Author – Simran Jha
Abstract
The Tata – Mistry case had all ears owing to its controversial nature and cardinal questions of law involved. However, ever since the Supreme Court has pronounced its judgment new questions came to the fore. That is, in order to achieve profitability in its true sense should a company’s decision be based on the majority shareholder’s ruling or should it rather focus on the interest of all the stakeholders involved? In other words, out of the two contrasting principles of corporate democracy and corporate governance, which one should prevail in order to balance all the stakes? The case was also scrutinized from another lens to look for any acts oppressive or prejudicial that might have been undertaken by the company and resulted into the rights of the minority shareholders being neglected. This article, therefore analyses whether corporate democracy really undermined the interests of the minority shareholders in this case or do they require a re-look? Do the concepts of corporate democracy and corporate governance stand in absolute contravention to each other or they stem from the same genesis and are just different means to a same objective?
KEYWORDS: Tata, Cyrus Mistry, Corporate governance, Corporate Democracy, Minority Interests.
Introduction
Indian corporate sector suffered one of its most vigorous jolts, first in the year 2016 when tussle between the Tata and Mistry took the media and nation by storm. To know of the age old multinational conglomerate undergo a managerial strain, who nearly contributes to about 2.24% towards the Indian finances was taxing in itself. Further, coming to know of Cyrus Mistry as the adversary in the present case, who was the serving Executive Chairman as well as the Director of Tata Sons before the fall out, made it clear that the issue is not one of a mere administrative rift but a corporate combat enough to undermine the roots of the company.
Cyrus Mistry, scion of another established conglomerate – Shapoorji Pallonji Group has had a long association with the Tata’s. It goes back to the year 1965 when Shri Pallonji Mistry, father of Cyrus Mistry acquired 48 preference shares and 40 equity shares of Tata Sons and later in 1980 was appointed as the Non-Executive Director of the company. He paved way for his son in the year 2004, after voluntarily stepping down from the post and consequently Cyrus Mistry took over the designation in the year 2006. After serving as the Non-Executive Director for about 6 years and becoming one of the prominent faces of the Tata Group, he was nominated for the post of Executive Deputy Chairman, successor of Ratan N. Tata, after due deliberations by the Selection Committee of Tata Sons which was subject to approval by General Meeting of the Shareholders. Not only his appointment was upheld in the Shareholder’s meeting but they also left it on the Board of Directors to re-appoint him as the Executive Chairman of Tata Sons. This is how, on 18.12.2012 Cyrus Mistry was appointed as the Executive Chairman of the Tata Sons, succeeding Ratan N. Tata and took over the reins. Over the years Cyrus Mistry under the name of Shapoorji Pallonji Group went on to acquire a total shareholding of 18.5% in the Tata Sons, thereby becoming the second largest shareholder after Tata Trusts which carries a total stake of 66% in the company.
However, things took an ugly turn when an unanticipated ouster of Cyrus Mistry from the post of Chairmanship started doing the rounds. The removal came from none other than the Chairman Emeritus of Tata Sons, Mr. Ratan N. Tata and majority of the Board of Directors (7 out of 9). Little was known initially, that the ouster would not settle for just being a sensational news but will go on to become one of the biggest corporate battles to be fought ever in the history of India.
The legal confrontation between the Tata and Mistry went through three phases: National Company Law Tribunal which upheld the removal of Mistry as legal and set aside all the allegations against Tata’s, followed by an appeal filed by Mistry in National Company Law Appellate Tribunal which decided in favour of Mistry and termed his removal as illegal. It further held such removal as oppressive and prejudicial to the interests of the minority shareholders/company and ordered his reinstatement as the Executive Chairman of Tata Sons. Finally, an appeal filed by the Tata’s was heard in the Supreme Court which on 26.03.21 settled the case by overruling NCLAT’s judgment in its entirety.
It becomes imperative to point out that the present case is not only limited to its controversial dispute between two notable tycoons of the country, but it also involved a pertinent question of whether the principle of corporate democracy will override the necessity of balancing the interest of all the stakeholders involved? In other words, whether corporate governance will be overshadowed by the age old practice of corporate democracy? This article seeks to answer the aforesaid by analysing the Supreme Court’s holdings in the present case.
