Class action may stall Satyam takeover
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All the members may not get equal compensation
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The lawsuits can be resolved through out of court settlements or through ‘directed mediation’ where the compensation was mutually agreeable to both sides.
It’s just the logical beginning for the month-long episode that caught the disgraced chairman of Satyam Computer Services B. Ramalinga Raju and his co-accused erstwhile top-brass of the company in a maze of controversies.
Legal issues
While the numerous legal and other issues are exacerbating by the day, little has anybody recognised the importance of the pounding of the New York Stock Exchange-listed (NYSE) Satyam Computer in the form of class action lawsuits.
As many as 11 class action lawsuits were slapped on the company in the U.S. by hordes of investors in the American Depository Shares in the last few days ever since Mr. Raju confessed to having fudged the accounts of the company for at least seven years.
A class action lawsuit is usually filed by a group of individuals who suffered at the hands of a company — be it employees or shareholders of those affected by the drugs of a pharmaceutical company and so on. All the members seeking class action may not get equal compensation from the respondent. Apart from the compensatory damages awarded in these cases, the other category is the punitive damages.
The lawsuits can be resolved through out of court settlements or through ‘directed mediation’ where the compensation was mutually agreeable to both sides. But when it becomes a ‘jury trial class action lawsuit’ the respondents can appeal and the process will be long-drawn. If the company declares bankruptcy, the complainants may not get any compensation also.
Against this background, a Mumbai-based corporate law firm, Nithish Desai Associates (NDA), when contacted by this correspondent, provided a lot of insights into the lawsuits filed against Satyam and discussed various possibilities. The NDA says: “A class action suit will emphasise Satyam’s U.S business and contacts in order to prove that American courts have jurisdiction to hear a case involving the company. They will probably bring a claim under the Securities and Exchange Commission (SEC) Regulations Rule 10b-5, which provides civil remedies for fraud and misrepresentation.
Will the class action lawsuits stand in the way of acquisition of Satyam? The NDA said yes and no. ‘No’ because any party that is trying to acquire Satyam now is not liable for its crimes. Class action suits alleging fraud or misrepresentation only apply to the management that existed during the period in which the fraud occurred. Thus, the third party itself is immune from liability. ‘Yes’ in the sense that if an outside party were the entity that acquires Satyam now, it would still have to pay damages on behalf of the company if the company itself was sued and lost.
On extradition and trial of Raju and the co-accused, who are facing probe in India, the NDA said that class action suits could only bring civil remedies to plaintiffs, and therefore criminal penalties could not be imposed. There was no private right of action to bring criminal charges in the U.S. However, the Government prosecutors must bring charges on behalf of the State against Satyam in order to impose any criminal liability on the company.
To a query on whether the directors and the company were separate vis-À-vis the lawsuits, the NDA said: “Lawsuits can be filed against both the directors/officers of a company and the company itself, often within the same suit. Though it was a unique situation, independent directors in both Worldcom and Enron agreed in a settlement to personally pay damages to the tune of $18 million and $13 million respectively.”
Monetary loss
Can the company disentangle itself from the lawsuits limiting the legal action to individuals concerned? As far as the legal claims alleged regarding fraud on the market or misrepresented share prices that resulted in monetary loss for shareholders were concerned, the company could not be separated from the directors. The directors might be held personally liable in addition to the company. But if claims were brought against both, it was really not possible to separate the company from the acts perpetrated by the management.
The only possible argument would be to claim that Mr. Ramalinga Raju and others were working outside their official capacity in committing the fraud and therefore did not represent the company, but that would almost surely fail because the inflated share prices were listed both on the NYSE and the Bombay Stock Exchange (BSE) under the name “Satyam”, said the NDA.
The list of law firms that filed class action lawsuits against Satyam are: Dyer & Berens LLP; The Brualdi Law Firm, PC; Law Office of Brodsky & Smith, LLC; Glancy Binkow & Goldberg LLP; Federman & Sherwood; Harwood Feffer LLP; Pomerantz Law Firm; Finkelstein Thompson LLP; Sarraf Gentile LLP; Vianale & Vianale LLP and Izard Nobel.
A. SAYE SEKHAR
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