The case study focuses on the breakup of the joint venture agreement between LML Ltd., and the Italian automobile major, Piaggio. The case deals with the various developments that led to the break-up, and claims and counter-claims made by LML and Piaggio. After a year long bitter dispute with petitions pending in the ICA, CLB, and the Kanpur Civil Court, the companies finally opted for a 'good-faith out of court' settlement in November 1999.
The Lohia Machines Private Limited (“the Company”) was incorporated on the 1st May, 1972, at Kanpur. The Company initially manufactured finished leather and carried out processing of synthetic yarn. In 1975, the Company undertook the manufacture of highly sophisticated machinery required for man-made fiber industry like crimping machines, draw texturising machines, assembly twisting machinery, up twisting machine, tow to top conversion equipment, screen printing carriages.
Piaggio was established in 1884 in Pontedera, (Pisa, Italy), was one of the world's leading producers of motorized two-wheeled vehicles. A leader in the European two-wheeler market, the company was also a manufacturer of three and four wheeled light transport vehicles and engines. The Piaggio family owned the company until December 1999, after which Morgan Grenfell Private Equity, a member of the Deutsche Bank Group, acquired 81.5% stake. The remaining 18.5% stake was held by Umberto Agnelli (10%), and Texas Pacific Group (8.5%). Piaggio entered the Indian automobile market in 1948, by launching its two-and three-wheelers in Mumbai. Very soon, the company signed a licensing agreement with Bajaj Auto for the production of two- and three- wheelers locally.
Piaggio had many firsts to its credit. It was the first European manufacturer to launch a 4-stroke scooter in 1995. In 1997, the company produced the first and only scooter in the world with an injected 2-storke engine, - Vespa ET2 Injection. This scooter, it was claimed to reduce emissions by up to 70% and fuel consumption by up to 30%, as compared to other scooters.
ORIGIN OF VESPA
Vespa is an Italian brand of scooter manufactured by Piaggio. The name means ‘wasp’ in Italian. Vespa has evolved from a single model motor scooter manufactured in 1946 by Piaggio & Co. SPA of Pontedera, Italy, to a full line of scooters and one of seven companies owned by Piaggio, now Europe's largest manufacturer of two-wheeled vehicles and the world's fourth largest motorcycle manufacturer by unit sales.
From their inception, Vespa scooters have been known for their painted, pressed steel unibody which combines a complete cowling for the engine (enclosing the engine mechanism and concealing dirt or grease), a flat floorboard (providing foot protection), and a prominent front fairing (providing wind protection) into a structural unit.
In 1984, in an unrelated diversification move, the Company entered into a licensing agreement for technical collaboration, for the production of Vespa, with Piaggio. The Company received letters of intent to manufacture 2,00,000 scooters as well as 50,000 three-wheelers per annum. Government's approval was received for technical collaboration with Piaggio & Co. S.P.A. for the manufacture of three-wheelers.
FORMATION OF VESPA CAR COMPANY LIMITED
In 1984 to implement the licenses, a new company was incorporated under the name and style of Vespa Car Company Limited during the year (“Vespa”). This new company was a sub-licensee, for the scooters and large number of components were to be supplied to the new company by the company.
In 1986 the Company introduced LML models name LML Vespa, NV3, Alfa, T5 & 4W. To restructure the Company's activities of scooter and synthetic yarn manufacturing, the undertakings of the fibre division was transferred to one of the wholly owned subsidiary companies, viz. LML Fibres, Ltd. with effect from close of business on 31st July, 1987. In 1988 the Company proposed to implement the scheme of indigenization to bring about cost reduction.
JOINT VENTURE BETWEEN LML LTD. AND PIAGGIO
In 1990 the licensing agreement was converted into a technical and financial joint venture, with Piaggio taking up a 23.6% equity stake in LML. In the same year, LML was spun off as a separate company. The Indian promoters had a 23.6% equity stake in the new company. Two of these were Mr. Deepak Singhania, and his brother Mr. Lalit Singhania, who held the stake through a holding company, Suryodaya Trading and Investment Co. The third Indian promoter was Mr. Sanjiv Shreya, a cousin of the Singhanias, who held the stake through Gold Rock Investments. The rest of the stake was held by pubic and financial institutions. Piaggio held the stake through Piaggio Vespa BV and Piaggio & C SPA. Both the companies, LML Ltd and Piaggio, had three representatives each on the board, with demarcated areas of responsibility. While the Singhania’s were responsible for management, finance, sales and external relations, Piaggio was responsible for technology transfer and quality control. But in the same year the Company's operations were adversely affected by the political instability, foreign exchange crisis and severe credit squeeze.
DURING THE PERIOD FROM 1991 TO 1999
· In 1991 the working results were adversely affected mainly due to the recession that prevailed in the automobile industry.
· During 1993 the Company launched a diversification-cum-expansion project involving a capital expenditure of Rs 204 crores as appraised by IFCI, which was funded by term loans from banks and financial institutions, lease finance, increase in share capital through public and rights issue and internal accruals.
· The Company then entered into a new Joint Venture arrangement and executed several agreements, along with Piaggio and Indian Promoters.
· In 1996, the Company, entered into Several Licence Agreements with Piaggio of Italy for import of technology and know-how to manufacture new models of Scooters and other two wheelers in different segments.
