Deloitte in Cross-hairs of Shareholder Dispute in India for Alleged Collusion

Malecki Law continues to follow a petition filed in the National Company Law Tribunal (NCLT) in Mumbai, India concerning the takeover of a US litigation data-management firm, Xcellence Inc. (operating under the brand Xact Data Discovery, XDD USA) by a private equity firm, JLL Partners Fund VII, L.P. For background on the case, read “A Cautionary Tale for both Private Equity Investors and Portfolio Companies”. The National Company Law Tribunal (NCLT) is a quasi-judicial forum in India, which adjudicates corporate stakeholder disputes and has all the powers of an Indian civil court.

The legal dispute involves Dominic Thomas Karipaparambil (Dominic Thomas), the 49% shareholder of Xact Data Discovery India Private Limited (XDD India), on one side and on the other side, XDD USA, XDD India, XDD USA’s India-based subsidiary, JLL Partners Fund VII, L.P. (JLL Partners), JLL XDD Holdings LLC. (JLL XDD), an entity owned by JLL, the directors of XDD India.  The directors of XDD India include the president and CEO of XDD USA, Mr. Robert Polus and surprisingly the Indian arm of the global accounting firm Deloitte Touche Tohmatsu Limited (Deloitte).

XDD USA was originally formed in 1994 under a different name and operates 17 offices across the United States. XDD India was formed in 2007, by Robert Polus and Dominic Thomas and operates two locations in India. It appears that at some later date, Robert Polus transferred his stake in XDD India to XDD USA, making XDD India a subsidiary of XDD USA. This structure is not atypical from the trend of U.S. data management companies seeking to cut costs by looking overseas for cheaper labor. In this instance, it hypothetically permits a company like XDD USA to offer cut-rate corporate and legal services through its Indian subsidiary, which provides e-discovery and other document review services at a lower cost than what traditional law firms in the U.S. would charge.  In early 2018, the private equity firm JLL Partners announced it had reached a deal to acquire XDD USA from its previous owner and manager, Clearview Capital.

Dominic Thomas filed the petition in June of this year claiming that he was being ousted and excluded from being able to exercise his lawful rights as a director, managing director, and promoter. He further alleges that the above-named respondents colluded together to prejudice his rights as a minority shareholder and as a director for XDD India. Recently, Dominic also released a service by publication in the New York area notifying JLL XDD and JLL Partners to tender appearance before the NCLT in India. It appears that both JLL XDD and JLL Partners are not actively participating in the proceedings in India.

As mentioned above, in a further twist to the proceedings, it appears that the Indian arm of Deloitte (Deloitte India) is also one of the respondents against whom Dominic Thomas alleges collusion. His claim against Deloitte India appears to suggest that they colluded with other respondents to intentionally prevent him from participating in the affairs of XDD India.

Apparently, Deloitte India claims it was not involved, but the consulting firm was allegedly engaged as a service provider by XDD India, in the areas of financial advisory and compliance management. Records of the NCLT and the National Company Law Appellate Tribunal (NCLAT), the appellate tribunal in India for NCLT cases, show that Deloitte India managed to get itself removed as a respondent at the level of the NCLT.  That decision did not stand, though, and the NCLAT reversed the NCLT order and put Deloitte India back in as a party to the proceedings.

From the orders of the NCLT and NCLAT, it appears that Deloitte India’s  litigation strategy is failing.

  • In the NCLT order taking Deloitte India out as a party to the proceedings, the NCLT has recorded the statement of Deloitte India given on affidavit. Deloitte India’s statement to the NCLT is that it was never engaged by XDD India in any manner and for those reasons it deserved to be removed as a respondent.
  • However, in the NCLAT order, records indicate that XDD India had in its reply to the initial proceedings before the NCLT confirmed that Deloitte India was indeed appointed by it.
  • Further, XDD India also seems to have made an admission before the NCLAT that it too engaged Deloitte India, although for a limited scope of work.
  • Deloitte itself has attempted to wriggle itself out of the situation before the NCLAT by distancing and distinguishing itself from another arm of Deloitte in India, which may have been engaged by XDD India. Interestingly, Deloitte India also admits before the NCLAT that it was involved with the affairs of XDD India, but for a limited assignment related to indirect tax matters.

The NCLAT seems to have considered all the facts and decided that whether Deloitte India is truly involved or liable for collusion needs to be decided after a fair hearing at the NCLT. It restored Deloitte India as a party to the proceedings before the NCLT and also allowed Deloitte India to file a detailed reply to Dominic’s petition. However, a few questions arise from the proceedings before the NCLT and NCLAT:

  • What exactly was Deloitte India’s role in this entire dispute?
  • Why would an organization of Deloitte’s repute and brand indulge in such inconsistent conduct in two court proceedings?
  • Did Deloitte India really advocate and assist majority owners to squeeze out Dominic Thomas?

These and many other questions once again remain unanswered in the continuing saga of Dominic Thomas vs. XDD India, XDD USA, JLL Partners, Deloitte India, and others. Hopefully, in the coming months, more clarity will emerge from the NCLT proceedings regarding Deloitte India’s role in the entire dispute.

While the NCLT has yet to rule on whether there was oppression in this takeover, it is clear there is a need to help overseas individuals enforce their rights in property and contract.  We live in a global economy, and while international outsourcing offers the benefit of efficiencies and reduced costs in the United States, it must not come at the expense of private equity deals that trample on the rights and livelihoods of international business owners and individuals who live overseas, where it is more difficult to access the protections of the US institutions and court systems which traditionally enforce  these rights.  For Dominic Thomas’s part, his pending litigation represents one way for minority shareholders and international business owners to protect their rights from improper takeover schemes as currently alleged. The story of a lone individual against the might of giant corporations has played out many times over in the United States and has made for many landmark jury decisions. India does not have a jury trial system, but nonetheless, whichever side is correct, justice should prevail in their favor.