Chapter E6
Rule 6 - Be unpredictable
For as long as I can remember, the rules of grammar were largely immutable. Everyone knew good English from bad English. SMS killed that clarity. No one is going to thumb-type ‘people’ or ‘point of view’ or ‘in my humble opinion’ when ‘ppl’, ‘POV’ or ‘IMHO’ would do. Crude and jarring it may be, but shorthand is effective. As it turns out, life imitates the march of technology and for the same reason: convenience! As you navigate through life, you tend to use stereotypes and short hand. “You can’t generalize”, an outraged friend may complain. Well of course you can’t my dear, but you should. It takes far too much effort to process each situation case by case every day. There are too many decisions to take and not enough hours in a day. Rules of thumb and shorthand thinking cuts through the logjam of decision making.
In this world of shorthand decision making, perhaps the most useful of all is the ‘Incentive Rule’. If your enemy wants to figure out what you will do, he will try and understand where your incentives lie. If he can read your incentives well, he can easily predict what you will do next. If your behavior is predictable, your tactics can be anticipated. How can tactics work if your enemy knows what you will do next? It is the element of surprise that lies at the heart of all successful warfare. If he cannot anticipate what you will do, he cannot prepare for it and will not be able to defend your attack.
There is a second reason why surprise is critical to successful war tactics. Like you, your enemy has a finite resource base and he needs to decide how to deploy his resources. If it chooses to strengthen himself in one area, he leaves other areas open to attack. If he chooses to strengthen those other areas, he leaves the first area open to attack. If he chooses to divide his forces equally along all areas, he is weak everywhere. The biggest benefit of being unpredictable is that it forces your enemy to strengthen himself as best he can everywhere and then he is weak everywhere.
In the legal world, each party has both strengths and weaknesses throughout its organization and structure: in the law supporting its position, on the ground, at the level of the Board of Directors, amongst its allies, in its networking, in its ability to handle the governing environment and so forth. Often, if you were to prepare a balance sheet of relative strengths, you will find that both armies are equally strong. Yet, when the fight gets underway, one party is able to beat the other. Generally, it turns out that the party able to effective project its strategic power through its tactics wins the war. Equally inevitably, unpredictable tactics are seen to have contributed to the victory.
When it comes to unpredictable tactics, the Celestial Pharma case is about as unpredictable as it gets.
The Celestial Pharmaceuticals Case
The roots of the Celestial Pharma case date back to the mid-1990s when the world woke up to the Indian opportunity. India was still too exotic a market for European companies to go it alone and Celestial Pharma was no exception. For a ‘local’ partner, they eventually settled on a dynamic owner driven politically well-connected business family who preferred to live abroad but had a substantial presence in a variety of Indian businesses: heavy engineering, construction, machine tools and power related equipment all operating under the Kaveri banner. Their Indian companies were professionally managed, but they knew nothing of pharmaceuticals.
Negotiations between Kaveri and Celestial culminated in a deal by which both became equal partners with equal representation on the Board of their JV Company, CK Pharma. The Chairman of the Board rotated between the partners on an annual basis without a casting vote. Sometimes around 2004, they took their CK Pharma public. Naturally, at this point, their private shareholders agreement lost all meaning. Nevertheless, on a gentlemen’s handshake basis, they agreed to honor the substance of the shareholders contract after listing. When the theater went up on their coming war, Kaveri and Celestial each nominated four directors to the Board and each had 26% of the equity. The rest of the equity was widely held by the general public. The Board had just about appointed Celestial’s nominee director as the Chairman of the Board.
As is often the case, at the heart of their differences were differing perceptions on India’s commercial opportunities. In India, Celestial focused only on its Pharma business. Celestial’s global business piggy backed on a variety of niche products, mostly cures for exotic diseases. Medicines for these diseases sold at very high prices in India. Celestial wanted to bring its products to India at much lower prices, take advantage of India’s lax Intellectual Property Rights regime. Celestial felt that once it had established itself in India, it could then roll out the same bouquet of cheaper products throughout South East Asia, Africa and the Middle East. Long before of-shoring became the buzz it is today, they also wanted to move much of their research and manufacturing to India. It did not strike them that Kaveri may have different plans.
