Of laws and flaws

Could New Jersey Superior Court’s decision this October be a wake up call for Indian companies with global ambitions

20151231ep02Could New Jersey Superior Court’s decision this October be a wake up call for Indian companies with global ambitions? Deliberating on a December 2013 breach of contract lawsuit filed by US-based FDASmart, the NJ Superior Court ruled that mid cap Dishman Pharma is ‘not immune to subject to NJ state jurisdiction’ as its US subsidiary is an ‘alter-ego’ of its Indian parent.

In a 12-page decision, the NJ Superior Court supports its ‘piercing of corporate veil’ opinion to deny Dishman’s motion citing several instances where key CXO level positions were manned by the same people in the Indian parent and US subsidiary.

New York-based consultancy firm FDASmart signed an MoU/ contract with Dishman Group, as in 2012 the Group had decided to sell its API facility in the Shanghai Chemical Industry Park. The FDASmart lawsuit claims that Dishman Group breached that contract by failing to pay for services rendered and by frustrating continuance of FDASmart’s efforts to sell the facility and collect sale success fee, according to a release from FDASmart. The MOU/ contract for the sale of the Chinese plant was signed by FDASmart CEO Ram Balani and Dishman Group’s Managing Director and Chairman, Janmejay (‘Jay’) Vyas who is also President and sole Board Director of Dishman US.

FDASmart has demanded a trial by jury for damages including $900,000 in lost commission, $40,000 in unpaid fees plus other costs totaling to $1 million. When contacted for a comment, Vyas said it was “an extremely small matter” and declined to answer queries on Dishman’s future course of action.

The Rs 2400-crore (approx $360 million) Ahmedabad-based company ultimately decided not to sell its Chinese API facility even though it was a drain on its balance sheet as approvals were taking a longer than estimated time. According to recent reports, the Shanghai facility only broke even in FY 15.

But the promoter’s patience seems to be finally paying off. Vyas recently announced that they would soon start importing intermediates from the Shanghai facility, which would be substantially cheaper than other sources. This would give a cost-competitive edge to Dishman, allowing it to supply cheaper APIs for export as well as domestic clients.

The NJ Superior Court’s October decision is by no means the final decision on this matter as Dishman is sure to appeal and stick to its contention that the matter has to be settled in India as FDASmart also has offices in India. Whether the final judgement goes in favour of FDASmart or Dishman, could this court opinion have larger repercussions? Could companies brush off responsibility for actions taken by subsidiaries in overseas locations, even if the same decision makers are part of its parent company’s management and in the case of Dishman, part of the promoter group itself? Could the arm of the law reach out across continents to hold the parent company itself responsible? Where does the liability lie?

Legal eagles point out that corporate law allows a mirror image between head office and overseas subsidiaries’ management boards. Legal sources felt that the FDASmart-Dishman case would not impact current practices as such cases are decided on a case-by-case basis. None could speak on record citing internal conflicts as they represent pharma companies but felt that courts seldom use the ‘piercing of corporate veil’ argument. This argument is reserved for extremely rare cases when the regulator is of the view that the listed entity maybe be guilty of fraud or such financial dealings that could impact shareholders’ value and always respect the legal entity represented by a listed company’s corporate structure.

The law does seem to put the corporate over the shareholder, giving the benefit of doubt to the company. For instance, in India, Clause 36 of the Equity Listing Agreement requires a listed company to inform the stock exchange of disputes, litigation, etc if the outcome could impact present or future operations or it profitability or financials. Vyas’ reaction is an indication that the FDASmart litigation does not fall into this category. So is the NJ Superior Court’s decision a sign of a more vigilant judiciary in the US as it involves a US taxpayer, FDA Smart? This could turn out to be an interesting case after all.

Viveka Roychowdhury

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First published on: 16-12-2015 at 19:28 IST