Moot Problem_2013 edition.pdf

7/27/2019 Moot Problem_2013 edition.pdf

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NLIU – JURIS CORP NATIONAL CORPORATE LAW MOOT COURT COMPETITION 2013

Appeal before the Supreme Court of India

Gryphon Limited

V/s

Competition Commission of India and Absolem limited

AND

Mr. Gopi Basu

V/s

Cheshire Limited

AND

Gryphon Limited

V/s

Absolem Limited

1. Gryphon Limited (hereinafter referred to as “Gryphon”) is an unlisted company, limited by shares, incorpoand registered in the Republic of India under Section 3 of the (Indian) Companies Act, 1956. Gryphonestablished in the year 1978 by the Patel Group (hereinafter referred to as the “Group”). The Group is knownone of the established business houses in India, having its registered office in Allahabad. The Group engagdiverse businesses, including infrastructure development, telecommunication and hospitality. Mr. Rajith

(hereinafter refer red to as “Mr. Patel”) is the promoter of Gryphon and enjoys a special stature in his buscircle. Gryphon has carved a niche for itself in the Indian market in the telecommunication industry with respits software development, marketing, human resource management and other related processes. Gryphon haverage pan-India market share of 43.7% and the turnover for the last financial year was INR 12.4 billion.

2. McTwisp Limited (hereinafter referred to as “McTwisp”) is popular in the United States of America aforemost player in the telecommunication industry. The brand name ‘McTwisp’ is synonymoustelecommunication in the global market. McTwisp, through its various subsidiaries has a diverse busincluding software development, wires manufacturing, manufacturing of mobile handsets, internet broaservices and IT consultancy services. In and around 2011, McTwisp decided to invest in the Indian market thGryphon. On 5th June 2011, the global giant entered into a share subscription agreement (hereinafter referas the “SSA”) with Gryphon and subscribed to 40% of its total equity shares. Except McTwisp, there are no

foreign shareholders in Gryphon. Under the SSA, Gryphon undertook to take the consent of McTwisp in relathe matters listed in “Annexure A”. The relevant provisions of the SSA are reproduced in Annexure A.

3. On 18th January 2011, McTwisp availed a loan of USD 2 billion from a consortium of lenders in the United Sof America (hereinafter referred to as the “Lenders”) for a period of 10 years for initiating mtelecommunication, internet broadband services and IT consultancy services in China. However, 7 monthsthe second disbursement, the Lenders realized that McTwisp had diverted the funds to countries differentthose agreed between the parties without notifying the Lenders, which triggered an event of default under theagreement with McTwisp. Accordingly, the Lenders filed a suit against McTwisp in the relevant court of Ken



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(hereinafter referred to as the “Court”). The Lenders sought for repayment of the loan amount inclusive interest. The matter is sub judice. As an interim measure and in an effort to protect the Lenders’ interest, thehas granted an injunction order freezing the assets of McTwisp and restraining it from dealing with any adirectly or indirectly, wherever situate.

4. Absolem Limited (hereinafter referred to as “Absolem”) is a public unlisted company, limited by sregistered and incorporated under Section 3 of the (Indian) Companies Act, 1956 having its registered off

Allahabad. A significant player in the telecommunication sector since 1975, Absolem is a multi-spectrum with a market share of 31.1% in the Indian market having an annual turnover for the last financial year of INbillion. Their efforts in sustaining growth with responsibility have merited them many notable awards for econservation & efficiency, safety, health & environment issues from the Government and other reputed age

Absolem’s main object is restricted to providing landline and mobile telecommunication services. Grypho Absolem feature in the top 3 market makers in India in the telecommunication industry. Some of the sharehin Absolem is as follows - Mr. Gopi Basu (hereinafter referred to as “Mr. Basu”) with 24% stake, Mr. Abhim

Ahuja with 3% stake and Mr. Vikas Shetty with 9% stake. The remaining 64% shareholding in Absolem is alsby other resident Indians/resident Indian entities.

