1% vs 90% Battle!

Never before has India seen a David versus Goliath battle of this nature. In classic terms, its shareholders versus the company promoter and management. In modern parlance, it’s a 1% versus 90% fight! UK based hedge fund TCI has filed a representative action in the Calcutta High Court against Coal India, its management, directors and majority shareholder ie: the government of India. This is the third salvo TCI has fired as it attempts to protect its 1.01% equity stake in the world’s largest coal producing company! Payaswini Upadhyay gets you more

The first warning came in March this year when The Children’s Investment Fund, wrote a letter urging Coal India’s Board to fulfill its fiduciary duties. This was in response to news that the government was pressuring Coal India to sign a swathe of fuel supply agreements at terms disadvantageous to the company Then, in April, in a press statement the fund said that it has directed its lawyers to launch legal action against Coal India’s board for allowing the company to be run in a manner that’s prejudicial to public interest and oppressive to shareholders. Sensing chances were bleak that the Board would heed its warning, TCI; this month filed a representative suit under Civil Procedure Code in the Calcutta High Court against the Chairman and Managing Director of Coal India and its 11 Board members Bharat Anand
Partner, Khaitan & Co.
“The Civil Procedure Code does allow representative actions on behalf of third parties. In the context of Company Law, quite often you have shareholders filing representative action or derivative actions against the Board in circumstances where the wrong has been committed by the Board itself and therefore the Board itself will not take any action and in that situation the law steps in and allows a representative action or a derivative action as it is quite often called.” Berjis Desai
Partner, JSA
“If the court is satisfied that the subject matter for the suit is such in which a sufficient number of other persons have the same interest, then ordinarily the court will allow the plaintiff to turn this into a representative suit. As I said, there are certain rules which will apply like you cannot withdraw without the permission of the court, you cannot settle the matter etc.” Aspi Chinoy
Senior Advocate, Bombay High Court
“It looks like its partially a derivative claim - there is a claim made by them on behalf of the company because the first financial claim is sought on behalf of Coal India and its partially a personal action because they are seeking a decree in their favor for loss suffered by their own shareholding.” TCI has pegged this financial loss for Coal India at Rs 2,15,250 crores and its personal loss at Rs 9942 crores.  It argues-  - Government interference in fixing the price at which Coal India could sell coal
- Signing fuel supply agreements at a price lower that the cost of imported coal
- Failing to take steps for increasing coal production and missing the targeted production
- Inaction on setting up of coal washeries that will help generate profits and save costs
- Theft of coal from Coal India and its subsidiaries
- Failing to raise objections to the draft mining bill that seeks to introduce a 26% coal mining tax
-  by allowing all of these, TCI says, Coal India’s Board members breached their fiduciary duty of care and failed to protect the commercial interest of the company. Bharat Anand
Partner, Khaitan & Co.
“Certainly, there are a couple of mitigating factors in favor of the government. The first and the most obvious one being if there is such a huge monetary loss, the government holds 90% of the shares- so who has lost more. The directors themselves have personally not benefited from any of their actions. Have the Directors actually exercised their discretion or have they simply paid obedience to the directions of the government- there is the business judgment rule that makes it very clear that courts cannot interfere in commercial decisions taken by Executive Management - unless it’s a legal issue, they are not meant to second guess commercial issues. And so the Directors can certainly use the business judgment rule as a defense. And finally there is the rule that the company is the proper plaintiff and therefore are these particular shareholders even entitled to bring this suit and I am sure, during the course of the trial, this particular issue will also come up.” Aspi Chinoy
Senior Advocate, Bombay High Court
 “There is a whole lot on neglect, lack of planning, lack of proper husbanding of coal resources, lack of adequate production facilities - those are more acts of omission and you might have to reach a rather high level of dereliction of duty before you can claim monetary relief on that score. But the question of pricing and deliberately fixing coal below its commercial price could lead to a factor which might give rise to right in relief in favor of TCI.” Or will it? Because the government is likely to remind TCI that Coal India’s Draft Red Herring Prospectus, at the time of IPO, flagged off several of these issues. The risk factors in the DRHP say
- that there may be a conflict of interest between the government’s and shareholders interest
- and that the government, via a Presidential Directive may direct the company to conduct its business affairs in a particular manner Berjis Desai
Partner, JSA
“The Memorandum and Articles of Association are a public document. They expressly contemplate the issuance of such directives; they expressly contemplate that such directives are binding on the Directors - so an investor, particularly a sophisticated investor, comes naturally with the knowledge of these public documents and even the risk factors- its not a worst case scenario- it categorically mentions several times in the Prospectus that it is a very real possibility that in the public interest, the government may interfere and that interference may conflict directly with the interest of the other shareholders; nothing can be more categorical than this.” Coal India produces over 80% of India’s coal and 66% of power generated in India is coal-based. And so when earlier in the year Coal India’s board dithered on signing fuel supply agreements with power plants, on grounds that the terms were disadvantageous to the company, the government issued a Presidential Directive ordering Coal India to sign the FSAs citing substantial public interest as the reason. Bharat Anand
Partner, Khaitan & Co.
“The first point is - does the Presidential Directive have a force of law or not and frankly if it does, then the Directors clearly have a very good escape route by saying that we were acting in accordance with law, we were acting bonafide and in good faith; and probably even under the Companies Act, they will be exonerated even if a prima facie breach was established. If however, it does not have a force of law, then the question is what is the sanctity of those directives in relation to the Articles. Now the Articles are a contract between shareholders and the company and therefore any shareholder, including the petitioner in this case, would be bound by those Articles. And if the particular shareholder has agreed that he would be subject to the Presidential Directives, then in a sense, he has contractually admitted to his position. So I think then to argue that those Directives are completely non-binding, to my mind, would be very difficult.”
 
Aspi Chinoy
Senior Advocate, Bombay High Court
“Once you have a public listed company, I don't think you can make the Directors' actions subject to a Directive by a majority shareholder; I doubt very much whether it would be valid under the Companies Act. Directors have a fiduciary duty and they are bound to exercise their discretion.” Taking similar line of argument, TCI has requested the Calcutta High Court
- to frame a scheme of management and administration for Coal India
- to grant perpetual injunction restraining government interference 
- Rs 2,15,250 crore claim for Coal India for loss & damages suffered
- Rs 9942 crores claim for TCI’s losses
- An enquiry into loss incurred by Coal India due to breach of fiduciary duty by the Board & shareholders’ claim to this amount First a Bilateral Investment Treaty Notice, then a writ petition in the Delhi high court and now a representative or derivative suit in the Calcutta High Court. The matter is expected to come up for hearing next month and experts tell me that a derivative action of this nature is unprecedented in India’s jurisprudence. The fate of TCI’s suit aside, the result of this battle will answer 2 very important questions- the question of minority rights in a government owned company and the question of a Board’s role and the discretion it should exercise while taking commercial decisions- both the questions assume importance as the government seeks to divest its stake in the various PSUs. We’ll keep you posted on the answers. In Mumbai, Payaswini Upadhyay