Cyrus Mistry's got legal options; ouster from TCS is no reason to rejoice for Tatas

Tata Sons managed to oust Cyrus Mistry as a director at Tata Consultancy Services Ltd’s extraordinary general meeting on Tuesday solely by virtue of its 73 percent stake in India’s largest IT services company. About 86.71 percent of the total shareholders voted out whom 93 percent voted in favour of Mistry’s removal. However, a closer inspection of the voting pattern reveals that 43 percent of institutional investor votes and 78 percent of retail investor votes were against the resolution.

Further, Tata Sons has increased its stake in the six remaining listed companies to bolster its chances of securing a favorable vote against Mistry. Its inability to operate in a more democratic manner has left it open to attack from minority shareholders. Mistry can rally shareholders from the listed companies to join Shapoorji Pallonji to file a case against the Tata Group for the oppression of minority shareholders under Sections 397-398 of the Companies Act, 1956.

 Cyrus Mistrys got legal options; ouster from TCS is no reason to rejoice for Tatas

Ratan Tata and Cyrus Mistry. AFP

Sections 397-398 of the Companies Act, 1956 find their genesis in Section 210 of the English Companies Act of 1948. Prior to this enactment, shareholders of companies in England had no right to complain of oppression or mismanagement unless the case fell within any of the three recognised exceptions to the famous case – Foss vs Harbottle. The only remedy available to shareholders at the time was to apply for the winding up of a company on the ground that it was just and equitable to do so.

The terms – oppression and mismanagement — are not defined in the 1956 Act. Sections 397-398 of the 1956 Act set out the remedies in respect of certain complaints against the management of the affairs of company. Under 397, members of the company can file a petition in the Company Law Board on a complaint that the affairs of a company are being conducted in a manner oppressive to certain members. Section 398 provides remedies for members if, among other things, a material change in the management or control of the company (such as the removal of a director) is likely to result in the affairs of the company being conducted in a manner prejudicial to the company. This provision was brought about by the Companies (Amendment) Act, 1960.

According to the dictionary, oppression is any act exercised in a manner burdensome, harsh and wrongful. It suggests a lack of probity and fair dealing in the affairs of a company to the prejudice of some portion of its members. The Supreme Court has held that it must be shown that the acts of the majority shareholders were oppressive to the minority members. In the exercise of powers, the CLB and the courts are under a duty to see that democratic functioning of the company in managing its affairs is ensured. The recent allotment of extra shares to boost Tata Sons’ stake in the assorted listed companies can be scrutinised and proved to be oppressive to the minority shareholders interest.

Another option available to Mistry is Section 245 of CA 2013 provides for class action to be instituted against the company as well as the auditors of the company. The Draft Companies Rules allow for this class action to be filed by the minority shareholders under Clause 16.1 of Chapter-XVI (Number of members who can file an application for class action). On close reading of Section 245 of the Companies Act, 2013, it can be seen that the intent of the section is not only to empower the minority shareholder and/or members of the company but also the depositors. Unlike Section 399 of CA 1956 which provides for protection to only shareholder/members of the company, Section 245 of CA 2013 also extends this protection to the class of depositors as well. However, in the current scenario, the provision of representation of a class of members or depositors by a particular member or depositor lacks clarity.

Sub-section (1) of Section 245 provides, "such number of member or members, depositor or depositors or any class of them, as the case may be, as are indicated in sub-section (2) may, if they are of the opinion that the management or conduct of the affairs of the company are being conducted in a manner prejudicial to the interests of the company or its members or depositors, file an application before the Tribunal on behalf of the members or depositors for seeking all or any of the following orders …". Besides, there being a typographical error in this sub- section (1) with respect to indicating sub-section (2) instead of sub-section (3) which provides for the minimum number of members who can apply for class action there is also some confusion as to the class on whose behalf such class action can be instituted. While 'member has been defined in the CA 2013 as including the subscriber to the memorandum of the company, shareholders and person whose name is entered in the register of members; definition for depositor is not provided under CA 2013.

Further, section 245 does not empower the Tribunal with discretionary power to admit/allow any class suit wherein class of members or depositors are unable to comply with the minimum number of members/depositors requirement to be laid down in the Companies Rules. Also, on a close reading of Section 241 and Section 245 of the Companies Act, 2013, we can find duplication in protection provided to the members in case affairs of the company are conducted in a manner prejudicial to the interest of the company/members.

The balance of consideration, however, still lies in Tata Sons’ favour as the burden of proof lies solely with Mistry and the minority shareholders. Whatever the outcome, there is no doubt that this fracas has deflected investor interest in the salt-to-steel conglomerate.

(The writer is the founder of Hammurabi & Solomon and a visiting fellow with Observer Reseach Foundation)

Updated Date: Dec 14, 2016 15:30:51 IST