Maintainability of a Derivative Action in India on Behalf of a Foreign Company

DERIVATIVE SUIT BY SHAREHOLDERS IS MAINTAINABLE IN INDIA ONLY IF THE COMPANY IS AMENABLE TO JURISDICTION OF INDIAN COURTS

On November 26, 2018, the Supreme Court (‘SC’) in Ahmed Abdulla Ahmed Al Ghurair v. Star Health And Allied Insurance Company Limited, laid down the law in relation to derivative action on behalf of a foreign company in India, forum non conveniens, under Clause XII of the Letters Patent Act[1], and declaratory relief in relation to beneficial interest of shares sought in the teeth of Section 89 of the Companies Act, 2013.

A derivative suit was filed in the Madras High Court in January 2017, on behalf of a Dubai incorporated company (‘ETA Star Dubai’), by its Dubai based minority shareholders (holding 34% shares) (‘Minority Shareholders’). The Minority Shareholders of ETA Star Dubai sought to protect and declare the beneficial interest of ETA Star Dubai in the 6.16% shares (‘Shares’) of Star Health Allied & Insurance Private Company Limited (‘Star Health’) (one of the largest health insurance company incorporated in India). It was alleged that, though these Shares were legally registered in the names of defendant Nos. 3 to 7 (being the majority shareholders of Eta Star Dubai) (‘Majority Shareholders’), the company, i.e. ETA Star Dubai was in fact the beneficial owner of the Shares (since the acquisition of these Shares had been indirectly funded by ETA Star Dubai). In light of the above, the Minority Shareholders further claimed that the Majority Shareholders had, in collusion with Star Health, acted against the interest of ETA Star Dubai.

The Single Judge granted Clause XII Leave and allowed the suit to proceed (after rejecting applications for revocation of the leave and for rejection of the Plaint). This order was challenged and overturned by the Division Bench of the Madras High Court, which held the following:

1.       Jurisdiction

  • A Court can decline the exercise of jurisdiction under Clause XII of the Letters Patent Acton the principle of forum non conveniens. This is the first SC decision recognizing the principle of forum non conveniens (i.e. the Court is not the appropriate/ convenient forum) for a Clause XII leave.
  • When the dispute is between the shareholder and a company with respect to the shares held in another company, the mere existence of registered office of the subsequent company is not a factor to clothe jurisdiction upon the court which has territorial jurisdiction over the area covering the registered office of the other company.

2.     Derivative Action

A derivative action of a foreign company is not maintainable in India as such a company is not amenable to the jurisdiction of Indian Courts. The fundamental test for a derivative action is that ‘such an action will necessary have the sanction of a law and this shall have no obligation to a foreign entity having beneficial interest which can be enforced in India especially when there are provisions dealing with such a situation.’

3.     Beneficial Interest

If a person holding beneficial interest in shares fails to make necessary declarations under Section 89 of the Companies Act, 2013, then neither the beneficial owner nor any person claiming through it can thereafter try to enforce the beneficial interest by seeking declaratory relief from an Indian court.

The SC has dismissed all 13 SLPs filed by the Minority Shareholders and affirmed the judgment of the Division Bench of the Madras High Court.

AZB & Partners successfully represented the Majority Shareholders in this case. This decision is significant, not only in law, but also as a means to pave the way for a proposed transaction involving sale of 100% of Star Health’s shares to the private equity investors (for approximately US$ 1 billion). Notably, AZB & Partners had also acted for the promoters for this transaction earlier this year.

[1] Clause XII of the Letters Patent of the High Court of Madras (‘Letters Patent’) sets the limits of the original jurisdiction of the Court. Except for certain suits, the High Court of Madras has jurisdiction to entertain suits where inter alia part of the cause of action has arisen within its territorial limits. However, for this purpose, the leave of the Court has to be first obtained.

Date: December 5, 2018