IN THE HIGH COURT OF KARNATAKA AT BANGALORE

APPELLATE JURISDICTION

Appeal No. 1

Rampura Sugarcane Growers Association … Appellant

v.

Carbon Inc. … Respondent

Appeal No. 2

Rampura Sugarcane Growers Association … Appellant

v.

Chandrappa & Sons Limited

Mercury Metals India Limited … Respondents

1. The village of Rampura in the Mara district of Karnataka is well-known for its
sugarcane crop. Situated on the banks of river Cauvery, large tracts of its land are
well-endowed with irrigation from the river that makes it conducive for growing
sugarcane. Most farmers in this area rely heavily on the sugarcane crop. Such reliance
has not at all been misplaced, since the bumper crop over the last several years has
rewarded them with great fortunes. Most of the farmers have been able to send their
children to good schools and universities, all thanks to nature’s gift in the form of
abundance of sugarcane in the region and the resulting wealth and prosperity that it
brings.

2. The farmers in Rampura have not lent their fortunes completely to the will of
nature. They have been progressive in using latest variety of hybrid seeds that are
imported from Holland and also high-quality pesticides that are manufactured in
Germany. For this they owe their gratitude to Mr. Keshava Rao, the bright, young
and energetic manager of Bharat Seed Bank Limited, which is a bank that focuses
primarily on financing the agricultural and rural sectors. Mr. Rao has been kind enough
to put the farmers of Rampura in touch with these manufacturers of seeds and
pesticides and also obtaining significant discounts on commercial terms in favor of the
farmers. Over and above this, Mr. Rao has sanctioned loans on behalf of Bharat
 Seed Bank that have been lent to several farmers in Rampura, which were used by
them to purchase seeds and pesticides. The only downside so to speak was that these
loans required the farmers to mortgage their residential properties in favor of the Bank.
The farmers did not bat an eyelid in mortgaging properties because the financial gains
from these new-age seeds and pesticides were excellent as they have seen on a
sustained basis for the last few years.

3. But, one fateful night, on January 3, 2007, everything changed for the farmers of
Rampura. When they went to work on their fields the next morning, each of the
farmers found their field ridden with some slimy substance that emitted a strong
and repulsive odor (even stronger than that of kerosene). Things did not look good
and they were almost certain that their crops would now be destroyed. With
bewilderment, the farmers first approached Mr. Keshava Rao, as he was not only
their banker, but more than that – one may say, a friend, guide and philosopher.
He advised the farmers to file a complaint with the local police station, which they
did by the noon of January 4, 2007. The local police merely recorded the statement
of two farmers who visited the police station, but refused to conduct any further
investigation and did not go to the farm site either.

4. In the meanwhile, Mr. Rao telephoned his friend in the Centre for Agricultural
Sciences (CAS), a non-governmental organization (NGO) that works for the
benefit of the agricultural sector in India. The friend, Mr. Sanjay Lall, who was
then in Bangalore, immediately rushed to the scene and collected samples of the
substance in bottles. With his 20 years’ experience in this field and through the
extensive database maintained by CAS, Mr. Lall suspected that the slimy
substance could be some harmful chemicals that may have been accidentally
emitted into a tributary of the Cauvery river by certain metal smelters situated in
Adipura, a small industrial town which was located 7 kilometres from Rampura.
Since these smelters are situated upstream on the Cauvery river, the substance may
have flowed with the river and reached downstream in the Rampura region. Mr.
Lall, again with his expertise and experience, realized that this could escalate into
a colossal problem. He knew that these smelters emitted harmful chemical
substances, which they were required to dispose off at designated disposal sites
situated several miles away. The disposal had to be done in a controlled manner
so that the substance would be placed several metres below the earth so as to avoid
damage to plants and animals. This was even a condition of the approvals granted
to them by the pollution control authorities. Mr. Lall immediately addressed an
email to the head of the pollution control authority explaining the occurrence of
events in Rampura that day.
5. Over the next few days, the pollution control authorities completed their
investigation and were able to get to the bottom of the problem. It was found that
the substance emanated from the largest copper smelter in Adipura, owned by
Chandrappa & Sons Limited. Examination of samples revealed that the substance
contained sulfuric acid, some amount of arsenic and other toxic substances that
were harmful to plants and aquatic life. It was also revealed that there was a
leakage of harmful chemicals from the storage facility of the copper smelter on
account of corrosion. This occurred despite an internal maintenance and safety
check that was carried out on the plant (and specifically its liquid emission storage
facility) by the smelter’s employees on December 4, 2006 that found the plant in
healthy condition. Following this accident, the pollution control authorities were
now certain that all the sugarcane crops in the Rampura region were destroyed
together with the soil and it would be at least another 5 years before the region
could see another successful sugarcane crop season. If these plants were
consumed, it would cause grave risk to the health of human beings and animals as
well, although there has been no report yet of any harm caused to human beings,
except that two cows owned by Mr. Gowda, a rich farmer in the region, died within
a day of consuming the polluted sugarcane.

