-*Abhinav Shrivastava & Aman Gugnani
Introduction
‘Goodwill is the one and only asset that competition cannot undersell or destroy.’
– Marshall Field
One might state that goodwill is perhaps the only intangible asset of the company which not only distinguishes a particular business from the others, but also contributes to increase company’s prospects. In today’s globalized market, not every other business is uniquely different and there are overlaps often covering the same domain, i.e., providing same/similar kinds of goods or services. It is the goodwill of the organization: its reputation, its brand value, which distinguishes it from its counterparts. Perhaps that is why goodwill is often accounted as an intangible, non-current asset in company’s financial statements. Although there are debates over how goodwill should be accounted for, one thing is certain: this reputation of the organization expressed numerically must be accounted for.
Since goodwill is highly contingent on multiple external factors, the question thus arises can an organization claim damages, if someone does something that brings its goodwill down? The answer in common law legal system has often been the tort of defamation. Corporate Organization’s right to preserve their reputation thus gains recognition. But how far can this right be stretched? What if the person ‘defaming’ them does it because of their job, like financial analysts? These are the questions the present article grapples with within the Indian context.
Defamation
The foundational question is: can a corporation actually sue anyone for defamation? The legal concept is, after all, thought for actual persons and the effect of such acts on their emotions. The question thus arises, since corporation are formerly a group of persons and such statements are not affecting anyone individually, can it then be considered that the corporation has been defamed?[1] Do we have to look for another action that could be initiated to counter this? As it turns out, defamation of a corporation affects its assets, goodwill in particular, and so such action can be initiated.[2] What this conception essentially does is corporate legal personalities must be put at a possibility to suffer harm to an asset, rather than emotions. In this sense, defamation of persons and corporations become divergent. Individuals must be shown to suffer an emotional and mental toll caused because of derogatory remarks to their reputation, whereas corporations have to show effect on their asset, resulting often in financial/economic loss.
The offence of defamation in India is included in Section 499 of IPC[3]. It covers both libel and slander, i.e., both written form and oral statements may amount to defamation. Explanation 2 to the provision clearly states that the corporations can sue as well.[4] Now, this very fact itself changes the Indian position. In most common law countries, defamation is included under the Tort Law – which essentially means that actions against defamation are pursued as a civil remedy. By including it within the IPC, the threshold that needs to be met for an action to be tried under the offence of defamation becomes higher. Simply put, now mere action won’t suffice. There needs to be mens rea – a malicious intention to cause damage to the person/corporation over whom the ‘derogatory’ remarks are intended at.[5] Herein lies the curious case of financial analysts, whose action is often said to be covered under sixth exception to the provision.
The Conundrum
A financial analyst’s job, as a layman would describe it, is to analyse the financial statements of a company and give their opinion about its future performance. Investors in the modern-day markets rely on the piece of such advice and often consider it mandatory to go for any stock after they have taken and considered a financial analyst’s opinion. The problem arises when these analysts project a negative future for the company. Investors may panic and withdraw their money, causing a huge loss for the corporations. Now, if a financial analyst has done their job in good faith and still the consequence is adverse for the corporation, can they be held accountable under the offence of defamation? Which side must prevail over the other: corporation’s right to reputation or a financial analysts’ right to free speech and expression?
Fortunately, answer is easier in Indian context. This contestation of right may be needed to debate over when such actions are within the realm of civil law, but since in India defamation is a criminal offence, the only question for the Hon’ble Court to decide after such actions have been proved is whether such action have been done maliciously? If a financial analyst has deliberately relied on the wrong documents, has made a claim without relying on any documents, has relied on correct documents but misrepresented the picture, is projecting light over only half of the problem, etc. are some instances where financial analyst could have been proved to possess a malicious intention. The same/similar standard has been adopted in other jurisdictions as well: U.S.’s New York Times v. Sullivan[6] for instance. Even in other common law countries, the general trend is similar, although they have explicitly stated that a financial analysts’ right to freedom of speech and expression must prevail. Although the legal question is and almost always have been reduced to these two adversaries, the decision comes with a hidden benefit to a ‘third party’ as well.
