1 IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION NOTICE OF MOTION NO. 3232 of 2006 IN SUIT NO. 2709 of 2006 Victor Fernandes & Ors. ..Plaintiffs. Vs. Raghav Bahl of Noida Indian & Ors. ..Defendants. Dr. V. V. Tulzapurkar, Senior Counsel with Mr. D. D. Madon, Senior Counsel and Ms. Alpana Ghone i/b. Kanga & Co. for the Plaintiffs. Mr. Janak Dwarkadas, Senior Counsel with Mr. A. S. Doctor and Ms. Phalguni Thakkar i/b. M/s. Doijode Associates for the Defendants. CORAM : S. J. VAZIFDAR, J. DATED : 8TH AUGUST, 2008 ORAL JUDGMENT : The plaintiffs have filed this suit as a derivative action on behalf of defendant no.3, e-Eighteen.com Limited. It is not necessary for the purpose of the present notice of motion to set out the precise shareholding of the parties herein in defendant no. 3. Suffice it to state that defendant nos. 1 and 2 together control 92.83% of the equity shares of defendant no. 3. The plaintiffs 2 together control about 6.38% of the equity shares of defendant no. 3. Defendant nos.4 to 10 are all companies directly and/or indirectly controlled, managed and owned by defendant nos.1 and/or 2. 2. The plaintiff has sought a permanent injunction restraining the first defendant from undertaking or pursuing or taking up any expansion, development or evolution of the activities or exploiting any opportunity offered to defendant nos. 1 to 3 after 12.9.2000 to any entity other than defendant no. 3 or its wholly- owned subsidiary; a permanent injunction restraining defendant no. 2 from in any manner exploiting any opportunity offered to it after 12.9.2000 except through defendant no.3 or its wholly-owned subsidiary; a permanent injunction restraining defendant nos.1 and 2 from in any manner carrying on the businesses in respect of the activities listed in paragraph 11 of the plaint or utilising any of the domain name or names listed in paragraph 11 and exhibit “D” to the plaint except to Defendant no.3 or its wholly-owned subsidiary. The Plaintiffs have also sought a decree directing defendant nos.1 and 2 to disclose the businesses started after 12.9.2000 by them directly or through any other entity controlled by them other than defendant no.3 and to transfer to defendant no.3 all such 3 businesses along with all the assets and properties belonging to such businesses, activities and ventures as so disclosed and to render accounts of all the profits and to such businesses ventures or activities commenced after 12.9.2000 in violation of an agreement dated 12.9.2000 whether directly or through any other company or entity owned or controlled by Defendant nos.1 and 2. Upon such accounts being rendered a decree is sought for paying over to defendant no.3 the amounts of such profits together with interest. Finally, the Plaintiffs have sought an order directing defendant nos.1 and 2 to get the shares of defendant no.3 listed on a stock exchange. The Notice of Motion is filed for interim reliefs in terms of some of the above reliefs. 3. Defendant no.3 was incorporated and registered on 16.3.2000. Under an agreement dated 21.5.2000, Plaintiff nos.1 and 2 agreed to sell and transfer to Defendant no.3 the entire share holding of a company called Moneycontrol.com India Pvt. Ltd., in consideration for a certain amount of money and 3,75,000 equity shares of Defendant no.3 which represented 7.5% of the equity share capital of Defendant no.3 at that point of time. In January, 2001 Plaintiff No.1 transferred 31,800 equity shares of Defendant no.3 to third parties including to Plaintiff nos.3 4 and 4. Thereupon, Plaintiff nos.1 and 2 held 3,43,200 equity shares of Defendant no.3 and acquired 32 equity shares of Defendant no.3. Plaintiff nos. 3 and 4 acquired 1800 equity shares of Defendant no.3 from Plaintiff no.1. Thus, together the Plaintiffs hold 3,45,03 equity shares of Defendant no.3, representing 6.5% of the total paid up equity share capital of Defendant no.3. 4. A subscription-cum-shareholder's agreement dated 12.9.2000 was entered into between Defendant nos.1 and 2, therein called the promoters, defendant no.3 and ICICI Global Opportunities Fund, LLC, a company incorporated in Mauritius, represented by its investment manager, ICICI International Ltd., referred to in the agreement and hereafter as the “VC Investors” By this agreement, the VC Investor had agreed to invest in Defendant no.3 by acquiring shares proposed to be issued to it. Recital `E' at page 53 and Clauses 3.1.1, 6.6.1, and Clauses 7, 11.1, 11.1.10 and 17 read as as under :- “E. In the above context, the Promoters and the VC Investors have reached certain mutual covenants and agreements on the capital structure, investment, scope, management and operations of the Company. 3.1.1 The present paid-up capital of the Company is Rs. 4,62,50,000 divided 5 into 46,25,000 equity shares of F.V. Rs.10/- each, all of which are held by the promoters and Shri. Victor Fernandis. 