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Petitioner: GOLDEN ARROW SELECTED STOCK FUNDS LTD. and another VS Respondent: CLARIANT PAKISTAN' LTD. and 9 others-Defendants
Court Name: Sindh High Court Judge(s): Munib Akhtar Title:GOLDEN ARROW SELECTED STOCK FUNDS LTD. and another vs CLARIANT
PAKISTAN' LTD. and 9 others-Defendants Case No.: Suit No.1373 of 2013 Date of Judgment:2015-06-05 Reported As: 2016 CLD 158, PLD 2016 Sindh 50 Result: Application dismissed Judgment ORDER MUNIB AKHT AR, J.---The application that falls for determination raises the issue whether the exception to the rule in Foss V. Harbottle is applicable to the facts and circumstances of the present case and if so, to what relief are the plaintif fs entitled. The exception, which allows for what is known as a "derivative action", has been largely superseded in English law by statute: see Part 11 of the (UK) Companies Act, 2006. However , even there it has not been wholly swallowed up by statute: see, e.g., the first instance decision in re: Fort Gilkicker Ltd. [2013] 3 All ER 546, where it was held that the "double" or "multiple" derivative action has not been abolished. See also Abouraya v Sigmund and others [2014] EWHC 277 (Ch), where Fort Gilkicker was expressly , approved, and Wadding ton Ltd v. Chan Chun Hoo Thomas [2009] 2B CLC 82 (Hong Kong Court of Final Appeal). However , in Pakistan (and, so it would appear , in India as well) the judicially evolved rule and its exception continue to apply . In Prudential Assurance Co Ltd v. Newman Industries Ltd and others (No. 2) [1982] 1 All ER 354, the Court of Appeal set out the rule and its exception in the following terms (pp. 357-8): The classic definition of the rule in Foss v. Harbottle is stated in the judgment of Jenkins L.J in Edwards v Halliwell [1950] 2 All ER 1064 at 1066-1067 as follows. (1) The proper plaintif f in an action in respect of a wrong alleged to be done' to a corporation is, prima facie, the corporation. (2) Where the alleged wrong is a transaction which might be made binding on the corporation and on all its members by a simple majority of the members, no individual member of the corporation is allowed to maintain an action in respect of that matter because, if the majority confirms the transaction, cadet question; or, if the majority challenges the transaction, there is no valid reason why the company should not sue. (3) There is no room for the operation of the rule if the alleged wrong is ultra vires the corporation, because the majority of mem bers cannot confirm the transaction. (4) There is also no room for the operation of the rule if the transaction complained of could be validly done or sanctioned only by a special
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resolution or the like, because a simple majority cannot confirm a transaction which requires the concurrence of a greater majority . (5) There is an exception to the rule where what has been done amounts to fraud and the wrongdoers are themselves in control of the company . In this case the rule is relaxed in favour of the aggrieved minority , who are allowed to bring minority shareholders' action on behalf of themselves and all others. The reason for this is that, if they were denied that right, their grievance could never reach the court because the wrongdoers themselves, being in control, would not allow the company to sue." It is pertinent to note that in the judgment appealed against (of Vinelott, J reported at [1980] 2 All ER 841 and [1981] 1 Ch 257) the learned Judge had held that "a shareholder was entitled to prosecute an action on behalf of the company if 'the interests of justice do require that a minority action should be permitted' ([1982] 1 All ER at p. 359). While the Court of Appeal did not give a definitive answer as to whether the scope of the exception had been so widened, it was observed as follows (pg. 366): The second observation which we wish to make is merely a comment on the judge's decision that there is an exception to the rule in Foss v. Harbottle whenever the justice of the case so requires. We are not convinced that this is a practical test, particularly if it involves a full-dress trial before the test is applied. On the other hand we do not think that the right to bring a derivative action should be decided as a preliminary issue on the hypothesis that all the allegations in the statement of claim of 'fraud' and 'control' are facts, as they would be on the trial of a preliminary point of law. In our view, what ever may be the properly defined boundaries of the exception to the rule, the plaintif f ought at least to be required before proceeding with his action to establi sh a prima facie case (i) that the company is entitled to the relief claimed and (ii) that the action falls within the proper boundaries of the exception to the rule in Foss v. Harbottle. On the latter issue it may well be right for the judge trying the preliminary issue to grant a sufficient adjournment to enable a meeting of shareholders to be convened by the board, so that he can reach a conclusion in the light of the conduct of, and proceedings at, that meeting." 