Unexplored Strategies in the Fortis Saga: Public shareholders and IHH Healthcare exposed to significant collateral damage?

Introduction

Diversion of funds, fundraises gone wrong, stalled open offers, a high-stakes arbitration, settlements with SEBI, and more – the Fortis story has truly been a saga in every sense, and it’s Daiichi Sankyo (Daiichi) which leads its latest chapter.

Daichii is on a quest to recover dues from Malvinder Mohan Singh and Shivinder Mohan Singh (the Singh Brothers), the erstwhile promoters of Fortis Healthcare Limited (Fortis). Daiichi’s most recent targets: Fortis, the INR 4000 crores invested by IHH Healthcare Berhad (IHH) into Fortis in August 2018, and indirectly, the public shareholders of Fortis.

Rather surprisingly, sparse attention has been paid to the impact that Daiichi’s claims may have both on Fortis’ public shareholders and on IHH (the promoter and a 31% shareholder of Fortis). The Supreme Court’s recent judgement¹ now brings both to the fore due to aggressive arguments made by Daiichi that: (a) Fortis, which is 68.8% held by public shareholders, should be responsible for the liabilities of the Singh Brothers; and (b) the money pumped in by IHH must go to Daiichi to right the Singh Brothers’ wrongs.

The claims raise an important question: can Fortis be held responsible for personal assurances made by the Singh Brothers, solely because the assurances were made while the two brothers controlled Fortis (especially if Fortis neither had a role to play in the wrongdoings, nor extended any commitments itself)? The Supreme Court has deferred answering this till further factual clarity. However, if upheld, it appears that IHH and public shareholders have the most to lose, while the Singh Brothers may escape personal liability.

While IHH did go into the deal with their eyes open, it could not have possibly conceived that the liability of the Singh Brothers would eventually translate to the liabilities of Fortis or of IHH.

In this analysis, we unpack Daiichi’s approach thus far, and explore key arguments and strategies for the public and for IHH. Four key arguments form the basis of our final conclusion: public shareholders and IHH must be ready to assume a war-footing, lest they become collateral damage.

Background

While there is a lot of story to tell, relevant context is as below:

• In 2008, Daiichi acquired Ranbaxy from the Singh Brothers only to discover that the Singh Brothers misrepresented certain facts about Ranbaxy. Daiichi filed for arbitration against the brothers in Singapore and was awarded a sum of INR ~2500 crores in April 2016, which was upheld by the Delhi High Court in January 2018.
• During court proceedings held between 2017 and 2022, Daiichi raised concerns that the Singh Brothers would dilute their asset base. Against this, courts took note of repeated assurances made by the brothers (through 2016 and 2017) that they would not dilute their asset value – a significant portion of which was derived from the ~71% stake held in Fortis through Fortis Healthcare Holdings Private Limited (FHHPL). Interestingly, in February 2018, when the Singh Brothers resigned as directors, their letter to the board indicates that the brothers were keen to clear Fortis of any potential liability that might arise from the Delhi High Court’s ruling upholding the award.
• Despite the assurances, the brothers’ holding in Fortis declined significantly to 0.77% by April 2018. While the exact facts are yet to emerge, it seems that the brothers had previously pledged their holding in Fortis in favour of banks and other financial institutions, which had through the course of 2017 and 2018 enforced these pledges. This led Daiichi to file a slew of contempt petitions against the Singh Brothers and various banks in the Delhi High Court and the Supreme Court (including the petition which led to the Supreme Court’s most recent judgement).

• Simultaneously, through 2017, Fortis’ board had started scouting for new investors. In March 2018, and then again in May 2018, bids were almost shortlisted, but public shareholders strongly protested the bids in both cases on grounds that they were undervalued. Finally, after another round of bidding in July 2018, IHH emerged as the winner – IHH would pump in INR 4000 crores for a 31% stake in Fortis, followed by an open offer to public shareholders.
• The funds infused by IHH were to be used to acquire assets which Fortis had been leasing from the RHT Trust Singapore (RHT Transaction). The preliminary agreement for this acquisition had already been disclosed much earlier, in November 2017, and also approved by Fortis’ public shareholders (in May 2018, with a 98% majority). Daiichi did not object to the RHT transaction at either of these points. Exchange filings indicate that in November 2017, Fortis indirectly held more than 29.7% of the units of RHT Trust while the Singh Brothers directly held around 0.55% of the units.
• Before the open offer could be completed, and after IHH had completed its subscription to 31% shares in Fortis, Daiichi succeeded in obtaining a stay order from the Supreme Court – preventing IHH from proceeding with the open offer. The order itself was unreasoned, but the Court’s most recent ruling seems to suggest that Daiichi viewed the RHT Transaction as a means for the Singh Brothers to take money out of Fortis, which rightfully belonged to Daiichi.
• Daiichi’s primary allegation in contempt petitions filed against various banks, financial institutions, IHH and Fortis itself is that all have conspired with the Singh Brothers to deny Daiichi its dues, though it has provided little evidence to this effect. As of date, the stay order on the open offer has been extended and continues to remain in force.