6.6.1 Until the listing of the Company's shares on a Stock Exchange pursuant to an IPO of the Company's shares no Transfer of any shares or other securities with rights of comparison to equity shares shall be made to any third party, (that is, parties other than the parties to this Agreement) unless such third party shall have agreed in writing to be bound by the provisions of this Agreement by executing the letter in the form attached hereto as Schedule 1. 7. PROMOTERS’ NON - COMPETE CONVENANT 7.1.1 Raghav Bahl undertakes to the Company and to the VC Investors that: 7.1.1.1 he shall : (i) devote his full time and attention to the business of the Company and the Group Entities; and (ii) use his best endeavors to develop the business and interests of the Company and the Group Entities. 7.1.1.2 he shall not (without the prior written consent of the VC Investors): (i) be involved or interested in or concerned with any other 6 business; (ii) increase any capital commitment in any entity in which he may be interested, including existing partnerships or otherwise; and (iii) do any activity which jeopardizes the interest of the Company in any manner. 7.1.1.3 upon his ceasing for any reason, to be employed by or to be a Director of the Company and the Group Entities, he shall not for a period of 3 years from the Expiry Date, whether on his own account, either personally or by his agent, or on behalf of any other person, directly or indirectly : (i) induce, procure or endeavor to induce any person who was an employee or consultant of the Company to leave the service of, or cease to provide service to, the Company; (ii) accept into employment or otherwise engage or use the services of any person who is, on the date of the termination of his employment, or was in the 12 months preceding such date, an employee or consultant of, or under contract of services to, the Company. 7.1.1.4 approach, solicit or deal with, in competition with the Company any 7 person that at any time during the 12 months immediately preceding the Expiry Date : (i) was a customer, client, distributor, agent or supplier of the Company with whom he had personal contact on behalf of the Company, (ii) was a customer, client, distributor, agent or supplier of the Company with whom employees reporting to him or under his direct control had personal contact on behalf of the Company, or (iii) was a person with whom the Company had business dealings (whether or not personally involving the Promoters). 7.1.1.5 seek to interfere with the continuance of the supply of goods and services to the Company or the terms of any supply. 7.1.1.6 carry on, engage in or be concerned or interested in (whether as shareholder, lender, director, consultant, principal, or as a partner, employee or agent of any person or otherwise), any business or activity which competes with the business and activities in which the Company is engaged at the Expiry Date, and any business or activity with or in which the Promoter was involved at any time during the 3 years before the Expiry Date. 11.1 Super Majority Rights of VC Investors 8 Notwithstanding the provisions of this Agreement except Article 11.2 hereof, and subject to such additional approvals as may be required by applicable Law, any action with respect to the following Fundamental Issues shall require affirmative concurring vote of the VC Investors in any general meeting of shareholders and/or the concurrence of the Nominee Director of the VC Investor or the VC investor at any meeting of the Board of Directors or Committee thereof as the case may be: 11.1.10 the acquisition of any other business, diversification or expansion either directly or indirectly through any other firm or company whether carried on individually or through partnership or otherwise; 17. TERMINATION 17.1 Grounds for Termination: This Agreement shall continue in full force and effect until terminated in accordance with the provisions of this Article. This Agreement may be terminated at any time : (i) by mutual written agreement of the Parties ; (ii) by any Party if there shall be any law or regulation that makes consummation of the transactions illegal or otherwise prohibited or if consummation of the transactions would violate any non-appealable 9 final order, decree or judgment of any Court or governmental body having competent jurisdiction; or 17.2 Effect of Termination: Termination of this Agreement shall be without liability of any Party (or any shareholder, Director, officer, employee, agent, consultant or representative of such Party) to the other Parties; provided that if such termination shall result from the (i) willful failure of any Party to fulfill a condition to the performance of the obligations of any other Party, (ii) failure to perform a covenant of this Agreement; or (iii) Material Breach; such Party shall be fully liable for any and all loss, cost damage incurred or suffered by any other Party as a result of such failure or breach . The provisions of Article 7.2, 15, 17.1, 19.1, 19.2, 19.3, 19.4, 19.8, 19.9, 19.20 and 19.21 shall survive any termination hereof pursuant to Article 17.1.” 