6. All these revelations left the farmers devastated. What was even more painful was
that Mr. Rao, who was very friendly and helpful to them until now began cracking
the whip. Under orders from his head office, he started vigorously following up on
loan repayments. In two cases where loans were overdue, Bharat Seed Bank
actually succeeded in going to the district court and obtaining orders to attach the
homes of the defaulting farmers. Following this, two farmers, whose homes were
attached, even committed suicide. The region, which experienced prosperity till
then, soon witnessed despair and agony. Something had to be done. How can
Chandrappa & Sons Limited get away after committing such a heinous crime in
the name of business activity?

7. With the help (and tremendous influence) of two members of legislature

representing the Mara district, the farmers were able to initiate legislation in the
Karnataka State Assembly and caused the enactment of the Rampura Sugarcane
Growers Protection Act, 2007. Under this enactment, the Rampura Sugarcane
Growers Association (hereinafter the “Association”) was established with the
purpose of initiating claims against non-compliant firms that were responsible for
the water pollution tragedy in the Cauvery river that occurred on the night of
January 3, 2007. The Association was also given the powers to initiate recovery
suits, such as for breach of duty and the tort of negligence, against polluting units
and claim damages in those suits on behalf of all the farmers, and finally to
determine the distribution of damages and compensation amounts among
aggrieved farmers. Section 4 of the Rampura Sugarcane Growers Protection Act,
2007 is in pari materia with Section 3 of the Bhopal Gas Leak Disaster (Processing
of Claims) Act, 1985, except that the powers of the Central Government under the
Bhopal Act are exercisable by the Association under the Rampura Act.
8. Exercising its powers under the Rampura Sugarcane Growers Protection Act,
2007, the Association initiated a civil suit against Chandrappa & Sons Limited in
the district court of appropriate jurisdiction at Mara. In this suit, Carbon Inc, a
company incorporated in the State of Delaware, was also joined in as a defendant.
At this stage, it may be appropriate to describe the corporate structure of
Chandrappa & Sons Limited, and the precise reason for including Carbon Inc as a
defendant in this case. Carbon Inc is a leading multinational company that has
operations in 45 different countries carrying on the business of smelters in various
types of metals. In most countries, Carbon Inc carries on business by establishing
its own branches, while in other countries it establishes separate companies that
are its subsidiaries. In 1997, Carbon Inc wanted to establish operations in India,
and was looking for an opportunity to acquire an existing smelter business rather
than to start one from scratch as a greenfield venture. At that time, Carbon Inc
came across Mr. Chandrappa who was in the business of smelter in Mara district.
Mr. Chandrappa, his sons and a few other family members were 100% owners of
Chandrappa & Sons Limited, which was carrying on the business of the copper
smelter at Adipura. In fact, this was the only business that Chandrappa & Sons
Limited had. After protracted negotiations, Carbon Inc decided to acquire the
entire share capital of Chandrappa & Sons Limited, except for three shares which
continue to be held by Mr. Chandrappa and his two sons, all holding one share
each. During the time of acquisition, Carbon Inc seriously contemplated carrying
on the business has its branch in India (as it does in most countries) rather than
through a subsidiary. That meant that Carbon Inc would acquire the business from
Chandrappa & Sons Limited rather than acquired the shares of that company.
However, Carbon Inc. was advised by its general counsel that in order to protect
itself from any legal risk and exposure to liability in an environmentally sensitive
area, it would be appropriate to carry on the business in a separate legal entity in
India so that the parent company, Carbon Inc, can be insulated from any potential
liability. That is the reason why Carbon Inc decided to acquire the shares of the
company and not the business. It is precisely for this reason that Carbon Inc
decided not to even use its name in the identity of the Indian company, and decided
to retain the old name so that the persons dealing with the company and the public
would not be generally aware of Carbon Inc’s involvement in Chandrappa & Sons
Limited. In other words, it opted to distance itself from the Indian company as
much as possible due to fear of legal and reputational concerns.

