Syntel Founder Can’t Duck Fraud Suit Over Sale To Atos
Law360 (October 19, 2022, 4:29 PM EDT) –
Multinational information tech company Atos SE on Wednesday kept alive its Delaware Chancery Court suit accusing Syntel Inc.’s former chairman of scheming to sell the business to Atos for $3.4 billion without disclosing a huge trade-secrets misappropriation liability risk.
While acknowledging potential weaknesses in Atos’ case, Vice Chancellor Nathan A. Cook declined to dismiss any of the four counts in Atos’ suit accusing Syntel founder and ex-chairman Bharat Desai of fraud, aiding and abetting fraud, conspiracy and unjust enrichment in connection with the 2018 sale of the business.
« The alleged facts support a reasonable inference that Mr. Desai was actively engaged in the sale process and an active participant in approval of information distributed to Atos, including withholding of negative information, » the vice chancellor wrote.
France-based Atos accuses Desai of orchestrating false assurances by Syntel that his company faced no material litigation risks before Atos acquired it.
At the time, Syntel was battling TriZetto Group Inc. in New York federal court over claims that Syntel misappropriated and infringed dozens of TriZetto trade secrets used in a Cognizant Inc. insurance software platform.
Atos says Desai, Syntel’s largest stockholder, was aware of negative developments in the TriZetto case during merger talks, and he received $1.4 billion for his shares.
After closing, however, Atos learned of undisclosed negative developments in the TriZetto litigation, which eventually produced an $877 million verdict against Syntel, later reduced to $570 million.
« To be clear and so there is zero confusion, I am making no finding of fact on any of these issues. That will have to await further proceedings, including in discovery and potentially trial, » the vice chancellor wrote.
Desai owned 38% of the company’s equity and, in combination with his wife’s holdings, controlled 51%. However, he was not a signatory to the merger.
The vice chancellor said Atos had to clear an early defense argument that representations about litigation risks were made by Syntel rather than Desai. But public policy in Delaware against fraud « is so strong that it vitiates everything it touches, » Vice Chancellor Cook said. « As such, at the pleading stage, I must reject the defendant’s argument that he cannot be held liable for representations solely made by Syntel. »
On issues of conspiracy and aiding and abetting, the vice chancellor found that « the alleged facts support a reasonable inference that Mr. Desai was actively engaged in the sale process and actively participating in approval of information distributed to Atos, including withholding of negative information. »
Atos’ unjust enrichment claims also survived, as the court said found sufficient allegations that Desai received inflated merger consideration as a result of fraudulent concealment of risks in the TriZetto case.
The vice chancellor indicated that hurdles remain for Atos, which has owned Syntel and access to its records for years.
« This raises some questions about the strength of the claims, » Vice Chancellor Cook said, adding.
Neither side’s counsel commented on the rulings afterward.
Atos SE is represented by Matthew D. Stachel, Jaren Janghorbani and Jeffrey J. Recher of Paul Weiss Rifkind Wharton & Garrison LLP.
Bharat Desai is represented by David E. Ross, Eric D. Selden and A. Gage Whirley of Ross Aronstam & Moritz LLP and Mark C. Hansen, Daniel G. Bird and L. Vivian Dong of Kellogg Hansen Todd Figel & Frederick PLLC.
The case is Atos SE v. Bharat Desai, case number 2021-0630, in the Court of Chancery of the State of Delaware.
–Editing by John C. Davenport.