Kaveri’s companies were cash rich but the Promoters were not focused on Pharma. They had no global pharma business to protect, no technology to speak of and no future in the busines. CK Pharma, was well established in India. Already, their leverage in the company had declined. On the other hand, they had the inside track on the Government’s plans. They knew that Dr Manmohan Singh’s government would create enormous new opportunities in the coming years. Government contacts and relationships lay at the heart of their business model! Kaveri’s self-interest lay in preserving the status quo within CL Pharma while they pursued opportunities elsewhere.
Blissfully unaware of these fault lines, Celestial prepared expansion plans and presented them to the Board of CK Pharma. These plans proposed that partners recapitalize CK Pharma through a rights issue at substantial premium, erect a new factory, launch new brands in 16 segments and push exports hard, all in a phased manner. The plan was good but Kaveri directors stalled. Celestial didn’t mind. Its always good for Directors to deliberate well before taking a decision.
Inevitably, the decision failed to materialize. Pushed to take one, Kaveri directors tried to stall, and when that failed, criticized the plans for all kinds of peripheral reasons. Celestial found itself stone walled. It was time to speak to the Kaveri family. It was at these owner level meetings that the truth spilled out. Kaveri did not mince words. If they supported a rights issue at a hefty premium, the public would renounce its rights. Kaveri did not wish to invest more in the pharma business: they had other plans. Kaveri would renounce its rights too, which meant that Celestial will become CK Pharma’s single biggest shareholder. Kavera did not want Celestial to renounce its gentleman’s handshake on partner parity.
Celestial did not believe a rights issue at par was defensible. The market wasn’t deep enough to mop up enough cash at par. It made no sense to offer shares at lower than their intrinsic worth in order only to protect Kaveri’s concerns. Celestial did not see the point in vastly expanding the business, only to then reward public shareholders. They saw Kaveri as a ‘dog in the manger’. They felt Kaveri should participate, or step aside. They told Kaveri as much. It took five meetings over eight months for parties to know they had arrived at a complete deadlock. Parties now had a fundamental and irresoluble conflict of commercial interest. Celestial went to its lawyers.
Lawyers did not offer any good news. Their reasons were clear enough. The Board was deadlocked and while the Chairman could steer meetings, he had no casting vote. The Managing Director was a Kaveri man and would fight Celestial at the ground level. Bear in mind that in a listed company, it is the MD who controls Company operations. In effect, if Celestial starts a legal war, Kaveri would use CK Pharma to fight Celestial, meaning that it will make Celestial pay for Kaveri’s case. Finally, Celestial had no handle on the governing environment. Just as Kaveri know nothing about the manufacturing side of pharma, Celestial knew nothing about the political side of pharma. It was another deadlock. It was not possible to break this deadlock without addressing each of its three elements: Board parity, MD loyalty and Government influence.
If you think about it, the deadlock actually had two elements to it, not three. If you took out the MD, Board parity would automatically disintegrate, leaving only the governing environment to worry about. The governing environment had three elements to it: workers, public shareholders and of course, the Government. How was Government to be managed? It needed voter leverage, because that, and election funding, is what politicians worry about. Celestial immediately increased its engagement with the government and roped in the trade unionists to further its cause. At this point in time, Trade Union elections loomed even as the Trade Union agreement had expired and negotiations were underway. To win the next elections, the Union President needed a reasonable settlement. Celestial made a bargain with him.
To the public shareholder, celestial sold the technology story. Celestial wanted to take the company forward, but Kaveri had other plans and didn’t want to pay the bill. They told anyone who would listen that Kaveri was holding back progress. In this way, they created a basket of noisy allies, mainly workers and public shareholders.
Eventually, Celestial got to judgment day. It was time to take out the MD and change the balance of power on the Board. This was a big ask. The MD was a great professional. He delivered results and his performance could not be faulted. Celestial roped in the Company Secretary, convincing him that his future lay with Celestial. Did he have any dirt on the MD? Had he swept anything under the carpet, window dressed numbers, taken kickbacks from vendors, anything? Nothing! The MD was clean. Celestial would have to do something unpredictable, perhaps unimaginable, even unethical!
