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6/27/11

397/398: Joint Venture disputes leading to litigation – a case study?

It is often been criticized that section 397/398 of the Companies Act, 1956 is being used as a forum to settle personal disputes between or among the shareholders. Taking advantage of the proposition that the Company Law Board has elaborate powers under section 397/398 of the Companies Act, 1956 read-with section 402, the shareholders/minority shareholders/petitioners approach the Company Law Board for the disputes which ought to have settled before other forums like Civil Court or the Magistrate Court. This is a constant criticism on the exercise of jurisdiction by the Company Law Board under section 397/398 of the Companies Act, 1956. Litigation is resorted often under section 397/398 of the Companies Act, 1956 so as to stall a proceeding before the Debt Recovery Tribunal and at times to get a transaction entered into between the Company and an outsider is set-aside. The Constitutional Courts have constantly maintained as to what constitutes ‘Oppression’ and what constitutes ‘Mismanagement’. Initially, there was so much emphasis on the definition of ‘Oppression’ and ‘Mismanagement’ and it is settled that an action of the majority should be ‘harsh and burdensome’ if it had to qualify for any remedial or preventive measures under section 397/398 of the Companies Act, 1956. But, now, there are judgments of Constitutional Courts laying emphasis on the ultimate objective of section 397/398 of the Companies Act, 1956 and the Courts held now that any preventive and remedial measures can be passed by the Company Law Board under section 397/398 of the Companies Act, 1956 even when there is no ‘Oppression and Mismanagement’ in strict senso.

The very interesting thing under section 397/398 of the Companies Act, 1956 is as to when the disputes arise between the parties to a ‘Joint Venture Agreement’ or understanding and raising these Joint Venture disputes pertaining to two separate legal entities in the ‘Joint Venture Company’ which is called ‘Special Purpose Vehicle’ very often. The Joint Venture disputes and these disputes leading to a petition under section 397/398 of the Companies Act, 1956 is always complicated and also interesting. I am of the opinion that the understanding between the two separate legal entities to the Joint Venture Agreement can be looked into in respect of a petition filed in the ‘Joint Venture Company’ which is constituted as a ‘Special Purpose Vehicle’ often. Infact, looking into the Joint Venture Agreements or the understanding and interpretation therefor is so difficult. At times, the clauses in the Joint Venture Agreement may have several meanings leaving huge scope for litigation. Again, it is complicatedness of corporate dealings that the business is done or the clauses in the Joint Venture Agreement is dealt with in the e-mail communications and acted upon. Even when the ‘Joint Venture Understanding’ is completely changed, it can happen through E-mail Communications too and it is possible. This corporate practice and the reality of corporate world makes it difficult for any one and especially the Company Law Board to understand the background of the ‘Joint Venture Understanding’ when it has to look into these business understandings in a Petition under section 397/398 of Companies Act, 1956.

The another significant point about the Joint-Venture understanding is that it can also substantially deal with the ‘Joint Venture Company’ or the separate legal entity which is often established as a ‘Special Purpose Vehicle’. This Company or the ‘Special Purpose Vehicle’ carries-out the Joint Venture Understanding. The understanding may refer as to the investment to be made in the ‘Special Purpose Vehicle Company’, the representation in the Board etc. While any company in India should be incorporated and run as per the provisions of the Companies Act, the Articles of Association etc., a conflict may come when the clause in the Joint-Venture Agreement comes in contrast to the express provision in the Companies Act, 1956. The Companies Act, 1956 may deal with the proportionate representation to the Board and other issues pertaining to appointment of Directors etc, and the Joint Venture Agreement may have an interesting arrangement when it comes to the representation in the ‘Special Purpose Vehicle Company’ which can only be a Private Limited Company or a Public Limited Company constituted under the provisions of the Companies Act, 1956.

