K.N. VASUDEVA ADIDAS Vs. VASUDEVA ADIDAS FAST FOOD (P.) LTD.

JUDGEMENT

(1.) THE present application is filed by the 1st and 3rd petitioners in the above company petition seeking directions from this Bench, inter alia, to appoint an Administrator to oversee the affairs of the company, restrain the respondents 2 to 5 from convening, and conducting the Board meeting on 18th February, 2014 or any other date not to interfere with the functioning of the 1st petitioner as the chairman of the company and restrain the respondents 2 to 5 from convening any extraordinary general meeting ('EGM') without the leave of this Bench. Shri Udaya Holla, learned senior counsel appeared for the applicants narrated the brief facts of the case. It is submitted that the applicants/petitioners along with the 2nd petitioner are the promoters of the R1 -company and the brand name and the corporate name of the R1 -company is derived from the name of the 1st applicant/petitioner. The petitioners and the R1 -company entered into share subscription and share purchase agreement and shareholders agreement with the R2 -company ('Definitive Agreements'). Pursuant to which, the 2nd respondent invested in the R1 -company and presently hold 18,017 ordinary equity shares (out of which 3,590 was purchased by the 2nd respondent and the transfer is vet to be recorded by the Board of the R1 -company), 51 class A equity shares and certain number of series A and series 13 compulsorily convertible preference shares ('CCPS') in the R1 -company. The 2nd respondent holds 36.03 per cent of the paid -up equity share capital of the company. The class A equity shares are the only shares in the company that carries voting rights in the company and each class A equity shares carry 1 vote. The 1st petitioner hold 49 class A equity shares and the 2nd respondent holds 51 class A equity shares, thereby 1st petitioner and the 2nd respondent have 100 per cent voting power in the company. In respect of the series A and series B CCPS there is a conversion formula provided in the definitive agreements which would as per the terms provided therein, gets converted into equity shares in the company thereby diluting the petitioners. It is submitted that the percentage of holding of the petitioners and the 2nd respondent in the R1 -company post the conversion of the aforementioned series A and series 13 CCPS depends on EBITDA of the year 2012 -13 as determined by the statutory auditor or such other accounting firm of international repute. The above investment and conversion was designed to confer upon the 2nd respondent a majority shareholding in the company while leaving the operational management in the management of the petitioners. Upon the conversion and reclassification of shares in terms of the definitive agreements, the petitioners shall have a one -time right to subscribe to hilly paid ordinary equity shares at the value determined in accordance with the definitive agreement so as to enable the petitioners to retain their shareholding percentage at 49 per cent. Thus, the percentage shareholding of the 2nd respondent is very much dependent on the EBITDA of the company achieved during the financial year 2012 -13. Therefore, it was agreed that the 1st petitioner would be the chairman and whole -time director in charge of the day -to -day affairs to be assisted by a professional management team so that the forecasted EBITDA for 2012 -13 with a margin of 15 per cent as contemplated could be achieved in the first year. Since the margin of EBITDA is not achieved the petitioners' shareholding shall accordingly be diluted.

(2.) IT is submitted that as set out in the petition, the agreement between the applicants/petitioners and 2nd respondent was such that the applicants/petitioners (being the experts in the hotel business) shall be involved in the management of the company and the 2nd respondent being the financial investor, its nominee directors shall be involved only at the Board level on strategic and policy matters. It was also contemplated that the 1st respondent would induct senior professionals from leading companies in the industry in operations, business development, sales, finance, etc., and the applicants/petitioners would in due course permit day -to -day operations to transition to these professionals so that both the promoters and the investors can focus on strategic issues around the growth and catering value while guiding the management team. It is submitted that with mala fide intent of usurping control of the company and to oust the petitioners from the company, the respondents 2 to 5 have not only alienated the petitioners from being involved with the affairs of the company and illegally removed the 1st petitioner as a managing director but also have completely mismanaged the affairs of the company and have caused disrepute to the R1 -company and consequently affecting the reputation of the petitioners. During management by respondents 2 to 5, the profitability was reduced which would affect the conversion formula determined in the definitive agreements and operate to increase the shareholding of the 2nd respondent at the expense of the petitioners. The profitability of the company came down on account of a combination of various acts and omissions on part of the 3rd respondent as detailed in the company petition. Thus, the respondents are guilty of taking series of decisions relating to the R1 -company with the deliberate intent and motive of bringing down the EBITDA of the R1 -company in order to enhance the shareholding of the 2nd respondent and dilute the shareholding of the petitioners. At this juncture, the petitioners received a notice dated 3rd February, 2014 and a letter dated 30th January, 2014 alleging breach by the petitioners. The said notice dated 3rd February, 2014 is a notice calling for a Board meeting to be held on 18th February, 2014 with the following agenda as stated therein. It is submitted that the Board meeting is being convened mainly for the purpose of conducting the EGM to appoint Mr. Vivek Sett as director and the petitioner apprehends that there would be an attempt to remove the 1st petitioner as a chairman of the company despite the assurances given by the respondents across the bar at the time of the first hearing. It is submitted that the applicant has given several agenda points as early as on 21st November, 2013 and one of the interim reliefs sought by the applicants is for a direction convening a Board meeting with the agenda as requested by the applicants. However the respondents ignored all these and brought their own agenda solely to cover up their defaults and usurp the control of the company and to oust the applicants from the company.

(3.) THE 2nd respondent has filed his counter affidavit to this application. Shri P.S. Raman, learned senior counsel appeared for the respondents submitted that this application is frivolous, vexatious and is neither maintainable in law nor on the facts. The application seeks to paralyse the functioning of the R1 -company. The R1 -company will suffer great financial loss and hardship and also the investment of this respondent of Rs. 101 crore will be seriously impaired in the event the R1 -company is not allowed to function normally. The R1 -company is an operating company having 22 food outlets, 2 units engaged in catering business and employs nearly 2,000 persons. Any injunction restraining the meetings of the Board of directors of the R1 -company would cause great financial loss and hardship to the R1 -company and all its stakeholders including its shareholders, its employees, its customers and its various suppliers. Under the circumstances the balance of convenience does not lie in favour of the applicants and the R1 -company should be allowed to function normally, without interference and this application deserves to be dismissed. This respondent submits that no irreparable injury or loss would be caused to the applicants if the meetings of the Board of directors is proceeded with. On the other hand the R1 -company is likely to suffer irreparable loss and injury, as the Board of directors is the body entrusted with the authority to take decisions on the day -to -day affairs of the R1 -company. The directors of the R1 -company have a fiduciary duty to act in the best interests of the R1 -company and its shareholders. This application has been filed solely to serve the self -interest of the applicants without any regard to the adverse effect which will have on the R1 -company. The R1 -company continue to lace various hardships due to actions of the applicants, including losses, defaults, etc., which is not in the best interest of all its stakeholders. The applicants as directors have fiduciary and contractual responsibility to participate in the meetings of the Board and giving their views, suggestions and decisions on various agenda items placed before the Board. One of their allegations is that regular Board meetings are not being held. This respondent is refraining from responding to the various allegations and averments contained in the application in view of the pendency of the application under section 8 of the Arbitration and Conciliation Act, 1996 and is limiting its submissions on the urgent need for allowing the company to function normally and conduct meetings of the Board and shareholders as necessary or required in law. This respondent submits that the meeting of the Board was convened to transact the following business.