5. As stated above, thereafter, in January, 2001 Plaintiff nos.3 and 4 acquired certain shares in Defendant no.3 from Plaintiff no.1. Thereupon, a letter in the form as per Schedule 1 to the said agreement was executed by the transferee i.e. Plaintiff no.3 which was strongly relied upon by Dr. Tulzapurkar in support of his contention that the Plaintiffs became entitled to enforce the clauses in the agreement dated 12.9.2000. 10 6. According to Dr. Tulzapurkar, the said letter was executed by the Plaintiffs and deposited with Defendant no.3. I was informed that upon the execution of the agreement dated 12.9.2000 the Articles of Association of Defendant no.3 were altered in accordance therewith. Thus, he submitted Plaintiff nos.3 and 4 are deemed to be parties to the said agreement dated 12.9.2000. 7. I do not agree. Plaintiff nos.3 and 4 upon acquiring the shares of Defendant no.3 from Plaintiff nos.1 and 2 were bound to execute the letter as per the form set out in Schedule 1 to the agreement as the transfer of the shares took place during the subsistence of the agreement. The agreement dated 12.9.2000 was entered into between Defendant no.1, Defendant no.2, Defendant no.3 and the “VC Investors”. The agreement, read as a whole, makes it clear that the undertakings given and obligations undertaken by Defendant nos.1 and 2 thereunder were for the benefit of the VC Investors. That the same were directed also to Defendant no.3 was, on a proper construction of the agreement, only for the purpose of effectuating and ensuring the implementation thereof to and in favour of the VC Investors. 8. Recital “E” makes it clear that the main purpose of the 11 agreement was the participation by the VC Investors in respect of the IPO. It is also important to note that the expression “The Promoters” in the agreement does not include all the shareholders. The Plaintiffs though shareholders, at the time when the agreement was entered into, were not parties to the agreement. Recital “C” states that “the promoters”, which did not include the Plaintiffs, had approached the VC Investors with a request to invest in the share capital of the company. Recital “E” stipulates that the covenants and agreements had been arrived at between “the promoters” and the VC Investors, inter-alia, in respect of the management and operation of the company. 9. That the agreement had been entered into between “the promoters” which did not include all the shareholders, is further established by Clause 3.1.1 of the agreement which refers specifically to Plaintiff no.1 being a shareholder of the company. The omission of Plaintiff no.1 as a party to the agreement was not accidental but deliberate. 10. Substantial reliance was placed by the Plaintiffs on clause 7 of the agreement. It is important to note that the undertakings contained in Clause 7.1.1 were furnished to the third Defendant company and to the VC Investors. The undertaking was 12 not furnished to all the shareholders of Defendant no.3. Even more important is the fact that the covenants furnished by Defendant no.1 in Clause 7.1.1.2 were only to and in favour of the VC Investors. I have already noted earlier that the exclusion of Plaintiff no.1 as a party to the agreement was not accidental but deliberate. This fact considered with Clause 7.1.1 and Clause 7.1.1.2 indicates the nature of the undertaking and the covenants furnished by Defendant no.1. They were essentially and for all intents and purposes, for the benefit of the VC Investors and not for the benefit of any other shareholders of Defendant no.3. The reference to the undertaking in Clause 7.1.1 also to the company/Defendant no.3 was only to give effect to the undertaking and the covenants in favour of the VC Investors and to ensure the enforceability thereof by the VC Investors. 11. What I have observed above, applies equally to Clause 7.1.2 of the agreement by which the promoters undertook to the company/Defendant no.3 and to the VC Investors that any expansion/development or evolution of the activities of the company and the group entities and any opportunities offered to the promoters shall only be pursued or taken up through the company or a wholly owned subsidiary of the company. It is 13 inconceivable that such undertakings or covenants would be furnished by Defendant nos.1 and 2 who admittedly, controlled almost 80% of the equity capital of Defendant no.3 to or in favour of the Plaintiffs, who even at the relevant time held less than 10% of the equity capital of defendant no.3. I do not suggest that such an inference must always be drawn merely on the ground of the extent of the share capital held by those seeking to enforce rights. This must depend on the facts and circumstances of the case. There however are no circumstances in the present case which even remotely indicate that there was any understanding or reason for such undertakings to be furnished by the majority shareholders to the minority shareholders. 