5. Around the same time as the equity infusion by McTwisp into Gryphon, one of the largest private equity playthe world, Cheshire Ltd. (hereinafter referred to as “Cheshire”), a company registered and incorporated as plaws of Germany entered the Indian telecommunication market vide a 49% equity shareholding in Absolem. the above investing arrangement, Cheshire bought 20% of its 49% equity shareholding from Mr. Basu at INRper share which was the fair value of the share as per the discounted free cash flow method. As per the terthe share purchase agreement (the “SPA”) executed between Cheshire and Mr. Basu on 17 th May 2011, Chhad the right to exercise an unqualified call option on the 4% of the shares held by Mr. Basu and had also obapproval from the Foreign Investment & Promotion Board to increase its shareholding in Absolem upto 55%this stake sale, there were several disputes between Mr. Basu and some of the directors of Absolem. The

issue of these disagreements was with respect to the strategic growth plans of Absolem and the restruc(related to management positions and day-to-day company functions) brought about after the investmeCheshire. This irreparably damaged the relations between Mr. Basu and Absolem’s management.

6. Mr. Basu is the promoter shareholder of another Indian telecommunication company, namely Oscilles L(hereinafter referred to as “Oscilles”) which recently established itself in the telecommunication industry in Indian states, namely – Uttar Pradesh, Uttarakhand, Himachal Pradesh, Haryana and Punjab (the “RegOscilles is an unlisted public company, limited by shares, incorporated under Section 3 of the (Indian) Comp

Act, 1956 and having its registered office in Nainital. It has been struggling to generate profits even after fiveof operations in the industry due to the high infrastructure maintenance cost in the telecommunications secto

7. Amongst the pan Indian players, Absolem was a leader in the Region while Gryphon had a relatively s

presence. During its market analysis, to expand its reach and increase its market presence in the Region, Gridentified Oscilles as a potential growth medium. Since Mr. Patel and Mr. Basu shared a great personal equover casual discussions on the industry with Mr. Basu, Mr. Patel came to be aware of the disagreements bet

Absolem and Oscilles. In order to maximize the advantages of Mr. Basu’s situation and in view of expaGryphon’s presence and name in the Region, Mr. Patel approached Mr. Basu to buy out his 4% stake in Aband 9.9% stake in Oscilles. For the proposed sale, Gryphon, Mr. Basu and Oscilles entered into a share puragreement (the “Agreement”), the terms of which are as follows:



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a. Gryphon will purchase the 4% shareholding in Absolem at a price of INR 700 per share thereby v Absolem almost twenty times its current valuation.

b. Gryphon will purchase 9.9% shareholding in Oscilles at a price of INR 300 per share thereby vOscilles almost forty five times its current valuation.

c. Gryphon will arrange for Oscilles to receive substantially subsidized infrastructure maintenance servic3 years.

8. Media reports claimed that the Agreement was a leg to the tacit understanding between Mr. Basu and Mr. Pawhich, at the end of 5 years from the Agreement, Mr. Basu would transfer his 62% stake in Oscilles to GryGryphon proceeded to transfer funds in favour of Mr. Basu for the transfer of the Oscilles shares. Mr. Basuproceeded to pump the funds towards the working capital of Oscilles. Renewed by the promise of the Agreeand the subsidized maintenance costs, Mr. Basu slashed talktime charges for its customers by a whopping This hitherto unforeseen move flipped the market dynamics and almost doubled the subscriber demanOscilles within the quarter. By the end of the quarter, the market share of Oscilles in the Region shot up to 5

As a result of this mark shift, Absolem’s overall market share in the Region went down by 12.8%.

9. News of the agreement leaked to the public by reports dated around 13th February 2013.On 14th February Cheshire served a notice to Mr. Basu exercising their call option with respect to the 4% shares held by Mr. B

Absolem. A copy of this notice was served on Gryphon independently.

10. Disregarding the said notice, Mr. Basu proceeded to transfer his shares to Gryphon. The share transfer(hereinafter referred to as “STF”) was sent to Absolem for registr ation and entry of the names of theshareholders into the register of members.

11. On receipt of the STF, a notice was issued for holding a meeting of the Board of Directors of Absolem (herereferred to as the “Board”). The minutes of the meeting of the Board indicated that the transfer of shares fro

Basu to Gryphon was rejected. In the Board’s opinion, such transfer of shares would violate the present under which the FDI is invested in Absolem. The 49% sectoral cap vide automatic route investment wbreached. For any investment beyond 49% Government approval would be required. Presently, such Goverapproval is not applied for/taken either by Gryphon or by Absolem. The Board also believes that the terms

Agreement are anti-competitive in nature.

