E-commerce firm Snapdeal's decision to walk away from Flipkart deal and execute a â€˜Snapdeal 2.0â€™ could lead to a potential litigation as it now appears that the founders may not have taken the board into confidence about the beleaguered company's new revival plan, according to two people privy to the development.
Vani Kola, co-founder of Kalaari Capital who till recently was sitting on the board of the company, has publicly criticised this move.
"I am extremely disappointed and shocked with the founders and their disregard for investors and the employees' interest," she said adding that she had no prior information on this and this was something not discussed with her, in an interaction with a television channel.
Snapdeal 2.0 is expected to be a much leaner organisation and will seeÂ exodusÂ of aÂ massive chunk of employeesÂ (Read here).
â€œWhen something goes without the agreement of the stakeholders, it can have repercussions. There could be litigation for mismanagement," one of the persons quoted above said adding that there is also a possibility that the deal could come back to the table in some form or shape. â€œDonâ€™t immediately know how will it come back or who will be the potential buyer but I don't think, it will die so easy as the shareholdersâ€™ value is eroding if you donâ€™t do a deal,â€� the person said.
"The fact of the matter is that the founders have gone ahead and taken a decision that the deal will not go through and the Snapdeal 2.0 is to happen. Has the board approved the Snapdeal 2.0? The answer is no," said the second person quoted above.
Snapdeal on Monday announced that it has terminated all talks for a distress sale to Flipkart and wants to pursue an independent path.
The key stakeholder, Softbank said that it supported the company in this decision and will â€œlook forward to the results of the Snapdeal 2.0 strategyâ€�.
Softbank is reported to be in talks with rival Flipkart to invest USD 1.5-2 billion.
Suvir Sujan, co-founder of Nexus Venture Partners, and Akhil Gupta (independent director) who sit on the board of Snapdeal did not immediately respond to emails from Moneycontrol.
To a detailed questionnaire, Snapdeal said, "the path to profitability being pursued by the company till date is as approved by the board in March 2017. The company will continue to seek guidance and direction from the board in further execution and detailing of such plans." However, it did not specify whether or not this move had an in principle approval from all the stakeholders.
AÂ third person who has been involved in the development (requesting anonymity) cited that the decision to not to go ahead with the deal has been endorsed by all the key people like Softbank, Nexus and the promoters. Itâ€™s a clear and final decision and a single shareholder like a KalaariÂ Capital cannot decide for everyone.
"In this deal,Â KalaariÂ has already taken out a decent exit besides they had a special payment promised by Softbank if the deal went through and there are discussions about them getting an additional investment from Softbank. It is them, if at all anyone whoÂ areÂ not working in the interest of the company," the person quoted above said. Advocating theÂ foundersÂ decision, the person also said that "any one shareholder likeÂ KalaariÂ cannot decide for everyone. Without the deal happening, theyâ€™re not going to get a special payment, ... theyâ€™re probably not going to get Softbank to invest in their fund, so that is why they are so unhappy. We think this is the best thing for the company."
He also added that even if the deal with Flipkart had happened at best the investors would have gained something out of it. For employees, it would have been worse. "There is likely going to be some reduction in people, but in the Flipkart deal it was very likely that almost 90 percent of the employees would have lost their jobs over the next 6 to 12 months."
To be sure, the employees, however, had retention bonuses if the deal with Flipkart went through. With Snapdeal 2.0 there isn't an immediate clarity on what sort of severance will be paid to the employees.
While the person quoted above, did not rule out the possibility of a litigation, he said that there was "zero possibility of the deal coming back on the table."Â Kola resigned from the board of Snapdeal in May even as the deal talks were ongoing. "OneÂ investorsÂ cannot unilaterally say that the deal should be back on the table. So it is much ado about nothing .. just trying to rile people up," he said.
"There is a reason why there is a Softbank statement and a Snapdeal statement -- it is to make it crystal clear that decision is made," he added.
According to a corporate lawyer, who spoke to Moneycontrol on the basis of anonymity, broadly, under the companies act there isÂ veryÂ limited action that anyone can take. "There are provisions like class action which requires a minimum of 10% of stakeholders to come up and raise the issue. The second problem is that it needs to be proven that the directors are not acting in the best interest of the company. It will be very difficult to question the business judgement of the director in this case, because the acquisition mayÂ couldÂ have resulted in shutting down of the company. So it will be very premature for anybody to file the case at this point in time. They would probably want to see what is the implementation of Snapdeal 2.0," he said.
He further added that the Snapdeal's case is particularly interesting because they are acting as the management and it has been widely reported that the founders have been trying to block the deal. "For instance, in the US, in a take overÂ battle, if the management is trying to protect their own job and not letting a deal to happen amounting to stakeholders losing value, it is a big issue. Management is often held responsible for the interest of the shareholders as a group. So where the management destroys the value of the shareholder because of emotional reasons then they bear a lot ofÂ risk. Someone can say that they did not exercise the judgement in good faith or diligence," he added.
According to him, at this point in the case of Snapdeal, it is premature currently but it will be interesting to see if the Snapdeal 2.0 fails and the company ends up being sold for a fraction of this value. "In such a case, one can expect a lot of risk of litigation and bad blood," he said.