12. The reliance upon the letter submitted by the Plaintiffs inter-se in terms of the form furnished in Schedule I of the said agreement is also not well founded. Article 6.6.1 read with the form itself, indicates that the requirement for furnishing the letter was not to create any rights between the existing shareholders per- se, but to protect the rights of the VC Investors in the event of there being any change in the shareholding pattern. The mere fact that in paragraph 4 of the letter it is stated that the the transferees would become parties to the shareholder's agreement and would 14 be entitled to all the rights and privileges provided thereunder, does not carry the Plaintiff's case any further. The letter read as a whole, indicates that it was for the benefit of the VC Investors. 13. It is pertinent to note that it is not even as if Plaintiff nos. 3 and 4 who were the transferees of the shares from Plaintiff no.1 had acquired the shares from the VC Investors. They thus did not step into the shoes of the VC Investors, entitling them to the rights created in favour of the VC Investors inter-alia under Clause 7 of shareholders agreement. 14. The share purchase agreement in any event stood terminated in March, 2003. On 7.3.2003 the VC Investor sold their shares to Defendant no.1. The VC Investor sold all its 4,04,000 shares to Defendant no.1 pursuant to and as evidenced by an agreement dated 7.3.2003 entered into between Defendant no.1, Defendant no.3 and the VC Investors. Defendant no.3 purchased the said 4,04,000 shares for a consideration of Rs.5,00,00,000/-. Clause 10(E) of the agreement provides that the same inter-alia supersedes all prior written agreements and understandings. 15. By a letter dated 17.5.2006 the VC Investor after referring to the shareholders agreement, stated that pursuant to the agreement dated 7.3.2000 by which the Plaintiff sold the said 15 4,04,000 shares to Defendant no.1, the shareholders agreement of 12.9.2000 stood terminated with effect from 7.3.2003. The VC Investor sought the confirmation of Defendant nos. 1 and 3 of the same which they issued by endorsing the same at the foot of the letter. There can be little doubt that the shareholders agreement dated 12.9.2000 came to an end by virtue of the agreement dated 7.3.2000 read with the VC Investors letter dated 7.5.2006. 16. Clause 17.2 of the shareholders agreement dated 12.9.2000 stipulates the clauses thereof which survive the termination of the agreement. Clause 7 is not included therein. 17. Dr. Tulzapurkar further submitted that Plaintiff nos. 3 and 4 having become parties to the agreement by virtue of the letter tendered by them upon the purchase of the shares from Plaintiff no.1, the agreement dated 12.9.2000 could not have been terminated without reference to them and the termination is not binding on them. 18. Prima-facie atleast, it is difficult to accept this contention. As stated above, the agreement dated 12.9.2006 contained the covenants essentially for the benefit of the VC Investor. There is nothing that prevented the VC Investor from terminating the agreement, which it did. Upon the termination of the agreement, 16 the rights and liabilities thereunder stood automatically terminated. There is nothing to indicate that the Plaintiffs or any of them stepped into the shoes of the VC Investor. Further, the termination has not been challenged. Further still, the personal rights of the Plaintiffs cannot form the subject matter of a derivative action, which is essentially for the benefit of the company. 19. Dr. Tulzapurkar also submitted that in any event Defendant no.1 is not entitled to act contrary to the interests of Defendant no.3 by virtue of his fiduciary role/capacity qua Defendant no.3. If the covenants in the shareholders agreement dated 12.9.2000 do not bind the parties thereto, including Defendant no.1, I do not see how the reliefs sought can be supported on this basis. There is nothing that prevents Defendant nos. 1 and 2 from carrying on other businesses either individually or otherwise. The mere carrying on the other businesses/ventures is not and cannot be detrimental to the interests of Defendant no.3. 20. This view is supported by the fact that to create such rights, Clause 7 was introduced in the shareholders agreement dated 12.9.2000 suggesting clearly that in the absence thereof there was no bar to “the Promoters” doing the same. 21. Thus, even assuming that what is stated by the Plaintiffs 17 in this regard is correct, I am not inclined to grant any interim reliefs on that basis. Defendant no.3 itself does not have a right to injunct its Directors from carrying on business in the names of the other Defendants. 22. In the circumstances, the Notice of Motion is dismissed.