NCLT Hyderabad Lays Out Structured Buy-Out Mechanism To Resolve Deadlock Between Shareholders In Escentia Group Case

The National Company Law Tribunal (NCLT) Hyderabad bench of Dr. Venkata Ramakrishna Badarinath Nandula (Judicial Member) and Charan Singh (Technical Member) in a company petition seeking relief under sections 241 and 242 of the Companies Act, 2013 (Companies Act) held that the actions of the Deccan Group amounted to grave acts of oppression and was not mere instances of internal shareholder disputes. The Tribunal further laid out a structured buy-out mechanism to resolve the deadlock between shareholders. Brief Facts: The Escientia Group was founded in 2008 by Dr Yadagiri Pendri and Mr Kiran Pendri, two scientists based in the United States of America, as a life sciences company that provides manufacturing and Research and Development support to large pharmaceutical companies globally, with offices in the United States, Hyderabad, Visakhapatnam. Majority stake in the group was bought by agrochemical CDMO, the Deccan Group, in 2020 from an outgoing investor. The founding members of Escientia accused Deccan Group- a passive investor turned active participant of oppression and mismanagement by taking control of the affairs of the companies. Allegations included unauthorized appointments, financial mismanagement, diversion of business opportunities and deviation from the agreed governance structure. Consequently, the petitioners filed a petition and sought relief sections 241 and 242 of the Companies Act in which a request for buy out was made. Contentions: The Petitioners submitted that the Deccan Group, despite initially committing to a passive investment role, had taken active control and acted against the interests of the original promoters. It was further argued that the involvement of the Deccan Group in a competing business through Primopus which is operating in Switzerland and Goa constituted a breach of fiduciary duties by its nominee directors. Business opportunities which included contracts from Eli Lilly and GlaxoSmithKline were unfairly diverted to Primopus. It was further submitted that the Deccan Group was also involved in financial mismanagement through their inter company loans and unjust enrichment through supply chain manipulations. Lastly, it was submitted that the Appointment of a Chief Operating Officer (COO) was a strategic move to wrest control from the original promoters. Buyout remedy should not serve as a reward for the oppressor for which they placed reliance on Dale & Carrington Investment (P) Ltd. v. P.K. Prathapan, (2004) and Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd., (1981). Per contra, the Respondents submitted that the petitioners failed to establish a case of oppression and mismanagement under section 241 of the Companies Act. Appointment of a COO was a strategic move essential for the company's growth. No conflict of interest existed since Primopus AG was legally separate from Escientia Advanced Sciences Private Limited (EASPL), and Escientia Biopharma Pvt Ltd (EBPL). It was further submitted that the Respondents as minority shareholders had mismanaged the companies and engaged in actions detrimental to business expansion. The majority shareholder should be given the first right of purchase for which they placed reliance on Yashovardhan Saboo v. Groz-Beckert Saboo Ltd., (1995) and Synchron Machine Tools (P) Ltd. v. U.M. Suresh Rao, (1994) Observations: The Tribunal noted that the Deccan Group despite initially being a passive investor had effectively taken control of EASPL and EBPL thereby breaching trust and the agreed governance structure. The actions of the Nominee Directors of the Deccan in financial and operational matters amounted to oppression of minority shareholders. The Tribunal after examining email correspondences noted that key business opportunities meant for Escientia were diverted to Primopus which caused confusion in the minds of the customers and created conflict of interest, violating corporate governance norms. The Tribunal further observed that inter company loans to Primopus AG were structured to unfairly benefit the Deccan Group at the expense of EASPL and EBPL. Particularly, loans were extended at exceptionally low interest rates while EASPL faced significantly higher rates when borrowing from Deccan Group entities. This clearly indicated financial impropriety. Furthermore, the Tribunal noted that the appointment of a COO at EASPL was unilateral as it lacked unanimous Board consent and was driven by nominee directors of the Deccan Group. The justification for this appointment was found by the Tribunal to be unsubstantiated as the company was performing very well without such a role. This was all done to consolidate power and marginalise the founding members. The Tribunal also observed that the Deccan Group violated the Articles of Association (AoA) and Shareholders' Agreement by disregarding the special rights...

NCLT Hyderabad Lays Out Structured Buy-Out Mechanism To Resolve Deadlock Between Shareholders In Escentia Group Case

Mohd Malik Chauhan

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