A board for the shareholders

There has been much brouhaha and anguish in the shareholder forums, proxy advisory firms and among activists over the judgment pronounced by Hon’ble Justice G S Patel of the Bombay High Court on October 26 in the matter of Invesco Developing Markets Fund and Zee Entertainment Enterprises (ZEE). 

The facts of the case, going entirely by the disclosures available in the public domain and in the judgment, are: Subhash Chandra, the “promoter” of Zee, and his family currently own 3.99 per cent in ZEE. Invesco, along with OFI Global China Fund, is the largest investors of Zee, holding 17.88 per cent, and the balance is held by the public. Invesco had sent a notice to Zee on September 11 to requisition an extraordinary general meeting (EGM) under Section 100 of the Companies Act, for the removal of Punit Goenka, the managing director and chief executive officer of the company, and two other non-independent and non-executive directors from the company's board (who resigned before the annual general meeting was held) and for the induction of six independent board members. 

Invesco moved the National Company Law Tribunal seeking an order for the EGM. The board of ZEE refused to hold the EGM on several grounds. It also moved the Bombay High Court seeking an injunction on Invesco’s requisition for an EGM and to declare it illegal, ultra vires, invalid, bad in law and incapable of implementation. 

Section 100 of the Companies Act lies at the heart of this legal controversy. This Section not only allows the board of a company to call an EGM at any time, the shareholders who hold at least 10 per cent of the equity capital of the company, can as well, requisition an EGM, and the board “shall” then have to call an EGM within a specified time. Should the board not do so, the requisitionists may call and hold the EGM themselves. Consequent to the judgment, Invesco could not proceed with the EGM and Section 100 could not be invoked at all. There has been an understandable disquiet about the judgment, particularly amongst the votaries of shareholder “activism”. According to them, the judgment takes away an important shareholder right of requisitioning an EGM and perhaps militates against the principles of corporate governance. 

Indeed, the possibility of a conflict between a board and the shareholders in convening an EGM has been contemplated in the wording of the Section, inasmuch as the Section says that if the board does not convene the EGM, then the requisitionists can hold the EGM on their own. There are two extreme situations that need to be balanced. One in which a shareholder or a group holding 10 per cent of the equity capital of the company does not bring any resolution and disrupt the workings of a company; and the other where a company board turns down every requisition for holding an EGM merely because it finds the resolution undesirable or unpalatable. The directors are fiduciaries and cannot take that stand and thwart every requisition, nor can they act in a manner to ensure that the shareholders never succeed. The independent directors have a role to play in ensuring that the board performs its fiduciary duty. Provided, of course, they are independent not only on paper but are also able to raise their voice in a company driven by a “promoter”(a word which is a relic of the era of development banking in India.

There is, however, a still long way to go. One will have to wait for the outcome of the appeal against the judgment by Invesco to a Division Bench. The judgment of Justice Patel can well be seen as a precursor to the development of jurisprudence in this key area of protection of shareholder rights. 

The judgment has shown that Section 100, is not as simple a section as its wording looks. It has highlighted that from a legal and practical standpoint several issues need to be sorted out. For instance, does the board have any role at all in examining the resolutions in the requisition? What constitutes a “valid”  requisition? Should the board examine the legal validity of a resolution proposed in the requisition notice, or its implementability? It is important for the company to lay down standards and processes that need to be followed by the shareholders for sending an EGM requisition notice, and unambiguous guidelines for its directors for considering a valid requisition notice to ensure uniformity. Currently neither exists.   These should be widely disclosed on the web site of the company and to the stock exchanges, in case the company is listed. The end result will be the harmonisation of relationship between the board and the shareholders to whom the company belongs, and strengthening of Section 100 so that it becomes an effective instrument of shareholder democracy. Hon’ble Justice Patel has also recognised the significance of this Section in his judgment. The relationship between the board of a company and its shareholders is for the long-term and cannot be adversarial. It is not “versus one another” but “with one another”. 

The writer was executive director of  Securities and Exchange Board of India between 1992 and 2006