Eventually, opportunity came knocking. During the course of a random feel-good discussion with the Union President, Celestial learnt that the Managing Director was carrying on with his personal secretary. He would go off for meetings accompanied by his very attractive secretary, but actually visit a friendly hotel with day rooms on hire. It seems the Union President knew about this because his brother worked at that hotel. Celestial had its opening. Would the brother inform Celestial the next time the MD showed up at the hotel?
Soon enough, that call came. Celestial activated its rapid action force. Remarkably, events soon escalated well beyond Celestial’s plans. Celestial had intended that the Union President remain in the hotel lobby with his gaggle of workers while Celestial’s lawyers surprised the MD. The plan was to persuade the MD to resign rather than face public humiliation. As it turned out, fifty workers followed the lawyers up to the hotel room and practically broke down the door, catching him buck naked in bed. Both rushed into the toilet, leaving their clothes behind. When Celestial’s local Director arrived at the hotel an hour later, he found 50 belligerent workers in a luxurious environment shouting slogan while the love birds crouched behind the bathroom door. This Director managed to evict the workmen but he could not get their clothes back and he then conducted the rest of the proceedings with his MD dressed in a towel. His resistance broken, the MD readily signed a resignation letter hand written by the Director. In due course, the clothes were returned and the workmen dispersed. It was done.
Kaveri was not informed of the MD’s disappearance for several days. In this period, Celestial directors progressively increased their presence in the company, getting to grip with both operations and key personnel. Eventually, Kaveri directors started to inquire of the MD’s whereabouts and it was time to unveil the next step of the plan. CK Pharma now issued a notice of a Board meeting to ‘discuss the emergent situation’. Expecting trouble, all Kaveri directors were present at this meeting. They could not understand why the MD had resigned. Unsuccessful efforts were made to contact him from the Boardroom. The meeting ended with the Directors agreeing to let the next man in the pecking order assume charge as the Chief Operations Officer.
It seems Kaveri did eventually find the former MD in his ‘home town’ but that hardly helped. Kaveri was one director short of parity on the Board of the company. Kaveri now wrote to the company nominating a replacement director. Bear in mind that Celestial didn’t have a legal obligation to appoint whoever Kaveri wanted it to. Still, Celestial wanted to maintain the illusion of parity because this would yield dividend if the matter showed up in court. Celestial needed to find a strategy that would project parity but serve its original purpose.
What did Celestial really want? It wanted to expand operations through a rights issue at a premium. If it had that in the bag, Kaveri would be forced to relinquish its rights. At that point, the parity of directors on the Board would also change. Why force the pace when the same result would come to it in time?
On receiving this nomination, Celestial responded by calling for a Board meeting to resolve issues pertaining to the new expansion project. Kaveri didn’t mind that, so long as there was parity on the Board. In a classic case of unpredictability, Celestial contrived with the Company Secretary to secure that the agenda of the Board Meeting placed the item on the new expansion project before the item on the new nominee director. The scene was set.
At the very commencement of the Board Meeting, Kaveri directors raised a storm of protest on the order of the agenda items. They wanted their co-director appointed before any other item was taken up. Propriety was on their side but the law was not. It was acrimonious. Eventually, after everyone had exhausted themselves, the Chairman put this issue to the vote and Celestial’s directors had the majority. Exactly as you would expect, the Board voted to retain the agenda unchanged. Kaveri directors wisely chose not to walk out.
The acceptance of the resignation of the MD the was first item on the agenda. He had resigned. There was nothing to be done. The item passed without incident. The Second item – on the new project – had no such luck. All directors had their very vocal say, but in the end, Celestial had the majority and the resolution passed subject to shareholders approval. The board authorized the Company to call for a shareholders meeting.
The brought up the agenda item on the appointment of a new Kaveri director. Kaveri did not have a legal ‘right’ to nominate directors but the Justice Machine could take the view that Board representation should be proportional. Why bait a sleeping lion? The item needed deft handling. Celestial was at its unpredictable best. Celestial directors deliberated the matter in harmony with Kaveri directors and then took the view that they needed to meet the gentleman before taking a decision! Kaveri directors were incensed but they were outvoted. The meeting adjourned amidst considerable tension. Two days later, the company issued notice convening an extraordinary general meeting of shareholders asking for fresh equity injection to fund the expansion project.