Can Fortis be held liable for a private transaction entered into by its promoters?

Daiichi’s claim that Fortis should be liable for the Singh Brothers’ wrongdoings is in part based on the ‘theory of attribution’ – the Singh Brothers were in control of Fortis when they made assurances that assets of group companies would be available to repay Daiichi, therefore they are argued to be Fortis‘ assuarances as well.

In India, the doctrine of attribution has typically been examined in the context of directors who are convicted of criminal activities while acting as representatives of their companies.² It is not immediately clear whether this legally extends to personal assurances, though it seems to fall apart in the face of steadfast principles of corporate agency. It’s only when directors act in a representative capacity (with express or implicit authorization) that companies become bound by directors’ acts, otherwise they are separate legal entities.

Though facts are still being uncovered, it appears that when the Singh Brothers made their assurances, they were acting in their personal capacities and not as representatives of Fortis – which also seems to be suggested in the Singh Brothers’ resignation letter to the board. Fortis, as a public listed entity, possibly had nothing to gain from the sale of Ranbaxy to Daiichi and hence, it seems far-fetched that the board and shareholders of Fortis would have provided assurances for a private transaction entered into by its erstwhile promoters. To this extent, the theory of attribution is difficult to appreciate in the case at hand.

Why should Fortis’ public shareholders be bothered?

Today, IHH is able to manage Fortis without having to conclude an open offer, and public shareholders are happy that their shares are worth far more today than the open offer price³ – dispassionately speaking, should Daiichi’s claims even bother public shareholders or IHH?

First, if Daiichi is held to be entitled to the funds infused by IHH into Fortis, this may be tantamount to a transfer of Fortis’ funds to Daiichi which in large part belong to public shareholders (holding 68% of Fortis’ shares). IHH’s infusion was intended to free up cashflows and purchase key assets, which may have indirectly led to increased returns for shareholders. To now tell shareholders that they would be disentitled from these returns appears to be unfair, especially since there is very little evidence to suggest that they signed off (directly or indirectly) on any assurances being made to Daiichi.

Second, the timing of Daiichi’s claim to reverse the RHT Transaction seems almost opportune. Daiichi does not seem to have raised any objections at the time Fortis approved the RHT Transaction, despite the details of the transaction being public knowledge. Daiichi has switched gears, now staking a claim to IHH’s infusion and seeking a reversal of the RHT Transaction.

Third, even if Fortis was held to be liable, hypothetically, on what grounds should public shareholders be denied their chance to exit in an open offer? The open offer was a transaction directly between public shareholders and IHH – and this would have no impact on Daiichi’s recovery. Daiichi‘s objective of placing liability on Fortis can still be achieved without depriving the public shareholders an exit opportunity. A clear rationale to the question is absent in the orders passed by the Delhi High Court or the Supreme Court.

Fourth, the Supreme Court’s status quo order means that IHH has been unable to infuse further equity capital, whether by way of rights issue or preferential allotment. Even if doors may be open for other investors, third-party investment is practically unlikely since Daiichi may stake a claim over these funds as well. Net-net, Fortis seems to be unfairly barred from accessing further investments, throttling its growth, and stifling returns for public shareholders – all for the private actions of its erstwhile promoters.

What‘s next for IHH and public shareholders of Fortis?

On all four counts, public shareholders have a strong basis to oppose the claims made by Daiichi. In fact, in 2018, it was the activist efforts of large institutional investors such as East Bridge Capital that effectively forced Fortis to launch a robust bidding process and enhance value for public shareholders. A similar proactive move is now needed.

Public shareholders who control the vast majority of the company, have been denied their fair right to tender in an open offer, and now risk losing out on funds that seem to be rightfully theirs. In such circumstances, the Supreme Court is under an arguably compelling obligation to pay heed to their arguments.

The shareholders may have to work together to foreclose any attempt by Daiichi to seek recourse against Fortis for the debts of the erstwhile promoters – by impleading themselves in the ongoing recovery proceedings. Public shareholders should also highlight these concerns to the SEBI, which holds itself out as the custodian of public shareholders’ wealth. At the very least, public shareholders must be provided an opportunity to complete the open offer process, especially since this is likely to have no bearing on the assets of Fortis.

For the public shareholders of Fortis, this is nothing new, they have successfully organised before in 2018. Now, it falls upon them once again to rescue their company, and it’s likely that with a push from IHH, they will rally together.

¹ Special Leave Petition (C) No. 20417 of 2017, Supreme Court of India, September 22, 2022.
² Iridium India Telecom Ltd. v. Motorola Incorporated and Ors., (2005) 2 SCC 145; Public Prosecutions v. Kent and Sussex Contractors Ltd., 1944 1 All ER 119.
³ As on 7th October, 2022, the share price is INR 281 per share, while the open offer price was set at INR 170 per share.