2. In Abouraya v. Sigmund and others [2014] EWHC 277 (Ch), the learned Judge observed that the "scope of "fraud" for the purposes of this exception has been considered in many cases" (para 18), and after considering some of them observed as follows: "24. It is therefore the case that all the authorities on direct derivative actions have taken as a requirement that the alleged wrongdoing should result in a loss to the company and, hence, an indirect or reflective loss to the shareholders and also that the alleged wrongdoers should have personally gained from their breaches of duty . ... 25. It follows, on the authorities as they stand, that financial or other loss to the shareholders, albeit normally of a reflective character , is essential to give a claimant shareholder sufficient interest in the proceedings to make the shareholder an appropriate claimant on behalf of the company ... Equally , the authorities require that, in the absence of actual fraud or an ultra vires act, the wrongdoers should themselves have benefited from the wrongdoing. The significance of this requirement is that their breach of duty cannot be ratified by a majority vote which depends on the votes of the wrong doers. It is essential to the exception to the rule in Foss v. Harbottle that the alleged wrongdoing is incapable of lawful ratification: see Smith v . Croft (No.2) [1988] Ch 1 14. 26. Satisfaction of the requirement for the claimant to establish a prima facie case both that the company is entitled to the relief claimed and that the action falls within the proper boundaries of the exception to the rule in Foss v Harbottle does not automatically entitle the claimant to permission to commence or continue the action. The court exercises a discretion whether to grant permission and will have regard to all relev ant factors. This is illustrated by the authorities which establish that a claimant who has been involved in the alleged wrongdoing or who seeks to bring the proceedings for an ulterior purpose will not be regarded as an appropriate claimant and will not be given permission: see Nurcombe v. Nurcombe [1985] 1 WLR 370 at 376 per Lawton LT, Barrett v Duckett [1995] 1 BCLC 243 at 250 per Peter Gibson LJ. Above all, it is illustrated by the requirement that a reasonable board of directors would consider it to be in the best interests of the company to pursue the proceedings." The foregoing are, in the main, the princ iples on the basis of which the plaintif fs' claim for interim relief is to be examined. (For the position in Indian law, see A Ramaiya, Guide to the Companies Act, 18th ed. (2015), pg. 109, et seq.)
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3. Learned counsel for the plaintif fs submitted that they were minority shareholders in the defendant No. 1 ("Clariant Pakistan"), which was (at the relevant time at any rate) a company listed on the stock exchange. They held about 1.5% of the shares of the company . As its name suggests, the defendant No. 1 was part of the multinational Clariant group, and learned counsel submitted that the defendant No. 11 ("Clariant International") was the majority shareholder in Clariant Pakistan (holding not less than 75% of the shares). The defendant No. 3 ("Clariant Chemical Pakistan") was another member of the same group, being a private company incorporated in Pakistan. The defendants Nos. 4 to 9 were at the relevant time the directors of Clariant Pakistan, and (as was to be expected) the Board of Directors comprised of nominees of the Clariant group. (For present purposes, the Clariant group can be regarded as represented, by Clariant International, and therefore the two terms will be used interchangeably .) 4. Learned counsel submitted that Clariant Pakistan was engaged in different businesses and manufactured a number of products. Sometime in Decem ber 2012 an offer by M/s SK Capital (another international group) for the latter to acquire the textile chemicals, paper speciality and emulsion businesses of the Clariant group on a worldwide basis. This offer was accepted. Since Clariant Pakistan was also engaged in making such products, this meant that a portion of its undertaking would be sold to SK Capital. However , Clarant Pakistan was also engaged in the "manufacture of several other products in other business area, including leather , masterbatches, pigments, additives, industrial and consumer specialities, oil and mining, detergents and intermediaiies and catalysts. These businesses were being retained by Clariant. A decision was therefore taken by the Clariant group that a local company would be incorporated and the businesses being retained would be "spun off" to this company . Clariant Chemical Pakistan was incorporated on or about 19.02.2013 apparently for just this purpose. The balance businesses to be left with Clariant Pakistan would be those sold to SK Capital, and for this purpose the shareholding held by Clariant International in the former would be transferred to the latter (or its nominee). 