Kaveri was before the Company Law Board within the week. Their case rested on three planks. First Kaveri produced the former MD’s affidavit swearing that he had been forced to resign by a Celestial director. This is why his resignation was in the handwriting of the Celestial director on hotel stationary. Such a resignation was invalid. Second Kaveri argued that both the gentlemen’s handshake and corporate propriety required proportional Board representation. How could such a strategic capital structure altering resolution be passed without first inducting a Kaveri director into the Board? Finally, Kaveri claimed bad faith. Celestial had hatched a conspiracy, orchestrated a meeting and arrived at a pre-meditated result, the consequence of which would be a change of management control within CK Pharma. Kaveri asked the shareholders meeting should be stayed till a fully constituted Board has properly examined the business expansion proposal.
Celestial presented a simple defense. A resignation is final once accepted. If this former MD believes he is competent to be appointed to the same position again, he can apply to the Board afresh. Only then would questions of competence, moral rectitude, reliability and track record be deliberated. At this point, the court had nothing to decide. As for appointing a replacement director, no party has a right to nominate a director. Now that Kaveri had made a nomination, the Board will treat this as a recommendation and deal with it in their best judgment as a mature Board would do. Finally, as regards the new project, it was established law that the courts should not restrain shareholders meetings or substitute their wisdom for the wisdom of shareholders. Let the shareholders take a view.
The Company Law Board saw the defense sympathetically. It took the view that it was nobody’s case that the MD did not sign the resignation. As for the appointment of the replacement director, the action was premature as the Board was deliberating on the appointment and they should have a reasonable opportunity to exercise their mature wisdom. Finally, CLB could see how it can stop a shareholders meeting. If shareholders want the expansion project executed and were willing to pay for it, why would CLB interfere?
It was now time to prepare for the Shareholders Meeting. Celestial expected Kaveri to act predictably doing the stuff cash rich promoters do. Not long after the CLB petition was filed, CK Pharma’s share price began its northward march. Clearly, Kaveri’s local group companies were very busy. Kaveri did not expect Celestial to do the same. As a foreigner, it would need regulatory approvals. It was a smart plan, but they bet wrong. Celestial found a way. It financed a Foreign Institutional Investor through a tax haven who in turn started mopping up CK Pharma shares. Simultaneously, Celestial pumped up the Union to take a strong stand at the meeting. Celestial also put together a group of four ‘professional’ public shareholders and persuaded them to make a nuisance of themselves at all shareholders meetings.
The shareholders meetings proved to be extremely animated. Professional shareholders made long speeches extolling the glory of Celestial, drubbing Kaveri for their treatment of their shareholders in other Kaveri group companies. They sang odes to Celestial’s technology and applauded Celestial’s aggressive India plans. In turn, Union leaders spoke glowingly of the benefits Celestial’s technology had brought them. They spoke of Celestial’s commitment to India. Kaveri sensed the mood and called for a poll. When the results were announced, it was clear that market operations by both parties had cancelled each other out. It came down to the remaining public ‘swing’ vote, and Celestial carried the day. The resolution was carried.
Kaveri’s CLB petition took a body blow. CLB would not stop the equity injection. Instead, it encouraged Kaveri to exit at valuer-determined price if they wished. Kaveri found itself between a rock and a hard place. Still, a smaller stack in a fast-growing pile was better than a quick exit at a low price. Kaveri chose to stay invested and were diluted. As 11% shareholders today, although they remain a thorn in Celestial’s side, Kaveri has benefited greatly. Meanwhile, CK Pharma has grown exponentially and Celestial has realizing its India ambitions.
There is a common perception among lawyers and layman that where the relative strengths of a case hang in the balance, the fate of the case also hangs in the balance. This is untrue. While much depends on the often unpredictable view that the Justice Machine may take of any legal issue before it, there is no such thing as rigid tactical configuration in litigation. More often than not, unpredictable creative tactics carry the day.