The latest order of the National Company Law Appellate Tribunal (NCLAT) in the Tatas-Cyrus Mistry turf battle has evoked a wide range of reactions from the industry and the legal community at large.
On the face of it, the verdict raises several fundamental questions that require further attention.
First, can the NCLAT direct re-structuring of the board and the management of companies by re instating Mistry as director and/or Executive Chairman of the Tata Group, in what is essentially a legal action (under Sections 241, 242 of the Companies Act, 2013) seeking protection of rights of the minority shareholders?
Indeed, the power available to the NCLAT under Section 242 is very wide. However, whether the scope of this power extends to re-configuring the board and the management of a company – like in the current case -- is unclear.
Second, in the absence of a shareholder agreement or other contract with the company, the specific legal right of minority shareholders invoked by the NCLAT needs to be explored. Under the law, rights of a shareholder are essentially economic rights, which -- in the absence of a contract -- do not include legal right to participate in the management of the company.
Admittedly, the minority shareholders relied on a past relationship based on mutual trust and confidence, which gave rise to “a legitimate expectation of being treated in a mutually just, honest and fair manner”. It’s not clear as to how subjective and moral grounds constitute an enforceable legal right.
Correctly, the NCLAT did not recognise legitimate expectations as an available legal concept under the applicable facts and law. However, the eventual directions appear to be tempered with an underlying inclination to do justice on equitable grounds rather than apply the law.
Third, the alleged interference by majority shareholders, apart from the alleged lack of independence and fiduciary duty by their nominee directors, perhaps does not confer jurisdiction on the NCLAT to substitute and/or supplement the board with person/s named by it and direct a mandatory consultation with minority shareholders for selection of directors. At best, the NCLAT can remove such deviant directors, but the selection of the directors would still remain with the shareholders.
Four, one cannot fault the judgment of converting the private Tata Sons back into a public company on legal principles. However, even after such re-conversion, it remains a closely-held public company. Even though this will certainly frustrate a covenant in the Articles of the private company, it affects the SP (Shapoorji Pallonji) Group’s ability to sell shares to a third party.
It’s not clear what higher standards of governance the NCLAT meant with such reconversion into a public company. The legal and moral standards of corporate governance and probity for a conglomerate like Tata Sons that controls several subsidiaries and listed companies should remain at the same elevated level, regardless of the private or public character.
Last, NCLAT’s pronouncement that the majority shareholders had indeed acted to the detriment of the minority shareholders, is a finding on facts and it may be difficult to dislodge this in the superior court.
On this note, the direction that the two groups of shareholders will consult on future appointment of executive directors to remove mistrust appears to be aspirational and a mere platitude as the battle lines are running deep. Under the current circumstances, while the Tatas can indeed explore further legal action, the SP Group is seen to have a considerable advantage as the finding of oppression and mismanagement as a question of fact has gone in its favour. Ordinarily, superior courts will be reluctant to re-visit evidence and findings on facts. This principle, of course, is not cast in stone and in appropriate cases, can be revisited.
Whatever the final outcome after a near-certain appeal by the Tatas, this order will certainly motivate Indian businesses to re-examine the issue of minority rights, corporate governance and ethics within their corporate structures.
This is a welcome step and will ensure that promoter-driven and controlled companies recognise the need for managing their public businesses based on procedures and prescribed practices, and not on a majority-oriented approach. The dichotomy of public companies being privately run is all too present in India, and this case will, hopefully, encourage adoption of a corporate culture where a larger group of shareholders is involved in managing the show.Hemant Sahai is Founding Partner, HSA Advocates. View are personal.