9. It is on account of the ownership pattern of Chandrappa & Sons Limited, and due to
the fact that nearly all of the shares of Chandrappa & Sons Limited are held by Carbon
Inc, that the Association decided to bring the suit against Carbon Inc as well. In the
district court, the judge held that Chandrappa & Sons Limited as well as Carbon Inc
were jointly liable for damages payable to the Association (on behalf of the farmers)
as Chandrappa & Sons Limited was nothing but an alter ego of Carbon Inc and an
agent of Carbon Inc (as the relationship here was one of agency, and that the principal,
being Carbon Inc, would be responsible for all the
 actions of the agent, being Chandrappa & Sons Limited). The amount of the
damages payable was adjudged at Rs. 36 crores. Against this, both Chandrappa &
Sons Limited as well as Carbon Inc preferred an appeal to the single judge of the
Karnataka High Court. On appeal, the single judge of the High Court partially
reversed decision of the district court and held that while Chandrappa & Sons
Limited was liable for payment of the compensation amount, Carbon Inc was not
liable as the smelter business in Adipura did not belong to it, but to its subsidiary
Chandrappa & Sons Limited. The Association later, however, found that
Chandrappa & Sons Limited had a business which has a net worth of only Rs. 5
crores, and would not be in a position to satisfy the entire compensation amount
of Rs. 36 crores. On the other hand, the Association also found that Carbon Inc is
a much larger company with worldwide assets and operations and would be in a
better position to discharge the judgment on compensation, and hence the
Association would be at the great disadvantage if it is not able to secure a judgment
against Carbon Inc. Therefore, the Association preferred an appeal before the
division bench of the High Court. This appeal was preferred by the Association
against Carbon Inc. On the other hand, Chandrappa & Sons Limited preferred a
cross-appeal against the single judge’s order in which it did not dispute that
leakage from its smelter caused the accident, but disputed that compensation needs
to be paid. Chandrappa & Sons instead offered to provide an unconditional
apology to the people of Rampura, and that even if compensation is required to be
paid, the quantum of compensation should not be more than Rs. 1 crore at the most.

10. While the appeal was pending, Carbon Inc decided to sell off its business
worldwide to Mercury Inc, which is another global conglomerate. The deal was
signed on June 1, 2008. As part of this global transaction, the parties decided to
provide for a special treatment regarding the transfer of the Indian part of the
business, which was vested in Chandrappa & Sons Limited. Mercury Inc had an
Indian subsidiary by the name of Mercury Metals India Ltd (MMIL) in which it
held in 70% of shares. The balance of 30% of the shares of MMIL was held by the
public, and the shares of the company are listed on the Bombay Stock Exchange
as well as the National Stock Exchange. Under the global sale transaction, it was
decided that the Indian leg of the sale would be given effect to by way of a merger
of Chandrappa & Sons Limited into MMIL. As part of the merger, all assets,
liabilities (whether existent, accruing or contingent), claims, properties and
employees of Chandrappa & Sons Limited will be transferred to and vested in
MMIL. Towards this end, Chandrappa & Sons Limited as well as MMIL filed a
scheme of arrangement under Sections 391 to 394 of the Companies Act, 1956
before the High Court of Karnataka. The High Court ordered the convening of
requisite meetings of shareholders and creditors of both the companies. The
meetings of shareholders and creditors were duly held, and the scheme was
approved by them. A petition was then filed before the High Court for sanction of
the scheme by the court.
11. Although the Association did not oppose the merger until then as it was under the
impression that it could continue to press its claims with MMIL, it later found out
that MMIL was a company which is under severe financial strain. Having a
negative net worth, its liability is worth more than its assets, and it had already
defaulted on its loans to various banks and financial institutions. Given this
situation, it was unlikely that MMIL would be in a position to pay the
compensation amount of Rs. 36 crores that was awarded by the court against
Chandrappa & Sons Limited. Therefore, the Association realized that that it needs
to fight this merger tooth and nail, failing which its chances of being able to
recover any amount of compensation whatsoever would be near to nothing.