5. Learned counsel submitted that for the foregoing purposes, an extraordina ry general meeting of Clariant Pakistan was called for 11.07.2013. In the statutory statement required to be annexed to the notice, particulars were provided of the proposed sale of the leather , masterbatches, pigments, additives, industrial and consumer specialties, oil and mining, detergents and intermediaries and catalysts businesses, together with the plants (i.e., the immoveable properties) located at Lahore and Karachi (herein after the "retained businesses", i.e., retained by the Clariant group). Disclosure was made of the sale of the Clariant businesses in textile chemicals, paper speciality and emulsion on a worldwide basis to SK Capital and that the retained businesses would be transferred to Clariant Chemical Pakistan. It was stated that Clariant Chemical Pakistan had offered to acquire the retained businesses as a going concern and at a premium above the fair market value. Details of the values of the retained businesses and the plants were also given in the statement. 6. Given that Clariant International held 75% of the shares of Clariant Pakistan, it was easily able to pass the necessary resolution(s) at the shareholders' meeting. The core of the plaintif fs' case is that a fraud has thereby been perpetrated on Clariant Pakistan and since the alleged wrongdoers (the Clariant group) are (or were at the relevant time) in complete control of the company , the exception to the rule in Foss v Harbottle is applicable, allowing and enabling the minority shareholders to sue and impugn the transaction for and on behalf of the company . In sum and substance, what is contended is that the retained businesses and the plants have been "spun off' to another Clariant entity at a substantial discount to their true and real value. Thus, Clariant Pakistan, as a legal entity in its own right, has suffered loss and injury for which it would be unable to pursue the appropriate remedy given that the wrongdoers are (or were) in control of its af fairs. 7 To substantiate the alleged fraud, and hence the plaintif fs' right to sue under the exception and claim interim relief (for and on behalf of the company), learne d counsel referred to the half yearly acco unts of Clariant Pakistan (made up to 30.06.2013). It was submitted that the book value of the assets shown as "held for sale" was given as around Rs.1.9 Billion. Learned counsel submitted that in the statement appended to the notice for the shareholders' meeting the fair market value of the retain ed businesses on a going concern basis was shown as Rs.2.474 Billion (approx.) and that of the plants as Rs.0.864 Billion, giving a total value of Rs.3.339 Billion (approx.). However , the admitted position was that these assets were disposed off to Clariant Chemical Pakistan for a total amount of
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Rs.2.578 Billion (approx.), which was at a marked discount. Learned counsel submitted that Clariant Pakistan had thus suffered a substantial loss. Learned counsel also submitted that different valuations were given to the retained businesses and the properties in the various documents circulated, which showed that the transaction was not genuine or bona fide. In this regard, learned counsel also contended that since the Boards of both Clariant Pakistan and Clariant Chemical Pakistan were controlled by the same group, it was simply not possible that a properly negotiated transaction had occurred since it was essentially the same party on both sides of the bargain. The conflict of interest was apparent on the face of the record. Learned counsel submitted that the transaction was clearly to the manifest disadvantage of Clariant Pakistan, and the plaintif fs accord ingly had standing to sue on its behalf in the facts and circumstances of the case. As to the relief sought, learned counsel submitted that a clear case for interim relief had been made out since all three "ingredients" for such relief (prima facie case, balance of convenience and irreparable loss and injury) lay in favour of the plaintif fs (or, more precisely , the company) and against the Clariant group. It was prayed accordingly . Learned counsel relied on a number of cases in support of his submissions, which are considered below to the extent as appropriate. 