Corporate Governance V. Corporate Democracy
Over the years, we have witnessed a paradigm shift from the concept of corporate democracy to corporate governance. Sadly, it has been majorly limited to texts and provisions and hardly ever seen to be executed in reality owing to the absence of a concrete and specific statute, enlisting ways in which corporate governance is to be carried out and setting out penalty in case of non-compliance. Some of the provisions in the Companies Act, 2013 relating to independent directors, audit committees, constitution of boards etc., that seeks to introduce corporate governance are limited only to listed companies. Moreover, the guidelines issued by SEBI and Standard Listing Agreement of Stock Exchanges are also applicable to the limited companies only and lack clarity thereby creating an ambiguity in their application. This limitation therefore eliminates a major chunk of corporate sector as still many companies remain unlisted, considering that a conglomerate like TATA remains an unlisted company.
Corporate democracy which is based on the notion of “majority rules”, believes shareholders to be the actual owners of the company and hence are endowed with the power to frame some of the most important decisions by virtue of their voting rights corresponding to the ordinary shares held by them, one of most dominant powers being the formation of board of directors. It believes that shareholders are the requisite part of the company and forms the majority of stakeholders owing to which they must be responsible for influencing paramount corporate decisions.
Corporate Governance on the other hand aims to balance the interest of all the stakeholders involved which include minority shareholders, managers, employees, customers etc. and opines that only when all the stakes are balanced, profitability in its true sense can be achieved. Corporate governance, therefore does not solely relies on shareholder’s supremacy and promotes upliftment of the company by taking into account the interest of every stakeholder, irrespective of their designation or the no. of shares held by them. The concept is based on 3 principles, namely – (1) Accountability: Corporate governance requires the board to be accountable of their decisions to the shareholders and entire management. It further necessitates the requirement of regular intimation of vital information to all the stakeholders, such as changes in the shareholding pattern, future business strategies etc. (2) Transparency: Due accountability and perpetual communication flow paves way for transparency which promotes greater sense of confidence in the company’s management. (3) Responsibility: The board must be responsible of its decisions and is required to act on behalf of the company in furtherance of its best interests. Their personal consideration must not prejudice the managerial decisions in any manner.
Out of many questions of law contested in the case of Tata Consultancy Services Limited v. Cyrus Investments and Pvt. Ltd. & Ors. , the chief dispute revolved around one question – Whether the ouster of Cyrus Mistry by Ratan N. Tata and the Board of Directors illegal? Was it against the principles of corporate governance? And, whether under the garb of corporate democracy the interests of the minority shareholders were forsaken?
Rise of the Feud
The main question upon which the debate of corporate governance v. corporate democracy surfaced revolved around the unprecedented removal of Cyrus Mistry from the office of chairmanship. Accordingly, in order to proceed further it is imperative to know of the circumstances which led to this. Cyrus Mistry’s performance and managerial decisions within the capacity of chairman failed to meet the desired outcomes as were anticipated. It was therefore on the basis of “sense of dissatisfaction”, as mentioned by the Tata’s, that compelled them to take such an action. On 25.10.2016, Mistry sent a response via mail which was directed towards the nominee directors and was not only unprofessional but also derogatory as they were referred as “postmen”. Moreover, the said response was also leaked to the media channels which then took no time to create a nation-wide commotion. This again amounted to an unprincipled conduct and on being questioned by the court to justify such a move, Mistry failed to provide a satisfactory answer. Further, such professional shortcomings aggravated when he went ahead to disclose some of the sensitive business information to the Income Tax Department while he continued serving as the director of Tata Sons, thereby creating a breach of confidentiality. When Tata Sons sent a legal notice addressing the move as out of his professional ambit, Mistry sent a few more documents containing sensitive information to the Income Tax Department, as if out of vengeance. It was only after the chain of these rebellious acts discharged by Mistry when the Board in their Extraordinary General Meeting held on 06.02.2017 removed him from the position of Director of Tata Sons as well.
