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Satyam’s Class Action Law Suit

19 January, 2009

B Ramalinga Raju’s recent confessional letter has led to the biggest scandal in Indian corporate history. Regulatory action in India is in process and lawsuits have been filed in the US. At last count, approximately twelve class action lawsuits have been filed in the US naming Satyam Computer Services Ltd. (‘Satyam’), the Chairman, Ramalinga Raju and the Managing Director, Rama Raju. More class action suits may be expected to be filed which may be consolidated into one larger class action law suit.

A class action suit is a form of a lawsuit where a large group of people collectively bring a claim to court through a representative. This form of collective action is most developed in the US. The important distinction between a class action law suit and a conventional lawsuit is that in a class action suit, the plaintiff is a representative of a group of people and / or entities unlike a conventional law suit, where the plaintiffs do not represent any entity or persons besides themselves.

Class Action Suits

•    The primary criteria in a class action suit is the plaintiff’s locus standi in maintaining such a class action suit. i.e the court must be satisfied that the plaintiff has been injured as a result of the defendant’s actions.

•    In addition, the class of potential complainants must be large enough to render the possibility of adding each party separately as a plaintiff impractical.

•    The court additionally ascertains the ability of the plaintiffs to function as class representative and whether such representative will protect the interests of the class. In Sosna v. Iowa, (419 US 393), it was held that the courts would take into consideration material factors such as whether the interests of the plaintiff are in line with the interests of the other members of the class. The qualifications and experience of the plaintiff’s attorney will also be examined by the court.

•    Part of the growth in class action law suits can be attributed to class action attorneys taking such lawsuits on a contingency fee basis, i.e. the client is not charged for the legal fees on a traditional hourly basis. Instead, if the lawsuit is successful, the lawyer obtains a pre-determined percentage of the awarded compensation. Contingency fee arrangements are not permitted in India but are possible in the US.

•    The main benefit of class action law suits is that individual complainants who may not have the resources to initiate individual proceedings may join together as a larger class. In addition, class action law suits may serve to increase the efficiency of the judicial system due to the avoidance of repetition of witnesses and arguments. 

Derivative Suits

Derivative suits are lawsuits brought by a shareholder on behalf of a corporation against a third-party. Often the third-party is an insider of the corporation, such as an executive officer or director. Shareholder derivative suits are unique because under traditional corporate law, management is responsible for bringing and defending the corporation against suit. Shareholder derivative suits permit a shareholder to initiate a suit when management has failed to do so. Unlike class action suits where shareholders of a company do not require permission to file a suit, shareholder derivative actions typically require the aggrieved shareholders to apply to the management first. Only if the management refuses to act within a specified time period, are the shareholders allowed to proceed with the derivative suit. It is still possible for the aggrieved shareholders of Satyam to file a derivative suit on behalf of Satyam against the directors and officers of Satyam. 

Class Action Suit against Satyam Computer Services Limited (‘Satyam’)

12 class action suits have been filed so far (and more are expected to be filed) against Satyam, the Chairman, Ramalinga Raju, and the Managing Director, Rama Raju by several law firms on behalf of purchasers of Satyam’s American Depository Shares (‘ADS’). Vianale & Vianale LLP first filed a class action suit on behalf of Aekta Ben Patel and any one else who has also bought ADS of Satyam between January 6, 2004 and January 6, 2009 in the federal district court of the Southern District of New York.

Charges

The charges alleged against the defendants in the law suit are:

1) The defendants issued misleading financial information about the Company including information contained in its Annual Reports, which were signed by the defendants and contained fairness opinions issued by Satyam’s auditor, PricewaterhouseCoopers. 

2) A letter was sent by Ramalinga Raju to the Board of Directors of Satyam and SEBI admitting to falsification of accounts, overstatement of profits and debt owed to the Company and understatement of liabilities. The purchasers of Satyam’s ADS were injured through their purchase of stock at inflated prices because they relied on the false and misleading information provided by the defendants.

3) None of the statements made by the defendants, that have been alleged to be false in the lawsuit, had any qualifying cautionary statements identifying factors that could cause results to differ materially from that stated.

Relief Sought

The plaintiffs have alleged that by defrauding the purchasers of Satyam’s ADS, the defendants have violated provisions of the US Securities Exchange Act, 1934 and therefore the plaintiffs should be awarded unspecified compensatory damages.

Enforcement of Foreign Court Awards in India

Section 44 A of the Indian Code of Civil Procedure, 1908 (‘Code’) allows for the direct enforcement of foreign awards in India if the award is made by a ‘superior court’ in a country that is a ‘reciprocating territory’, as defined in the Code. Currently, the Indian government has not notified the US to be a reciprocating territory and therefore, any judgement against Satyam in any class action law suit instituted in the US cannot be directly enforced in India. In contrast, arbitral awards rendered in the US are enforceable in India, subject to certain exceptions, as the Indian government has notified the US to be a country that is a party to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958 (New York Convention).

Instead, a fresh lawsuit must be filed in the Indian domestic courts. The foreign judgment is considered to have value as evidence. Pursuant to Part X of Division I of the Schedule to the Limitation Act, 1963, the time limit to file such a law suit in India is within three years of the delivery of the foreign judgment. 

Comparison with India

In India, although the basic concept of a class action lawsuit is mentioned in the Code in Order 1, Rule VIII, it is used infrequently as compared to the U.S. There are few judicial precedents of note in this area in India, and the few that exist overlap the concept of a class action lawsuit with that of a Public Interest Litigation (‘PIL’). Although, there is a possibility of a class action lawsuit being filed in India, it is unlikely that such a course of action will be adopted due to the lack of precedents and the fact that contingency fee arrangements are not permitted in India.

Public Interest Litigation

PIL in India broadly means a legal action initiated in a court of law for the enforcement of public interest or general interest in which the rights of the general public or a section of the community are affected. Due to its nature as a tool for safeguarding socio economic rights, judicial precedents have held that the procedural and technical rules of the Code may be relaxed in the case of PILs. For example, the concept of locus standi has been relaxed to allow for parties who have not suffered any legal injury due to any alleged wrong doing to file a suit regarding the alleged wrongdoing. The Supreme Court held in Fertilizer Corporation Kamgar Union v. Union of India that there was no need to strictly adhere to the principle of locus standi and a broader, holistic picture needs to be taken. 

Some key differences between class action suits and PILs include:

1) PILs can be filed only against the state or public authorities in the High Court and Supreme Court under Section 226 and Section 32 of the Constitution, respectively, whereas class action suits can be filed against any entity, including private entities.

2) The plaintiff in a class action suit must necessarily have suffered a legal injury and must have a financial interest in the suit unlike a PIL where the plaintiffs are not required to have sustained damage due to any wrong doing mentioned in the suit.

It is possible for a PIL to be filed against regulatory agencies such as SEBI and the Ministry of Company Affairs.

The legal outcome for aggrieved Satyam shareholders is still to be determined as both the regulatory action in India and the class action suits filed in the US take their course.

(Shantanu Surpure is Managing Attorney at Sand Hill Counsel, a law firm with offices in Mumbai and Silicon Valley. He focuses on venture capital and private equity transactions. Shantanu holds a BA from Brown University/London School of Economics, an MA Juris from Oxford University and a Juris Doctor from Columbia Law School and is admitted to practice law in India, California, New York and England and Wales. He can be reached at ssurpure@sandhillcounsel.com.)

Shantanu was assisted by Nischal Reddy of Sand Hill Counsel.

This column is meant for public discussion and informational purposes only and is not to be construed as legal advice.

 


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Satyam’s Class Action Law Suit

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