The Hidden Benefit
This balancing approach has been widely applauded primarily because of the twin benefits. It does not implead an individual for doing their jobs properly. Right to fair criticism is a part of right to freedom of speech and expression and as such, any individual should not be punished for exercising this right, or otherwise there would be a “chilling effect”[7]. The balance thus stricken does not entirely discards the interests of corporation as well. The resources that go into building a firm’s goodwill needs to be respected as well. So, by raising the bar for due diligence and skill that a financial analyst must employ to ensure that the firm’s true picture is displayed, it prompts them to do their jobs vigilantly, with validating and legitimizing every step.
Remember sixth exception mentioned above herein? This exception to the provision states that if an opinion regarding merits of the performance has been submitted to the public and author does express such opinion in good faith, it is not defamation.[8] What this defence thus argues that is by giving public right to access information regarding performance, the corporations have, to a certain extent, invited praise and criticism alike. There is a level of surrender to the opinion of the public.[9] It is plainly clear that this surrender is legally mandatory and rarely voluntarily. Public Companies, especially, have to release information on their financial, future plans, etc. on a regular basis for stakeholders to take informed opinions. These are essentially the permeable points in the corporate veil. The intention could be termed as granting them a right to knowledge. But how can the information released be turned into knowledge? Not everybody is trained to go through financial statements, go through trends within the markets, etc. This is where financial analysts come in – reiterating this information in layman’s language. What this essentially does is it increases accessibility of that information and aids individual’s right to knowledge. The twin benefits mentioned gives a push to this as well.
Conclusion
The article has made a deliberate attempt to not just look at how the narrative adopted by the Courts have impacted the adversaries, but also to keep in mind that judicial institutions have perfectly fulfilled the intention of legislatures as well. It is indeed right to fair criticism that must prevail, however the same cannot be limitlessly stretched. If absolute immunity is provided to financial analysts, it creates a major loophole in the system. Not only it will be detrimental to the corporations who have worked hard to build their reputation over time, but it will also be detrimental to public at large. The amount of trust in expertise investors display is huge and this trust casts an obligation over the analysts to do their job with due diligence and deploy as much care as any reasonable person should. This simultaneously also becomes the justification for their accountability. By striking the balance, the Courts have affirmed rights of all the three groups mentioned herein above – which is commendable.
[1] See D. Mark Jackson, ‘The Corporate Defamation Plaintiff in the Era of SLAPPs: Revisiting New York Times v. Sullivan’, (February 2001) William & Mary Bill of Right Journal, Volume 9 (2000-2001), Issue 2, Article 9 <https://scholarship.law.wm.edu/cgi/viewcontent.cgi?article=1366&context=wmborj> accessed 14th July 2022
[2] See Metropolitan Saloon Omnibus Co. v. Hawkins [1859] 4 H & N 87 at 90, Dixon v. Holden [1868–1869] 7 LR Eq 488 at 492
[3] Section 499 is defined in Indian Penal Code as follows:
‘Defamation — Whoever, by words either spoken or intended to be read, or by signs or by visible representations, makes or publishes any imputation concerning any person intending to harm, or knowing or having reason to believe that such imputation will harm, the reputation of such person, is said, except in the cases hereinafter expected, to defame that person.’
[4] Explanation 2 to Section 499 reads as follows:
‘It may amount to defamation to make an imputation concerning a company or an association or collection of persons as such.’
[5] Union Benefit Guarantee Company v Thakorlal Thakor, (1935) 37 Bom LR 1033
[6] 376 U.S. 254 (1964)
[7] M/S Indiabulls Real Estate Ltd. vs M/S Veritas Investment Research Corporations and Ors., 2019 SCCOnline Del 8204
[8] The Sixth Exception to Section 499 of IPC reads as under:
‘Merits of public performance — It is not defamation to express in good faith any opinion respecting the merits of any performance which its author has submitted to the judgment of the public, or respecting the character of the author so far as his character appears in such performance, and no further.
Explanation — A performance may be substituted to the judgment of the public expressly or by acts on the part of the author which imply such submission to the judgment of the public’
[9] See Jackson, The Corporate Defamation Plaintiff in the Era of SLAPPs: Revisiting New York Times v. Sullivan (n. 1)
*Abhinav Shrivastava is a Co-Founding Partner of GSL Chambers. Aman Gugnani is an intern at GSL Chambers.