Analysis
Mistry’s foundational stone of terming the acts of the company as oppressive and prejudicial of the interests of the minority holders were based on the decision taken by the board with respect to his removal from the office of chairmanship and directorship. However, it is well known that when the removal of a key person was backed by the majority’s consent and was done by reasons of unsatisfactory performance and unprofessional conduct, it cannot be termed as oppressive or prejudicial. To put it in a clearer context, since a move unfavourable to Mistry was undertaken which was based solely on merits doesn’t mean the act was illegal and oppressive to the minority holders just because he too forms part of the community. Moreover, Mistry in his petition also made an argument whereby he explained that how just 4 months before his ouster, things were completely fine, he was lauded by the board and the Nomination and Remuneration committee even suggested of his pay hike. These arguments were contradictory to his very own claims against the Tata’s. If Mistry’s performance was being acknowledged and appreciated by the nominee directors only a few months before his unceremonious removal and even an increased salary was proposed with respect to discharge of his professional duties, then how can the same people now act oppressively? Had this really been the case, the nominee directors would have never appointed a person like Mistry as the successor of Ratan N. Tata to take over a massive organization, who hardly owns a meagre 18.5% stake in it.
In order to move further, articles 104B and 121 of AoA of Tata Sons must be considered. Mistry allegedly argued in the court that the affairs of Tata Sons were in contravention to the principles of corporate governance which the Companies Act, 2013 primarily focuses to envisage. He pointed towards the decision of his removal by the board of directors of which 1/3rd members were appointed jointly by the two trusts, namely – Sir Dorabjee Tata Trust and Sir Ratan Tata Trust in accordance to Art.104 B and Art.121. He added that since the board had members dominated by the two trusts, corporate democracy was thereby undermining the interests of minority shareholders. He also wanted that the affirmative rights should be made available to the nominee directors of Shapoorji Pallonji Group.
In response to the questions put forth, the apex court made certain observations. It was of the view that the incorporation and continuance of the Tata group has been familial ever since the incorporation of the business until the instatement of Mistry as the Executive Chairman was made. Mistry being an outsider was elevated to the rank of Chairmanship within a period of 6 years by the same nominee directors whom today he has accused of violating minority rights. If at all, the intentions of Tata group were to run the company by upholding majority supremacy, Ratan N. Tata would have never stepped down from the position of chairmanship only to hand it over to someone with relatively much less experience. Moreover, as we know that the stakes held by the Tata trusts jointly amounts to 66% and had they used their voting rights which are available corresponding to the shares owned by them, the entire organization must have been filled with their own men. However, through Art.104 B they have instead limited their right by appointing only 1/3rd of the total members’ thereby giving chance to the outsiders and relying on them with much prestigious posts. In the year 2019, Uday Kotak Committee Report which dealt with corporate governance reflected its main objective to avoid the continuance and superiority of family run businesses and to achieve a wholesome board. It was suggested that in order to achieve the same the person serving as a chairman or non-executive director must not be relative to MD or CEO of the same organization. In compliance to the same, it is evident that even before this report came into being Tata Sons has been abiding by the requirements which are required for healthy corporate governance. As far as corporate democracy is concerned, the Company Law Board once opined – “The petitioners should come to court with clean hands and if they do not do so, they are not entitled to any relief against oppression & mismanagement. It is the duty of the courts to recognize the corporate democracy in managing its affairs by the company and the court should not restrict the powers of the Board of Directors.” In another case, Madras HC also surfaced -“The Company Law Board has to recognize the collective wisdom of majority of the members and respect the corporate democracy of a company in managing its affairs. The Company Law Board will not normally interfere with the day to day functions, management and administration of a company, unless it is shown that the decisions taken by the members at the Extraordinary General Meeting are ultra vires the Act or the Articles of Association of the company.”
Conclusion
There indeed has been a growing awareness regarding the concept of corporate governance for invoking transparency and profitability in its true sense. However, this does not sabotage corporate democracy. In the present case, Tata Sons being a private unlisted company is not obliged to execute the provisions which deal with corporate governance. Still as evident, the company has been managing its affairs in lines with the required provisions. Corporate democracy if practiced in its true sense has its own sets of benefits to offer. As the Supreme Court also opined in the present case – “We have not found any merit in the argument that Majority Rule has taken back seat by introduction of corporate governance in Companies Act, 2013, it is like corporate democracy is genesis, and corporate governance is species. They are never in conflict with each other; the management is rather more accountable to the shareholders under the present regime. Corporate governance is collective responsibility, not based on assumed free-hand rule which is alien to the concept of collective responsibility endowed upon the Board.”
Leave a Reply