8. Learned counsel for the defendants Nos. 1 and 2 (i.e., Clariant Pakistan and Clariant Chemical Pakistan) strongly opposed the grant of any relief. It was submitted that no case whatsoever had been made out for invoking the exception to the rule in Foss v Harborttle. There had been no fraud and the entire transaction, as to which there had been full disclosure at every stage, was entirely proper and in accordance with law. In particular , it was submitted that the assets disposed off to Clariant Chemical Pakistan had been sold at a premium over the fair market value, which was Rs. 2.474 Billion. The claim that the proper value was Rs.3,339 Billion was completely incorrect. It was submitted that the fair market value of the immoveable properties was included in the value of Rs.2,474 Billion, and the plaintif fs were wrongly counting this amount twice over to reach their inflated figure of Rs.3.339 Billion. The separate indication of the value of the immoveable properties in the statement was, it was submitted, nothing but compliance of statutory requirements (SRO 1227/2005 dated 12.12.2005) and the plaintif fs were deliberately and with mala fide intent misreading the contents thereof. It was categorically denied that there was any wrongdoing or that any wrongful gain or profit had been made by the Clariant group at the expense of any person or entity , including Clariant Pakistan. No case of fraud, or even of negligenc e, had been made out. As to the applicability of the exception to the rule, learned counsel submitted that the resolution(s) at the shareholders' meeting had been passed by members holding 80.7% of the shares. It was submit ted that if at all any derivative or representative action was. Permissible, it could only be brought by those holding a majority of the remaining shares (19.3%), i.e., by members holding not less than 9.65%. The plaintif fs' shareholding was only a miniscule 1.5%. It was further contended that the plaintif fs had in any case acquiesced in the transaction. Learned counsel submitted that the plaintif fs did not attend the meeti ng held on 11.07.2013 even though they had admittedly received notices for the same. After the meeting and the completion of the transaction, SK Capital, as acquirer of the majority shareholding of a listed company , had made a public offer to the minority shareholders in accordance with law. The plaintif fs chose not to participate in the said offer. It was emphasized that the assets were disposed off at a price (Rs.2.578 Billion) that was above the fair market value. It was submitted that the present application ought to be dismissed. Learned counsel also relied on several decisions, which are cons idered below to the extent as appropriate. 9. Learned counsel for the defendant No. 3, which is the entity that acquired the majority shares in Clariant Pakistan, endorsed the submissions of learned counsel for the defendants Nos. 1 and 2. It was submitted that the new management was fully satisfied with the transaction and did not challenge or impugn the same. It was prayed that the present application be dismissed. 10. I have, heard learned counsel as above, examined the record and considered the case law. Learned counsel for the parties referred to a number of decisions to delineate the rule in Foss v. Harbottle and its exception permitting a derivative action. On the plaintif fs' side, learned counsel referred (as to English law) to Daniels v. Daniels [1978] 2 WLR 73,*75 (et seq.) and Konamaneni and others v. Rolls Royce Industrial Power (India) Ltd. And others [2002] 1 All ER 979, 987-9 (paras 24-29), and (as to Indian law) to Praka shchandra Rajmal Jain v. Firm Swarupchand Hukumchand and Co. And others 1975 MPLJ 390 (para 29 et seq.), Spectrum Technologies USA
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Inc. v. Spectrum Power Generation Comp any Ltd. (Delhi High Court, dated 21.09.2001 (para 82 et seq.)) and Nirad Amilal Mehta v. Genelec Limited and others [2008] 146 Comp Cas 481 (para 8). For the defendants, learned counsel referred to the judgment of Vinelott, J in Prudential Assurance Co Ltd v. Newman Industries Ltd and others (No. 2) [1980] 2 All ER 841, [1981] 1 Ch 257, North-W est Transportation Company Ltd. And another v. Henry Beatty and others (1887) 12 App. Cas. 589 (PC) and an extract from Palmer's Com pany Law (24th ed., 1987, para 65-02 et seq.). It is, with respect, not necessary for me to consider this material in any detail since the principles relating to the rule and its exception have already been set out in the beginning of the judgment. 11. I therefore turn immediately to a consideration of whether the exception is at all applicable in the facts and circumstances of the present case. In one sense, the factual aspect of the case moves within a narrow compass. It is not in dispute that the relevant assets of Clariant Pakistan were transferred to Clarinet Chemical Pakistan for Rs.2.578 Billion. If therefore the fair market value of the assets was, as claimed by learned counsel for the defendants, Rs.2.474 Billion then there can hardly be any case of fraud within the meaning of the exception. On the other hand if, as contended by learned counsel for the plaintif fs, the value was Rs.3.339 Billion, then there may well be a case to answer . 