12. The Association launched a three pronged attack against the merger. It filed three
different sets of objections to the petition (filed by Chandrappa & Sons Limited
and MMIL) before the High Court and prayed that the merger ought not to be
sanctioned. The three different types of objections filed by the Association are set
forth below.

13. First, the association pleaded that it is an "interested party" in the merger as it
holds a judgment debt of Rs. 36 crores against the amalgamating company, which
is Chandrappa & Sons Limited. Since the merger would reduce the ability of
Chandrappa & Sons Limited (as succeeded by MMIL) to pay the judgment debt,
it affect the interests of the Association and the farmers that it represents. Hence
the association argues that the merger should not be sanctioned.

14. Second, the association pleaded that it is a creditor of the company to the extent of
the compensation amount, and since its interest as a creditor is adversely affected,
and hence the merger scheme should not be sanctioned.

15. Third, the Association in the meanwhile purchased 10 shares of MMIL on the
stock exchange. Being now a shareholder of MMIL, it alleged that the scheme is
adverse to the interests of MMIL shareholders because the exchange ratio of 3
MMIL shares being issued to shareholders of Chandrappa & Sons Limited for
every 1 share of Chandrappa & Sons Limited held by them does not represent the
true value of MMIL shares, and that the ratio ought to be at least 6 MMIL shares
for 1 share of Chandrappa & Sons Limited. The Association also an alleged that
only one valuer's report was obtained by the parties and placed before the court,
which indicated a valuation of 3:1 as set out in the scheme. The Association also
alleges that the valuation report was obtained from Messrs ESB & Co, and that the
valuer was in fact an interested party. Mr. E.S. Basava Reddy, the senior partner
of ESB & Co. was a director on the board of Chandrappa & Sons Limited. Hence,
the Association alleged that there was hardly any independence in the valuation
process, and that the companies should have also obtained additional valuation
reports before fixing the share exchange ratio for the merger. The Association
pleaded that the court should reject the merger as it is against the interests of
MMIL’s shareholders.
16. To this, Chandrappa & Sons Limited as well as MMIL strongly rebutted the
arguments of the association. They pleaded that the association was neither an
interested party not a creditor and that it was only a “meddlesome interloper” in
the merger proceedings, having maliciously purchased shares only with the
purpose of thwarting the merger process.

17. The single judge of the High Court of Karnataka hearing the objections of the
Association to the merger held that the Association did not have any locus standi
to object in the merger proceedings and therefore the application containing the
objections of the Association were dismissed.

18. Against this order, the association preferred an appeal before the division bench of
the High Court. The division bench decided to combine the two appeals of the
Association in the interests of convenience and expediency. The first appeal relates
to the order for compensation where the respondent is Carbon Inc. The court also
has before it the cross-appeal filed by Chandrappa & Sons Limited questioning the
award of compensation by the single judge of the High Court, but the court decided
not to hear the dispute regarding the compensation in these proceedings, and
decided to leave this question for determination at a later stage after making a
decision on the principal questions. The second appeal relates to the amalgamation
process where the respondents are Chandrappa & Sons Limited and MMIL. In
both the cases, the appellant is the Association.

19. The matters are now being heard together in a composite hearing.

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