12. Cheshire decided to initiate proceedings by way of a suit for breach of contract before the Allahabad High (the “HC”). The suit was admitted under the original jurisdiction of the HC. The HC ruled that the call optionsvalid. Mr.Gopi Basu decided to appeal the order before the Supreme Court of India.

13. Simultaneous proceedings were initiated before the Competition Commission of India (the “CCI”) by Abagainst Gryphon. The CCI ruled that the agreement between Gryphon and Mr. Basu did not amount t

competitive practices. An appeal was filed before the Competition Appellate Tribunal (the “COMPAT”)COMPAT upheld the decision laid by CCI. This decision was further appealed by Absolem.

14. Gryphon filed a petition before the Company Law Board, New Delhi (“CLB”) against Absolem for its refuregister the share transfer made in favour of Gryphon. CLB stayed the transfer of shares on the ground thatapproval was not applied for and directed the parties to procure such approval. Gryphon appealed againorder to the HC which upheld CLB’s order. In a final step, Gryphon has filed an appeal for the same befoSupreme Court of India.



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15. The above appeals were clubbed together before the Supreme Court and is listed for arguments on 18 th O2013.

16. The following are the questions before the Supreme Court:-

a. Whether the call option exercised by Cheshire is valid?b. Whether McTwisp has indirect control over Gryphon pursuant to Annexure A and whether the trans

shares to Gryphon breaches the FDI limits?c. Whether the agreement for sale of shares by Mr. Basu to Gryphon is anti-competitive?

17. Parties to argue for Gryphon and Mr. Gopi Basu OR Absolem and Cheshire.



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Annexure A

Relevant portion of the Share Subscription Agreement

10. Reserved Matters

10.1. Subject to clause 10.2, none of the matters listed in Schedule I of this SSA (hereinafter referred

Reserved Matters) shall be taken up by Gryphon without the consent of McTwisp. No resolution

Board of Directors or any committee or resolution by shareholders shall be passed in respect of

Reserved Matters without the consent of McTwisp.

10.2 Any matter not listed as a Reserved Matter may be taken up without the consent of McTwisp. How

McTwisp shall be informed of all such matters prior to execution of such matter.

Schedule I

List of Reserved Matters

1. Any amendment to the articles of association or memorandum of Gryphon;

2. The issue or allotment of any share capital of Gryphon or the creation of any right to subscribe or acqu

convert any security into, any share capital of Gryphon;

3. Application for the listing or delisting of any shares or other securities of Gryphon on any stock exchange;

4. Resolution to wind up, dissolve or liquidate, re-organize or restructure Gryphon or any subsidiary;

5. Any material change in the nature or scope of the business, including the introduction or discontinuance o

field of activity and the relocation or expansion of the business of Gryphon, or the establishment of any bus

outside the Territory;

6. Merging, re-organizing, consolidating or engaging in any other form of business combination in resp

Gryphon;

7. Making or taking loans, making investments, providing or receiving guarantees and other securities othe

above the pre-agreed threshold of INR 3 million;

8. Appointment of key managerial personnel such as CEO, CFO, Vice President or President;

9. The commencement or settlement in any jurisdiction of any kind of dispute resolution proceedings which -

a. Involve or may involve an amount in excess of INR 3 million; or

b. Involves any damage to the reputation or interests of Absolem or any its affiliates or associated compor c. Involves any damage to the reputation or interests of McTwisp or any its affiliates or associated comp



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NOTE TO THE PARTICIPANTS

1. Please provide a detailed interpretation of the contentious Reserved Matters attached as Annexure A and does or does not constitute indirect control.

2. Please consider the definition of “control” as notified by the Department of Industrial Policy and Promotion in Note 4 of 2013.

3. The provisions of the (Indian) Companies Act, 1956 as on 30th August 2013 shall be applicable.4. Please note jurisdiction is undisputed and must not be raised as an issue.5. Please assume that all norms by DOT and TRAI and any other applicable state level telecom regulation

complied with.6. Participants may put forth up to a maximum of two additional issues in their submissions, (barring jurisdict

they so desire.

Moot Problem_2013 edition.pdf

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