12. Learned counsel for the plaintif fs placed strong reliance on In Re: Dunlop India Limited and Madura Coats Limited (2012) 2 Comp LJ 199 (Calcutta High Court) to support his contention that a disposal of a valuable asset (here immoveable property) at a discount would certainly constitute fraud within the meaning of the exception. It is pertinent to note however that the context of the cited case was a winding up petition and an application for appointment of a provisional liquidator . The petitioner was an unpaid creditor of the company sought to be wound up (Dunlop India Ltd.). With respect, it is not therefore of any direct relevance since in a contested winding up the aggrieved party is the petitioning creditor or member (or other permissible party such as the Registrar of Companies) whereas in a derivative actio n, the aggrieved party is the company itself, the procedural device of the action being necessitated because the wrongdoers are in control of the victim. However , since it was so strongly relied upon by learned counsel, it is only proper to consider this decision in some detail. As presently relevant, in the cited decision the controlling shareholders of Dunlop India had incorporated another entity , Dunlop Properties private Ltd. ("new entity") the controlling shares of which were (ultimately) held by a Mauritian entity . To the new entity Dunlop India transferred a property worth around (Indian) Rs.80 crores and in lieu thereof was issued shares therein at a huge premium. The property was then mortgaged for the benefit of sister companies of the same group, in the amount of Rs.575 crores. The shares issued to Dunlop India were transferred to the Mauritian entity . The transaction incurred the wrath of the learned Judge: "The company and those in management thereof had meticulously planned the entire scheme with the skill of a trained killer" (para 25). The learned Judge opined that the "property stolen from the company's fold and parked with Dunlop Properties must have been worth substantially more than Rs.575 crore since banks keep a margin before granting credit facilities against any immovable property", and that the "company , it is obvious, sold one of its landed properties at a gross undervalue to an entity controlled by the same management" (ibid). This was however , not a one-of f isolated transaction. The learned Judge detailed three other such transactions and concluded as follows: "29. Four valuable immovable properties of the company were, therefore, shown to have been removed from the company's fold and placed in the laps of other companies under the 'same manag ement by depressing the actual values thereof, receiving almost no consideration against them and by the company transferring - whether a substantial part or the entirety thereof - the shares which it received by way of ostensible consideration to other companies in the same management such that the beneficiary companies, which had become subsidiaries of the company upon the allotment of shares as consideration, were delinked from the company .... 30. There is no doubt that a company has a right to sell its properties and the prices at which it sells its properties may not be justiciable. But such principle which is founded on the doctrine of indoo r management - like the rule as to freedom to extend one's arm as long as it does not touch another's nose - is not absolute; and a company's act of selling its assets should not be opposed to public interest or seen to cause unfair prejudice to another if such other is entitled to complain of it before a court of law. The company would have been perfectly justified in selling off its properties to meet its debts and pay off its creditors or its employees and workmen. This company did not
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take such a mundane road. Instead, it effected the transfers, or most of them, when its creditors had no access to it or its properties by virtue of the protection that it enjoyed under the said Act of 1985 and the company did not use the money to pay off its creditors; its management used the company for the cash cow that it was for self aggrandizement and to the detriment and prejudice of its creditors, employees and workmen. Whether or not the transactions were in breach of the provisions of the said Act of 1985, they are good enough grounds to be cited to seek the appointment of a provisional liquidator over the company . It must not be lost sight of that Dunlop India Limited is a listed company and its controlling shareholding may not even constitute fifty per cent of its paid-up capital. Since the four immovable properties have been alienated from the company and parked with entities under the exclusive control of the group holding the controlling shareholding in the company , such act would also amount to gross mismanagement qua the other shareholders of the company and be seen as a fraud on such other shareholders." ' The strong terms in which the learned Judge condemned the actions of the controlling shareholders of Dunlop India are also attested by the last paragraph of the judgment. When stay of judgment was sought (apparently to enable filing of an appeal) the Judge peremptorily rejected the request "in view of the despicable conduct of those in the management of the company". 13. The cited decision may appear , superficially , to have some resemblance with the facts…
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