Cyrus Mistry’s sudden ouster from his post as Chairman of Tata Sons poses a number of interesting legal questions. As the Chairman of Tata Sons, Mistry has certain rights under the Company’s Articles of Association as well as the Companies Act, 2013. Although the Economic Times reported that Mistry was not going to take any legal action against the board’s decision, a chary Tata Trusts has filed a number of caveats with Company Law Board to ensure that an ex-parte order is not passed against them. This begs the question as to what Mistry and ShapoorjiPallonji’s legal options are under the current provisions of law.
Assuming that recent reports detailing the events of the board meeting where Mistry was ousted is accurate, the assembly might itself be illegal. The NDTV report states that Mistry’s removal was not listed on the board’s agenda and that it was brought up as a residuary item. Section 101 of the Companies Act of 2013 lays down rules for notices of meetings. The provision stipulates that every notice of a meeting shall specify the place, date, day and the hour of the meeting and shall contain a statement of the business to be transacted at such a meeting.
Courts have held that a good notice must fairly disclose the purpose for which the meeting is called, be open, be free from craftiness, and be in a language understood by common people. Consequently, if a resolution is passed without the notice fairly disclosing it, it will be void. Courts have also held that if a notice does not specify a particular business to be transacted there at, the meeting cannot deal with that matter. The notice of a general meeting must fairly and intelligently convey the purposes for which the meeting is called; it should not be misleading or equivocal.
Section 102 of the Act discusses the statement to be annexed to the notice. This clause corresponds to Section 173 of the erstwhile Companies Act of 1956 and seeks to provide that a statement setting out all the material facts concerning each item of special business to be transacted at a general meeting, shall be annexed to the notice calling such a meeting. Unlike Section 101 which has been held to be a directory provision, Section 102 of the Act is a mandatory section and its stipulations are to be followed strictly.
The section requires that shareholders should be informed truly of the nature of the business that will be transacted in the meeting. What is required by the section is a full and frank disclosure without reservation or suppression. Statements which do not provide sufficient disclosure of the important facts material to a proposed resolution will not conform to the provisions of law and are contrary to proper corporate governance norms. In view of the positions taken by the courts on this matter, Mistry can call for an invalidation of the motion through which he was dismissed.
According to tenets established by the courts, a chairman who has been elected by a meeting can be removed by the meeting. The usual proceeding would be for a member to propose a vote of no confidence in the chair and this move must be affirmed by a second member. The chairman has the right to make a representation against the removal and the matter is then to be put to a vote. If the chairman loses the vote, he must relinquish the chair. However, where the appointment is made under the provisions of the company’s articles, that appointment not being made by the members, the meeting cannot remove him unless it is due to bad faith, partiality or abuse of authority.
The Articles of Association of Tata Sons clearly stipulate that a Selection Committee shall be constituted for the purpose of appointing a Chairman. The Committee will make a recommendation and the board may appoint the person so recommended as the Chairman of the Board of Directors. Article 121B of the Articles of Association states that a director is entitled to give 15 days’ notice to the board for any resolution that has to be discussed or passed.
ShapoorjiPallonji, the construction company owned by Mistry’s family, has an 18 percent stake in Tata Sons making it the second largest shareholder in the company. News agencies predict that the construction behemoth will file an action against the Tata Group for oppression of a minority shareholder under Sections 397-398 of the Act of 1956. These provisions were new and had no predecessors in the Companies Act of 1913.
The genesis of these provisions is from Section 210 of the English Companies Act, 1948. Prior to this enactment, shareholders 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. Section 397 provides for relief if the affairs of a company are conducted in a manner which is prejudicial to public interest or oppressive to any members.
Section 398 provides that members of the company may apply to the tribunal if a material change has taken place in the management or control of the company, including but not limited to an alteration in its board of directors, and that such a change will result in prejudice to public interest or the interests of the company. Under this Section the Tribunal may pass orders to rectify the situation. Under the Act, ShapoorjiPallonji would have to establish that Mistry’s removal is an action that is detrimental to the interests of the Tata group. A figure that bodes well for Pallonji in this regard is the recent market capitalisation of the Tata Group, which doubled during Mistry’s abrupt tenure. However, there are many statistics that also go against them.
Though there are a significant number of legal options open to Mistry and the Pallonji group, the litigious battle that is slated to ensue between the two titans of Indian industry will be a hard fought one. One only hopes that the outcome will establish precedent for better and cleaner corporate governance in the future.
Dr. Kumar is the founder of Hammurabi & Solomon and a visiting fellow with the Observer Research Foundation
Updated Date: Oct 26, 2016 15:00 PM