· By 1998, Piaggio established its presence in the Indian two-wheel market, in its collaboration with LML, by bringing in a number of models of its famous brand of scooters.
SCENARIO AFTER 1999
On June, 23, 1998, Mr. Deepak Singhania, received letters from Piaggio. The letters curtly informed him that four of the group companies would be merged with Piaggio & Co. SPA on July 1, 1998, under a restructuring plan. There had also been a change in the shareholding pattern. Mr. Deepak Singhania immediately sensed that the reorganisation and the changing shareholding pattern of Piaggio & Co SPA would strengthen the anti-Singhania faction in Piaggio. Proactively, Mr. Singhania invoked certain articles of the joint venture agreement with Piaggio. Mr. Singhania contended that he had the right to buy out Piaggio's stake in LML. According to him, the demise of Giovanni Alberto Agnelli triggered an event that gave LML the right to purchase Piaggio's stake.
PUBLIC ANNOUNCEMENT OF THE DIVORCE
On June 3, 1999, the Company had informed all major stock exchanges of the country that its joint venture partner Piaggio had given notice to the company for termination of the joint venture and other related agreements.
In a letter to the National Stock Exchange (NSE) and stock exchanges of Delhi, Mumbai, Ahmedabad and Kanpur, the company has said that it received a faxed notice from Piaggio Vespa BV and group company Piaggio SpA on May 31, 1999, on the issue. The Company had also written that “persuant to Clause 36 of the listing agreement, we hereby notify that Piaggio has filed before the CLB on May 28, 1999 a petition under sections 397, 398 and 402 of the Companies Act, 1956 against the Company, its director and Indian promoters.''
The termination of joint venture agreement would mean that LML would not be able to access the technology of Italian two-wheeler major Piaggio and be forced to scout for other partners for technology transfer. But over the years LML had become the second largest scooter manufacturer in India. LML was also into the manufacture of scoterettes. When the sales of scooters began to fall in India, the company entered into highly competitive motor cycle segment, by entering into collaboration with Daelim of Korea.
CLAIMS AND COUNTER CLAIMS
Mr. Deepak Singhania took the matter to the court of the civil judge (Senior Division) Kanpur. Mr. Singhania's petition contended that Piaggio should be forced to sell its stake. Meanwhile, Piaggio has approached the CLB seeking removal of Mr. Deepak Singhania as managing director of LML Ltd on the ground of mismanagement of the joint venture. The Kanpur court gave an interim order restraining both LML and Piaggio from selling their holdings.
The principal bench of CLB has reserved the order after hearing both the parties. Piaggio had also sought appointment of an independent chairman and administrator to look into the affairs of LML. However, LML’s counsel had argued before CLB that the allegations made in the petition by Piaggio were baseless and frivolous.
Piaggio had also alleged that the Mr. Singhania was not giving the details of the shareholding pattern in LML. Its petition had further alleged that Singhanias have been buying the shares of LML from the open market in order to increase their stake in the company. It had also asked CLB to debar the company from disposing its assets and venturing into any new business activity. And finally it had sought reimbursement of the entire amount invested by the Italian company in its Indian venture.
Later Piaggio also moved to the ICA, Paris, for arbitration as per the clause which was opposed by Singhanias. They had pleaded in the court that the matter should not be referred to ICA as Piaggio Vespa BV was not a party to signing the joint venture.
THE BREAK UP
Analysts felt that Singhania's initial move of filing a petition for buying Piaggio's stake in LML was a bolt from the blue.
The company had gained market share and its profits were also improving steadily. Also, in 1997, two months before the death of Giovanni, the partners had announced their decision to enter the motorcycle segment. Moreover, the fact that LML's stylish scooters were more stylish when compared to Bajaj's stodgy models, was attributed to LML's partnership with Piaggio. Above all, as Piaggio was also LML's technology partner, the fight could put on hold Singhania's plans of launching the Gilera range of motorcycles through LML. However, Singhania felt that Piaggio's contribution had become insignificant.
On November 15, 1999, LML and the Piaggio group resolved their long-pending disputes and differences in an out-of-court settlement agreement.
· The Joint Venture Agreement of LML with Piaggio came to be terminated. The exclusivity rights of LML also terminated.
· LML retained non-exclusive rights to use all Piaggio technology received for all vehicles other than Piaggio motorcycle.
· Piaggio became free to set up any business in India, including competing business except manufacture of motorized two-wheelers powered with lateral engine till December 31, 2007.
 The Author is a 5th year law student of Symbiosis Law School, Pune, Maharashtra.
 The Co-author is a 5th year law student of Symbiosis Law School, Pune, Maharashtra.
 The International Court of Arbitration
 Company Law Board
 "Piaggio Group Launches Market Expansion Plans". Rider Magazine. Retrieved 2007-09-03.
 The Name of the Company was changed from Lohia Machines, Ltd. To LML Ltd. with effect from 6th May.
 To increase local participation in or ownership of: toindigenize foreign-owned companies.
 Managing Director, LML Ltd
 Industrial Finance Corporation of India
 LML Board Informs Bourses About Divorce With Piaggio, Indian Express (New Delhi), June 3, 1999 (http://www.expressindia.com/fe/daily/19990604/fco04026.html)