Explained | The way ahead in the ZEE-Invesco case

It is clear that Invesco’s petition at the National Company Law Tribunal (NCLT) was premature as there was no cause of action, and an application based on anticipated action requires the skill of a mind reader. The courts rarely take cognisance of such applications. Yet the NCLT did hear the application, although Zee had the time to call an EGM, as enshrined in Section 100 of Companies Act 2013.

Yet questions have been raised on ZEE’s intent, so much so, it is reported that the NCLT bench opined that ZEE should not have announced its merger with Sony Pictures Networks India (SPNI). Why, and on what basis, the bench made such an observation is not known. However, if ZEE kept the announcement under wraps, it would have violated SEBI regulations.

An Empowered Board

Is Zee duty-bound to call an extraordinary general meeting (EGM) upon a valid requisition? Section 100 of Companies Act uses word ‘shall’. In normal course ‘shall’ has to be interpreted as ‘must’, but the law of interpretation is guided more by intent of the law than choice of words. By providing within the Section an alternative mechanism of holding an EGM, in case the board of a company fails to act, law makers have closed the door of interpreting ‘shall’ as ‘must’.

Therefore, the Board is empowered to use its discretion. With no costs or liability attached to requisitionists, there are chances that a provision of law can be misused, and the Board and company can be held hostage to numerous such requests. Therefore, the Board must discuss, and reach a conclusion on merit.

Zee Refuses EGM

Proving all the sceptics right, ZEE has indeed refused to call for an EGM, and stated that “the requisition is invalid and illegal”. Does this open a door for NCLT to intervene?

That’s unlikely, as Section 100 of Companies Act, read with relevant rules, provides for a remedy: the investor can call an EGM directly, and the company (ZEE) is duty-bound to provide shareholder details to the investor. Therefore, when there is a self-built remedy, under what provision can the NCLT ignore and provide an alternative remedy?

The argument that Invesco being a United States-based fund does not have the infrastructure to call for an EGM cannot be accepted, howsoever sound it may be, as the law is same for all, and any concession would raise questions as to on what basis are courts differentiating investors.

Illegal and Invalid

Zee has cited various provisions of the law to establish that in the opinion of the Board, as advised by legal luminaries, the requisition is illegal and invalid based on SEBI LODR, the Companies Act, and the guidelines set by the Ministry of Information and Broadcasting (MIB).

The MIB guidelines state that a company must “take prior permission from the Ministry of Information & Broadcasting before effecting any change in the CEO/Board of Directors”.

Does ‘any change’ mean only fresh appointments, or does it apply to resignations/removals as well? The intent of law cannot be to stop anyone from quitting. However, a fresh appointment can only be made after the ministry’s approval.

Therefore, the law does not prohibit action on Resolution 1 (removal of managing director). For the remaining resolutions, Invesco has already stated that it is subject to approval, although ZEE is interpreting that even these resolutions cannot be passed by shareholders. This interpretation would hardly find any takers.

Will the appointment of the majority (50 percent) of directors put Invesco in control? It is most likely that in the eventuality that Invesco succeeds in appointing 50 percent-plus directors, SEBI SAST provisions would trigger. But this is something which is contingent, and in any case obligations for the same would be on Invesco, and not on ZEE.

Hence, the Zee Board cannot be concerned about this as long as it informs investors of all the issues at hand. Similarly, the consequences of not having the approval of the competition commission, etc., are the responsibility and liability of Invesco. Therefore the same could not be a basis for calling the resolution illegal.

As regards violation of the provisions of the LODR, the Companies Act, etc., are concerned, most of these violations are consequential to actions that are permitted in law, and there are curative provisions for such defaults. For example, if the managing director is removed, leading to the violation of Section 203 of the Act, it can be cured within six months. However, prior approval from the MIB may cause a delay, and the company may have to function without a leader.

However, any action which violates the law ab initio cannot be cured. As per the Companies Act Section 149(6)(a), the proposed appointees (for independent directors) do not pass the mandatory test of independence, which states that “who, in the opinion of the Board, is a person of integrity and possesses relevant expertise and experience”.

Obviously, there is no opinion of the Board to certify the independence and suitability of proposed appointees as an independent director. This is in effect a deal breaker.

Other issues are the provisions of the Articles of Association, which in opinion of the Supreme Court are sacrosanct, as held in Tata Vs Mistry case.

Therefore, ZEE is partly right, and partly wrong. The important issue to be considered is, can ZEE’s investors choose to side with Invesco given the uncertainties such as prior approval, no managing director, SAST trigger, competition commission approval, no given future plan, and not even the reasons for such a game changing notice?

Zee’s countersuit

Zee, after terming Invesco’s EGM notice illegal, has petitioned the High Court of Bombay to give legal sanctity to its contention. Like Invesco, Zee is also jumping the gun, as the view taken by Zee on Invesco’s notice has not been legally dismissed by the NCLT, which is scheduled to hear Invesco’s petition on merit. Is Zee hedging against an adverse order from the NCLT? Everyone is wondering as to what will be the fate of the application, what will be Invesco’s next move, etc. It is clear that no one will let it go easily, at least until the apex court ruling.

Does the Zee-Sony merger require Invesco’s nod?

From media reports it appears that the NCLT bench observed that the ZEE-SPNI merger proposal cannot go through without Invesco’s nod. While Invesco and the OFI may have 18 percent equity, in case the other 82 percent shareholders vote for a merger, Invesco will not be able to stop it. There appears to be lack of clarity as to why and how the bench made such an observation.

THE GOVERNANCE PRISM

Board and EGM

Many, including Invesco, have questioned the wisdom and intent of the Zee Board to propose a merger. It is also alleged that the Board has done this with the sole objective of keeping the current promoter in the saddle. Such an action is cited as bad governance. Such an argument also fails to appreciate vital points.

Does the Board become non-functional while an EGM notice is pending? Obviously not. If that be the case, effectively 10 percent shareholders can keep the Board and company hostage.

Governance Issues

If the current promoter is incompetent and the epitome of bad governance, why would SPNI, a 50 percent shareholder post-merger, want to retain him as managing director? A point not to be forgotten is that Invesco and the OFI would have around 9 percent in the merged entity. Therefore, going by corporate democracy, should 9 percent prevail over 50 percent?

Moreover, the Board is only proposing, whereas the ultimate power lies with the shareholders.

Invesco, as per reports, may not be averse to the deal, but is averse to continuation of the promoter. In case the EGM goes through, the current Board (including promoter) is ousted, and later the merger deal is approved, there is nothing that stops SPNI from bringing back the current management. Therefore, unless Invesco blocks the merger deal, its objective of removing the current promoters cannot be achieved.

A Roadmap

Invesco, it would appear, has acted as the white knight for the current promoters, and have bailed them out. Why does Invesco suddenly want the promoter out? Has there been a deterioration in governance? Is the performance poor? Invesco would receive shareholder support if it were willing to spell out what are the issues? A notice for removal without elaborating the reasons will not satisfy shareholders.

As things stand today, Invesco’s notice is disruptive and does not offer a clue as to what next. On the other hand, the ZEE-Sony merger plan gives a roadmap which promises financial stability and infusion of funds.

Practitioners of governance often forget that they propagate governance not for sake of it, but for value creation with the belief that good governance yields better value.

Therefore, one cannot cry bad governance unless it is specified and a solution is offered, which seems to be lacking, although it cannot be ruled that Zee is a winner on the governance front.