I would like to deal with a hypothetical case study in this regard and it is as follows:

Facts of the Case:

A Company has know-how in respect of a particular thing and it is a Foreign Company being the research and development as its strength. It wanted to expand its activity in India upon an understanding and using the Indian policy of Foreign Direct Investment. It has found-out a Private Limited Company in India which has expertise in manufacturing. Both Companies have come together and held thorough discussions and decided to form a separate company to act upon the understanding. Accordingly, a separate ‘Special Purpose Vehicle Company’ has been constituted in India. The foreign partner or the Company to the Joint-venture is interested in getting their ‘intellectual property’ carefully guarded and it keeps a watch as to the leakage of its secrets or the know-how. Thus, there was a detailed business understanding between the Foreign Company and the Indian Company and another Company as a ‘Special Purpose Vehicle Company’ has thus been constituted. The main Joint Venture Agreement has got an Arbitration Clause to get the disputes settled through Arbitration.

Even after the constitution of the ‘Special Purpose Vehicle Company’, the communications went on between the Foreign Company and the Indian Company constantly and it refers to the business being carried-out by the separate ‘Special Purpose Vehicle Company’. There were misgivings at times as to the implementation of the Joint-Venture Agreements, there were complaints, there were explanations and even the accommodations were made when it comes to complying with the clauses in the Joint Venture Agreement. The business is carried-out this way for few years and suddenly, the confidence between the two major groups has lost and the foreign player has become aggressive and wanted to have a much more stake in the ‘Special Purpose Vehicle Company’. The Foreign players insisted for an expansion of activity and wanted an additional investment into the ‘Special Purpose Vehicle Company’. As another group could not make an additional investment in the Company as required, the Foreign Company has brought the additional investment into the ‘Special Purpose Vehicle Company’, got the authorized share capital increased and its equity in the Company has thus been substantially increased. Now, the other partner holds only a minimal equity in the ‘Special Purpose Vehicle Company’. There is a complication in this entire issue regarding the representation to the Bard of ‘Special Purpose Vehicle Company’. While the initial Joint Venture Agreement has elaborately dealt with the representation issue, the Articles say a different thing that the directors in the ‘Special Purpose Vehicle Company’ are to be re-elected every year. Despite this clause in the Articles, the Joint Venture Agreement or the understanding was acted upon for some time and after the additional investment, the Foreign Player wants a complete say in the ‘Special Purpose Vehicle Company’ and insists that it should be run as a separate Company without giving too much priority as to how the Company was constituted and the main and initial understanding. Even when it comes to the initial and main understanding, there was enough and countless communication in-between.

Now, referring to the additional investment and allotment of equity and referring as to how the Joint-Venture clauses are violated, the other Indian partner having a negligible stake files a Petition under section 397/398 of the Companies Act, 1956 seeking various relief against the majority in the ‘Special Purpose Vehicle Company’ and it meant that the Indian player to the Joint Venture is questioning the Foreign Company literally.

The entire narration in the petition under section 397/398 of the Companies Act, 1956 deals with all business issues, complaints etc. from the past so many years and despite these issues and complaints, the Joint Venture Agreement was acted upon substantially and the business was as usual for sometime.

Now, the petition is filed in respect of the ‘Special Purpose Vehicle Company’ and it is very difficult to allege ‘Oppression and Mis-management in respect of this Company. This Company is professionally run though it carries-out the substance of the business understanding between the foreign player and the Indian Company.

The Joint Venture Agreement or the understanding contains an Arbitration Agreement. There can be an argument that the issues under Joint Venture Agreement can be raised separately before the Arbitrator or the Civil Court and these disputes can not constitute an act of ‘Oppression’ and ‘Mis-management’. There can be counter argument that the ‘Special Purpose Vehicle Company’ was constituted solely based on the ‘Joint Venture Understanding’ and as such those disputes should also be looked into while dealing with a petition by the minority in the Company under section 397/398 of the Companies Act, 1956.

The above narration of a hypothetical case is only an example as to how difficult it is to deal with litigation based on a ‘Joint Venture Agreement’ under section 397/398 of the Companies Act, 1956.

Note: the views expressed are my personal and a view point only.

6 comments:

  1. This Case Study on Joint Venture Disputes are Very Comprehensive and Descriptive, For companies it would be batter approach to understand each other business dynamics and law implications before signing a Joint Venture.

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