time went on, he was lulled into complacence. After grandstanding for almost two weeks, once Kamath’s back was turned, Rolland sent in its forensic due diligence team pretending to be consultants. What they found was a shock.
Investigations into the accounts of the JV Company revealed several clear cases of defalcation of funds. They also found evidence of collaterally motivated capex decisions. On more than one occasion, Kamath had instructed the CEO to grant extraordinarily beneficial contracts to Kamath’s family members. It turned out that one of Kamath’s own surrogate companies was the biggest beneficiary of such contracts. Neither employees nor the Board were aware of the relationships between Kamath and this surrogate. In time, the forensic due diligence team submitted its report. It read like a fraudster’s handbook of practical advice. It showed that the JV company was now practically bankrupt. What was to be done?
Kamath owned half the company, had a majority on the Board and controlled the day-to-day management of the Company too. Rolland had the other half the company, but they were a minority on the Board and barely knew their own managers. It was clear that Rolland needed control over the CEO and by implication the Company Secretarial function. Rolland approached the CEO. They were taking over management control, they told him, and wanted his cooperation. The CEO was delighted. Getting the Company Secretary to cooperate would be no problem.
Rolland now found itself at a fork in the road. Its straight-line option was to call a Board Meeting and confront Kamath. Could they embarrass Kamath into resigning? No one thought so. As long as Kamath had equal shareholding and a Board majority, he would laugh in their face. Should they perhaps file criminal cases immediately and then take over management? Rolland was very fixated on the idea of retribution, of crime and consequence. It was true that Kamath should not be allowed to get away with fraud but Rolland’s corporate aim was to take over the business, not hang Kamath on main square at high noon. It would be useful not to ignore public perception. India had been ‘liberalized’ less than a decade ago. Rolland could not be seen to be a colonial bully trying to pulverize the native victim. Finally, what about the cost? Did Rolland have the budget to achieve ultimate justice? It needed an unorthodox strategy.
The strategy that emerged was obvious, yet singular. In India a director vacates his office if he “fails to disclose his interest in any contract or arrangement in which he is directly or indirectly interested”.
”fails to disclose his interest in a company that has contractual relations Rolland could treat Kamath has having vacated his office of director. Simultaneously, Kamath’s nominee directors could be threatened with complicity and their loyalties shifted.
As events unfolded, Rolland declared war by contacting Kamath’s nominee directors. The audit report was placed before them and they were asked if they knew about it. Both stampeded. Instead of switching loyalties, they resigned and asked that they not be sued. Rolland accepted this, provided they signed undated resignation letters and went incommunicado till after the next Board Meeting.
Rolland now moved to exploit this opportunity. The Company Secretary sent out a notice of a Board Meeting. The agenda had an item on losses in the company. When the Board met, Kamath was surprised that two directors did not show up. Curiously, Kamath had not contacted his own nominee directors before this Board Meeting. Kamath asked the Company Secretary if he had news of them and was told his nominees had resigned. He then placed their resignation letters before the Board.
Kamath lost it at that point. Why had the agenda not specified that the resignation of two directors was to be considered? He demanding that the meeting be adjourned. The Company Secretary maintained that these resignation letters had been received after the agenda had been circulated. Since the quorum was complete, the Board carried the resolution accepting these resignations by a majority of 2 to 1. Kamath was livid but helpless. The Board now proceeded to discuss the losses in the Company. The Company Secretary placed the substance of the Audit Report before the Board. In the ensuing storm, the Board Meeting was adjourned for three days, it being agreed that the impact of Kamath’s defalcation would be up for debate at this upcoming adjourned meeting.
Kamath was with his lawyers almost immediately. Rolland in turn instructed its lawyers to hold a watching brief in all courts where Kamath could possibly apply for protective orders. Predictably, Kamath’s lawyers managed to file a hurriedly patched up injunction suit on the morning of the adjourned Board Meeting. The court was not impressed but reluctantly stopped the Board from removing Kamath as a director. Meanwhile, almost simultaneously, Rolland unleashed its unorthodox masterstroke. Invoking the provisions of their shareholders contract, Rolland exercised its call option and advised the Board in writing of its decision.
A copy of the court order were delivered to the Board minutes before the meeting began. Kamath was there. The Board took up the agenda of the adjourned meeting, discussed the financial issues and then took up the issue around the implication of the fraud on the JV Agreement. The Company Secretary now tabled Rolland’s call option letter together with the Audit Report. After a short fiery debate, the Board resolved to “respect the JV agreement”. It passed a resolution authorizing the transfer of shares and directed Kamath to execute the necessary share transfer forms.
Kamath was back in court the following day. He wanted the transfer of shares stayed. The Court was sympathetic but reluctant. It issued notice of the case to Rolland. Rolland now finally appeared in court and filed the Due Diligence report. The Court got the storyline immediately. It dragged its feet on protecting Kamath any further. Meanwhile, Rolland argued that this was now a Company Law Board case (now NCLT), not a civil court case.
Kamath could see the legal validity of the point on jurisdiction. He filed a petition in the Company Law Board and asked for the same protection. Rolland was ready with its defense. It appealed to the judge’s sensibilities, arguing that where partners could not live together, divorce was the best option. The parties had already agreed that an expert from one of the Big Five would make a valuation. This had been done. Parties should now give effect to their agreement. Kamath resisted this. A surreptitious valuation was meaningless: he needed to participate in the process. The strategic point here is that in this short period of a few days of conflict, no one was talking about Kamath’s majority on the Board any longer. Already, within a few days, Kamath had gone from being a very dominant shareholder in operational control to fighting to keep his shareholding!
Along another stream, Rolland argued that all questions on JV Agreement related issues should be decided by arbitration. CLB quickly came to realize that there was no legal solution to an irretrievably broken-down relationship. Employing all the power at its command, and with considerable wisdom, CLB was able to prevail on Kamath. Rolland yielded somewhat in the share valuation but at the end of the day, Kamath exited at a modest price which took into account his financial jugglery.
The Rolland case is a good illustration of lateral thinking, as opposed to vertical thinking. It’s a simple point – how to view the same old facts from a totally new perspective – and how to implement solutions in an unorthodox manner to achieve a spectacular victory. The point is simple. If you want to win, you need to set the stage using orthodoxy and then, when the moment is right, it is the unorthodox that will carry you to victory.