The Tata-Docomo partnership was a contract marriage. But as it unravels, Docomo is finding it tough to collect the promised alimony of $1.17 billion. And so, the Japanese telecom major has moved Indian and British courts, going after even overseas assets of Tata Sons. But lawyers speaking to BloombergQuint say Docomo may not find much success in either country.
In 2009, Docomo acquired a 26 percent stake in the Tata Group-owned Tata Teleservices Ltd. (TTSL). When TTSL failed to meet key performance indicators as envisaged in the shareholders’ agreement, the Japanese telecom major exercised an exit clause that gave NTT the right to sell its TTSL shares back to Tata Sons at 50 percent of the acquisition value or the fair market value, whichever was higher.
Turns out that in July 2014, when Docomo exercised the option, the fair market value of TTSL stood at Rs 23.34 per share, much less than 50 percent of the acquisition price or Rs 58.05 per share. So Docomo demanded Rs 58.05 per share. But Reserve Bank of India (RBI) and regulations under the Foreign Exchange Management Act (FEMA) do not permit guaranteed returns on such an equity investment. And so Tata Sons claimed it could neither pay that price nor had it found a buyer that was willing to pay over twice the fair market value.
After Docomo failed to get an exit as contemplated under the shareholders’ agreement, it invoked the dispute resolution clause and moved the London Court of International Arbitration (LCIA) on January 3, 2015.
What Happened At The LCIA?
In the LCIA award, pronounced in June 2016 and a copy of which is with BloombergQuint, the arbitral tribunal noted that:
- The object of the agreement was to guarantee Docomo an exit at a minimum price of 50 percent of the subscription price.
- Tata and Docomo recognised that FEMA regulations might affect Tata’s ability to perform its obligation. And so, the parties provided for an alternative method of performance i.e. find a buyer at the agreement governed price.
- Tata’s primary and unqualified obligation was to find a buyer/buyers for the sale of shares at the price governed by the agreement.
The tribunal concluded:
Tata is liable for breach of contract.LCIA Award
In saying so, on June 22, the LCIA held Tata to be in breach of its primary obligation and ruled that Docomo was entitled to damages. The tribunal directed Tata to buyback TTSL shares and pay Docomo $1.17 billion. However, the tribunal expressed no view on whether or not RBI’s permission is required before Tata can perform its obligation to pay Docomo damages in satisfaction of the arbitral award.
Enter Judicial Forums
The question left open by the arbitral tribunal became the primary ground for an extended legal battle in India and Britain. On July 7, 2016 Docomo moved the Delhi High Court asking for the enforcement of the arbitral award, states a Tata Sons affidavit filed in response to Docomo’s petition. In this affidavit, a copy of which is with BloombergQuint, Tata Sons argued against the enforcement of the award as it would violate India’s public policy.
The affidavit notes that on the same day Docomo also moved the Commercial Court in the U.K. to enforce the LCIA award. The U.K. Court, in an ex-parte order, allowed Docomo to enforce the award against Tata Sons, according to a Docomo media statement. On September 5, Tata Sons, said in a media statement, that it had filed an application to set aside the ex-parte order claiming that Indian regulations do not permit it to pay Docomo the award amount.
Tata Vs Docomo: Which Side Will Prevail?
Legal position in India
India’s arbitration law provides, under Section 48(2) (b), that the enforcement of a foreign award may be refused if the court finds that it would be contrary to the public policy of India. The explanation to the Section broadly describes an award to be in conflict with the public policy of India if the making of the award was induced or affected by fraud or corruption. And while Indian courts hesitate to refuse enforcement of foreign awards on public policy grounds, Mamta Tiwari, a counsel at Fox Mandal & Co, told BloombergQuint in an email interview, that the LCIA award would fall under the rigour of Section 48 and would be difficult to enforce.
It can be argued that the award is incapable of enforcement as no payment can be made in violation of FEMA Regulations – it would be against public policy.Mamta Tiwari, Counsel, Fox Mandal & Co
Anand Desai, a partner at DSK Legal concurs.
