Majority vs minority cliffhanger

It’s turning out to be a cliffhanger with the last ball set to decide the winner. Corporate India is breathlessly waiting for the outcome that will redefine the legal boundaries of majority versus minority shareholders. The ball will be in the hands of the Supreme Court (it’s now a near certainty that the Tatas will knock on its door), and every twist and turn of that delivery will be analysed in great detail for the impact it may have on the legal landscape of India Inc.  
 
No one had expected India Inc’s most dramatic and consequential corporate battle in recent history to stretch this far. The Tatas were miles ahead of the Mistrys after the National Company Law Tribunal dismissed the latter’s pleas challenging Cyrus Mistry’s removal as Tata Sons chairman, as also the allegations of rampant misconduct on the part of Ratan Tata and the company’s board. But just when everybody thought the match was over, came the bouncer from the National Company Law Appellate Tribunal (NCLAT). It reinstated Mr Mistry as the executive chairman of the Tata group and termed the conversion of Tata Sons from being a public company to private illegal and oppressive to the minority members and depositors.

 
While it’s anybody’s guess what the Supreme Court will decide, a few points stand out. First, the Tata group needs to seriously introspect about the way it functions. The NCLAT judgment has surely dented Mr Tata’s reputation as he has been asked to “desist” from interfering in the affairs of the group. In the process, the tribunal has given legitimacy to Mr Mistry’s accusation that the chairman emeritus acted like “a chairman who never retired” and who insisted on being a “super board” by wanting to pre-vet and pre-decide what gets formal approval in the Tata Sons board. The accusation that key Tata Trust directors left Tata Sons board meetings, keeping others waiting, in order to obtain instructions from Mr Tata is distressing and does not do justice to the Tatas’ hard-earned reputation of being the gold standard for Indian corporate governance.

 

So even if the apex court rejects the NCLAT verdict, Mr Tata and the group bosses need to reassess their working relationship and address the concern that the shareholding trusts of a holding company with minority holdings in operating companies take key decisions, not the chief executives or the boards of the operating companies. The Tata group’s opaque corporate structure — two-thirds of Tata Sons’ shares are held by trusts — must be modernised.
 
The second issue which will have a far-reaching impact on corporate India is the legal status of Tata Sons. Is it a partnership? The NCLAT certainly thinks so, and says that “that the Tata group which is the majority group should consult the minority group —the Shapoorji Pallonji Group —and any person on whom both the groups have trust, for appointing an Executive Chairman or Director as the case may be...”. This, the tribunal feels, is necessary for better protection of interest of all stakeholders. The point is that the tribunal hasn’t given any reason why it has come to such a decision. This is important because if it’s a partnership, then Mr Mistry can legitimately argue that his minority rights were suppressed. But mere reliance on perception and the absence of factual evidence can’t be the basis for an order of this magnitude.

 
In any case, independent lawyers argue, the Indian corporate law is clear that the 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. Conventional wisdom is that reinstatements are possible only for unionised workers and not managerial staff or management cadre.
 
This means the board has the power to replace its chairman (Mr Mistry’s removal was resolved upon by a majority of the directors — seven out of nine who voted in favour of his removal as the executive chairman) and the shareholders have the power to appoint or remove a director. No court can take away that power from the board and the shareholder. The Supreme Court itself has time and again held that the powers entrusted upon the minority shareholders cannot be used as a weapon against the majority. In that context, any assumption by the executive chairman that he would have a free hand in running the affairs of the company is incongruous with corporate democracy.

 
Thirdly, the NCLAT order is intriguing as it exceeds even the prayers made by Mr Mistry who never asked for this return as executive chairman. It would anyway be impractical for Mr Mistry to reassume his position three years after he was removed. Also, the dispute related directly to the affairs of Tata Sons and the other group companies were not even a party before the tribunal. Hence, the remedies suggested by the NCLAT has stumped many — even those outside Bombay House. Let the run-up to the last ball begin!