India: The Boardroom Battle

INTRODUCTION

Oppression and mismanagement are terms often chanced upon when company affairs are put to review. Statutorily dealt within the provisions of the Companies Act, 2013¹, these terms denote a situation of boardroom conflict, a prejudicial approach in conducting the affairs of the company by the directors of the Board and stymieing of the views of minority shareholders.

This article discusses the decision dated 12.07.2018 passed by National Company Law Tribunal ('NCLT') in the case of Cyrus Investments Pvt. Ltd. v. Tata Sons Ltd. & Anr. and Ors. (in short 'NCLT Order')². Cyrus Investments Pvt. Ltd. & Anr ('Petitioners') in this case were a class of minority shareholders in the Tata Sons company, comprising the companies Cyrus Investments and Sterling Investment Corporation (of the Shapoorji Pallonji Group of Companies) - headed by Mr. Cyrus Mistry, holding over 18% stake in the company.

LEGALITY OF THE OUSTING

Without following due procedure of putting the party to notice, constitution of relevant Committee for validating such removal and pursuance of an unset agenda at the meeting by it being voted upon, on 24th October, 2016, Executive Chairman of the Board of Tata Sons, Mr. Cyrus Mistry, was ousted from such position in the company before completion of his tenure, thereafter re-instituting Mr. Ratan Tata as interim- Chairman.

ALLEGED BREAKDOWN OF CORPORATE GOVERNANCE MACHINERY

Being the single largest shareholder collectively next to the Tata Trusts (which holds over 66% stake in the company), the Petitioners were a minority group with no special rights in the Articles of Association (AoA) of the company. The petition alleged that Mr. Ratan Tata (head of the Tata Trusts) along with his lieutenant trustee, Mr. Soonawala, both acting as 'shadow directors'³, had created a sort of 'Super Board' or a 'Coup Board' in themselves by instituting controlling clauses in the AoA⁴ that limited the right of the Petitioners to control the management and steer the affairs of the company. The Petitioners demanded to have proportional representation on the Board in line with the shares held by them – as is also statutorily directed.⁵ Veto powers and unbridled authority to override decisions of the Board along with clauses such as Article (Art.) 118 of the AoA that tend to usher in external influences on the decision of the Board, as contested by the Petitioners, are typical of traits of agents that can cause collapse of corporate democracy. The Petitioners further stated that the recent misconduct of the Respondents in terms of random exits from meetings⁶ to seek directions from Mr. Tata and unwarranted interference in the decisions of the Board was stifling of their powers. A challenge thus was made stating the ultra vires of such clauses in the AoA.

An ostensible conflict seemed to exist between the concept of Majority Rule⁷ and that of corporate governance⁸. In light of the limited powers of the minority to air their grievances against the company, the Petitioners were disgruntled of having their will sidelined by the dominance of the majority. Grievances before the NCLT

Having approached the NCLT under a company petition, Petitioners demanded the redressal inter alia of the illegal ousting and other related matters. Averments pertaining to failed acquisitions, doomed endeavors such as the Nano project causing substantial losses to the company, breach of insider trading regulations and fraudulent transactions in Tata's aviation undertakings also flooded the pleadings of the Petitioners thereby indicating a general resentment to the manner in which the affairs of the company were being conducted, primarily at the behest of the Tata Trusts. Allegations of loss-causing bargains caused by Mr. Ratan Tata with related parties and preferential treatment being accorded to persons who enjoyed his patronage (sale of shares at "throwaway prices" to a certain Mr. Sivasankaran from Sterling Infotech Limited) in breach of arms length transaction norms were also stated in the petition.⁹

Legacy-rooted conflicts, dynastic power control (oppression and mismanagement), improper constitution of the Board of Directors and the illegal expulsion of Mr. Mistry from the Board were the main contentions of the Petitioners.

DECISION RENDERED BY THE NCLT

On the question of illegal ousting, the Tribunal ruled that such was on account of the loss of confidence in Mr. Mistry continuing as Chairman and irrespective of the mandate of the AoA, the Board of Directors are sufficiently empowered to carry out such a removal.¹⁰ However, the procedure mandated under this provision was not complied with (in terms of giving of notice, providing an importunity of being heard, etc.). Additionally, the Tribunal stressed on the fact that the mere designation of 'Executive Chairman' does not make the title-holder a 'sovereign authority' within the corporate structure.¹¹

The Tribunal also declined to hold that the affairs of the company were being conducted in a manner prejudicial to the Petitioners. It, in fact, placed the burden of poor corporate governance on the Petitioners by citing incidences on their part of leaking information of the company to the tax authorities and the media. Even though in negation of the principle embodied in the Companies Act¹², the Tribunal did not find force in the argument of the Petitioners that it must be given proportional representation on the Board.

The Tribunal excluded of purported legacy issues and alleged transactions in violation of arms length requirements from the ambit of oppression and mismanagement and stated the deal to be an independent "commercial negotiation" in line with investor expectations.¹³ The allegations of the Petitioners were dismissed as being mere conjectures in the attempt to spin a conspiracy theory.¹⁴

The precursor to the decision being in favour of Tata becomes evident soon after the first few paragraphs of the 368-page NCLT order are read. In fervent terms, the order bespeaks of the golden historical legacy of the Tatas, their inherent understanding of 'welfarism' and how, being oppressive in the context of corporate management stems from the sense of "fairness as in a person's mind."¹⁵

The decision rightly explained that corporate governance could be considered a species within the genus of corporate democracy.¹⁶ Though democracy survives on the will of the majority, corporate governance is required to be accommodated therein to install an adequate system of checks and balances within the structure of the company. The order emphasized on the duty of collective responsibility of the Board towards the shareholders of the company.

APPEAL BEFORE THE NCLAT

Mistry and his wingmen have approached the National Company Law Appellate Tribunal (NCLAT) in appeal against the NCLT order. ___ Another related issue pertains to the question of conversion of the company to a private one, which hitherto has been a public limited company.¹⁷ Determination of this issue is pivotal since it will have a bearing on the potential of the Petitioners to sell their stake outside the company, if their removal is upheld to be legal.

Footnotes

1. § 241 - § 244, Companies Act, 2013

2. Order in C.P. No. 82 (MB)/2016 before NCLT, Mumbai Bench dated 12.07.2018

3. 572 of the order; A shadow director is a person in accordance with whose directions or instructions the director(s) of a company are accustomed to act, even though such person may not hold the designated position of being a director in such company.

4. Some of these controlling clauses were in the form of the power of Tata Trusts to nominate one-third of the Directors to the Board (Art. 104), decisions of the Board requiring an affirmative vote of the majority of Tata Trusts to come into effect (Art. 121) and non-meeting of quorum in any General Meeting unless an authorized representative from Tata Trusts was present (Art. 86).

5. Infra Note 9

6. ¶ 61 of the order

7. Foss v. Harbottle [(1843) 67 ER 189] is a landmark English law case that established the concept of Majority Rule within the corporate structure. It stated that any action against the company must be initiated by the majority of shareholders of the company.

8. Corporate governance essentially involves balancing the interests of a company:s many stakeholders, such as shareholders, management, customers, suppliers, financiers, government and the community.

9. ¶ 67 of the order

10. § 169, Companies Act, 2013

11. ¶ 561 of the order

12. § 163, Companies Act, 2013

13. ¶ 123 of the order

14. ¶ 125 of the order

15. ¶ 10 of the order

16. ¶ 581 (i) of the order

17. Company Appeal (AT) No. 254/2018 , order of 08.08.2018

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