The Supreme Court of India has held that Foreign Exchange Regulation Act (FERA) and FERA violations are matters of public policy. Under the FEMA regime also, the Supreme Court has said that foreign exchange regulations are a matter of public policy.Anand Desai, Partner, DSK Legal
Both Indian lawyers are of the opinion that it will be difficult for Docomo to get an Indian court to rule that a payment be made in violation of existing regulations.
Legal position in the U.K.
The U.K. Commercial Court ex-parte order permitted Docomo to enforce the award, but since Tata Sons has filed an application in response, Docomo cannot initiate action till the court decides on the application. BloombergQuint asked lawyers in London on the possible outcomes in this case.
“An English court can enforce such an award subject to certain exceptions,” said David Wolfson, a barrister at One Essex Court, in a telephonic interview. He pointed out that in the case of a London arbitration, unless the losing party can come to the English court and say the enforcement of the award would be repugnant to English public policy, the award will be enforced.
The mere fact that it would be offensive to Indian public policy is unlikely to prevent enforcement by the English court.David Wolfson - QC, Barrister, One Essex Court
Wolfson says for a meaningful enforcement, Docomo will need to go after Tata Sons’ U.K. assets.
Docomo can quite easily obtain an order attaching assets assuming that Tata Sons has assets directly owned by it, or earnings or money due to it in the U.K., Patrick Taylor, a partner at law firm Debevoise & Plimpton told BloombergQuint in an email interview.
Docomo may apply for a charging order imposing a charge over Tata Sons’ beneficial interests in land, securities or other assets in the U.K., or a garnishment order over bank accounts held in its name or earnings due to it in the U.K., he added.
Could Docomo claim the amount from group companies of Tata Sons, such as Tata Motors and TCS as both have substantial U.K. assets and businesses.
Wolfson explains that these assets may not be vulnerable to the court order. But Tata Sons’ shareholding in these companies may be.
If I have got an award against the parent, I cannot enforce it against the assets of the subsidiary, because that is a separate legal entity. But I can enforce it against the shareholding of the parent in the subsidiary, because those shares are assets of the parent. Additionally, if a subsidiary owes money to the parent, and I have an award against the parent, then you can get a garnishee order directing the subsidiary to pay that money to me. The same principles apply to group companies as well.David Wolfson - QC, Barrister, One Essex Court
Patrick Taylor stated that an English court would only consider lifting the corporate veil where Tata Sons is deliberately evading a legal obligation (in this case, the LCIA award), or where it deliberately frustrates the enforcement of that award by interposing a company under its control.
Given that Tata Group’s U.K. operations have been structured as they are since before the LCIA proceedings and also seeing as the U.K. companies are only part-owned by Tata Sons, Docomo is very unlikely to be able to enforce the award against those assets, he added.
It will be very difficult to enforce against the assets of say TCS or Tata Motors as they are only part owned by Tata Sons and I am not aware of any evidence that they were set up to avoid enforcement of the award. I therefore think it highly unlikely, if not impossible, for Docomo to charge and sell assets of TCS/Tata Motors to satisfy the award. If there are dividends paid up to Tata Sons and if those happen to be segregated for and/or paid to Tata Sons in the U.K., then those monies could be seized.Patrick Taylor, Partner, Debevoise & Plimpton
Patrick said that besides the U.K. and India, Docomo may also attempt to go after Tata Sons’ assets in other jurisdictions.
Docomo can enforce against Tata Sons assets in any New York Convention state with only limited exceptions to enforcement. There are currently more than 150 signatory states to the New York Convention.Patrick Taylor, Partner, Debevoise & Plimpton
In response to BloombergQuint’s queries on the ongoing litigation and enforcement of arbitral award, a Tata Sons spokesperson said, “The matter is subjudice. We have no comments to offer.” An email to Docomo asking for its comments on the same remained unanswered.
The outcome in this case is likely to set a precedent for several shareholder agreements, or rather diasagreements, of a similar nature. When the Delhi High Court hears the matter next month on October 5, the audience will be more than just Tata Sons and Docomo.