Opinion

The curious predicament of the inherited, ‘trapped’ investor

R Gopalakrishnan | Updated on September 13, 2020 Published on September 13, 2020

This kind of shareholder feels stuck within the entity and can’t exit easily and efficiently. It’s an emotional imbroglio

Competitiveness and spite are endemic in the world, particularly in business. In 2017, Angelina Jolie directed a brilliant film, Unbroken, which is streaming now on Netflix. American Louis Zamperini, an Olympic athlete and Second World War participant, suffered severe torture by the Japanese, upon his capture. In an interview to The Atlantic in 2014 just before his death at 97, Zamperini reflected that forgiving the Japanese was healing for him. To hate somebody hurts physically, mentally and emotionally. He quoted Mark Twain, “Forgiveness is the fragrance that the violet sheds on the heels that crushed it.” Families and partners with disputes in business should learn the art of mediation and forgiveness.

In business, there are two kinds of investors — direct and inherited. Venture and PE firms are direct investors in unlisted Indian companies. Such equity providers, being professional, secure directorships and legal provisions for an exit. The successful investment of Warburg Pincus in the start-up, Bharti Airtel, during the 1990s was a classic and happy case study. As Tolstoy wrote in Anna Karenina, “All happy families resemble one another, but each unhappy family is unhappy in its own way.” In unhappy cases, exit becomes difficult because the company is floundering and is not IPO-ready. The direct investor case is not the focus of this article.

The ‘inherited’ investor experiences what it feels like to be trapped and there is a cautionary message for the inherited trapped investor. Such a shareholder may face restrictions on exit by selling privately; he/she may also lack visibility of the company’s finances through a non-executive directorship. The grievance of a trapped investor can be alleviated only by the majority shareholders, failing which unintended consequences follow.

The 1970s charming film, Bobby, showed a young Rishi Kapoor serenading an innocent Dimple Kapadia — Hum tum, ek kamre me band ho, aur chaabi kho jaye — a delightful trapping. The Netflix serial, Bloodline, shows tormented Rayburn family members, leading one another into terrible traps, all because oldest son, Danny Rayburn, felt scarred by experiences of his upbringing.

The case of YES Bank shareholders’ dispute is an example. After the death of founder Ashok Kapur, his family members could not get a board position despite being substantial shareholders. Another example is of a Tamil Nadu-based unlisted, public incorporated company. This holding company owns an influential percentage of shares in the business group’s listed companies. Daughters of one branch of the family along with their mother inherited a respectable and valuable shareholding in the company upon the death of their father. The elder daughter (and head of her Hindu Undivided Family) seeks a position on the company board, which has been denied so far; they also have no satisfactory exit. Thus, they became inherited trapped investors.

Dialogue and mediation

A trapped investor may be individuals or a company. If it is a public listed company, it is complex to solve. Dialogue with and persuasion of the majority shareholder is the only way to address the investor’s problem. Mediation can be the second stage. Legal action is a possibility — the success rate and time frame involved make this an unattractive route.

The trapped investor must keep alive a direct or indirect dialogue and must never walk away from the discussion table. As it happens with war-like foreign relations issues, it is essential to stay connected, to discuss options, and to compromise within one’s limits. Recall the hugely impactful Camp David accord between Egypt and Israel. Egypt’s surprise Yom Kippur attack on Israel was mounted so that Israel would be compelled to return to the peace table. The approach becomes what NYU’s Prof James Carse termed ‘an infinite game.’ An infinite game has no clear rules of play and has no defined beginning or end.

If persuasion and mediation fail, then the trapped investor may fight hard and ferociously, like a trapped animal. Nature provides gory lessons on what happens when two similarly resourced animals fight. Psychologists point out that, in this situation, the human ‘thinking’ brain yields power to the ‘emotional’ brain. The trapped investor may inflict severe and unintended harm to the company as has been seen in bitter family business disputes. In a public fight, the issue subtly shifts from business issues to the ego of the leaders concerned. The corporate entity, its employees and its consumers will suffer in a vicious shareholder battle.

The golden rule, derived from experience and prudence, is to embrace diplomacy and dialogue and shun PR disasters and uncertain legal battles.

The writer is a former Director of Tata and Vice-Chairman of HUL. (Through The Billion Press)

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Published on September 13, 2020
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