Background
In one of the first few cases
interpreting the provisions of the Companies Act, 2013 (the 2013 Act), the
Bombay High Court last week issued its judgment on the use of postal ballot
facility at a court-convened meeting to consider a scheme of arrangement. In re Godrej
Industries Limited, the court was concerned with a scheme of amalgamation
of Wadala Commodities Limited into Godrej Industries Limited under sections 391
to 394 of the Companies Act, 1956 (the 1956 Act).[1]
The narrow question at the initial stage for summons for direction to convene
the meetings was “whether in view of the provisions of Section 110 of the [the
2013 Act] and SEBI Circular dated 21st May 2013, a resolution for approval of a
Scheme of Amalgamation can be passed by a majority of the equity shareholders
casting their votes by postal ballot, which includes voting by electronic
means, in complete substitution of an actual meeting. In other words, whether
the 2013 Act, read with various circulars and notifications, has the effect of
altogether eliminating the need for an actual meeting being convened.”
interpreting the provisions of the Companies Act, 2013 (the 2013 Act), the
Bombay High Court last week issued its judgment on the use of postal ballot
facility at a court-convened meeting to consider a scheme of arrangement. In re Godrej
Industries Limited, the court was concerned with a scheme of amalgamation
of Wadala Commodities Limited into Godrej Industries Limited under sections 391
to 394 of the Companies Act, 1956 (the 1956 Act).[1]
The narrow question at the initial stage for summons for direction to convene
the meetings was “whether in view of the provisions of Section 110 of the [the
2013 Act] and SEBI Circular dated 21st May 2013, a resolution for approval of a
Scheme of Amalgamation can be passed by a majority of the equity shareholders
casting their votes by postal ballot, which includes voting by electronic
means, in complete substitution of an actual meeting. In other words, whether
the 2013 Act, read with various circulars and notifications, has the effect of
altogether eliminating the need for an actual meeting being convened.”
The court answered this question in
the negative to effectively find that while the mechanism of postal ballot
(which includes electronic voting) ought to be offered as an additional
facility for voting by shareholders, that cannot do away with the need for
conducting a meeting. In arriving at this conclusion, the court considered
various aspects of the purpose and conduct of shareholders’ meetings, issues of
corporate law and governance contained in the 2013 Act as well as various SEBI
circulars.
the negative to effectively find that while the mechanism of postal ballot
(which includes electronic voting) ought to be offered as an additional
facility for voting by shareholders, that cannot do away with the need for
conducting a meeting. In arriving at this conclusion, the court considered
various aspects of the purpose and conduct of shareholders’ meetings, issues of
corporate law and governance contained in the 2013 Act as well as various SEBI
circulars.
Reasoning
Even though the issue at hand was
quite focused, the opinion of the court rendered by Justice G.S. Patel is
elaborate and insightful on various legal and practical matters involving
shareholder rights and corporate democracy (and hence I have taken the liberty
of extracting some of the important observations). Some of the key issues
considered are as follows:
quite focused, the opinion of the court rendered by Justice G.S. Patel is
elaborate and insightful on various legal and practical matters involving
shareholder rights and corporate democracy (and hence I have taken the liberty
of extracting some of the important observations). Some of the key issues
considered are as follows:
Purpose
and Importance of a Meeting
and Importance of a Meeting
One consideration before the court
was whether the purpose of corporate democracy is to simply permit shareholders
to cast their vote or whether it was still important to hold a meeting of
shareholders so as to enable them to deliberate on the issues and express their
opinions. If deliberation is a crucial aspect of corporate democracy, then even
where a postal ballot is provided for it is not possible to avoid a meeting
altogether. The court expressed its views in the following manner:
was whether the purpose of corporate democracy is to simply permit shareholders
to cast their vote or whether it was still important to hold a meeting of
shareholders so as to enable them to deliberate on the issues and express their
opinions. If deliberation is a crucial aspect of corporate democracy, then even
where a postal ballot is provided for it is not possible to avoid a meeting
altogether. The court expressed its views in the following manner:
We must remember
that at the heart of corporate governance lies transparency and a
well-established principle of indoor democracy that gives shareholders
qualified, yet definite and vital rights in matters relating to the functioning
of the company in which they hold equity. Principal among these, to my mind, is
not merely a right to vote on any particular item of business, so much as the
right to use the vote as an expression of an informed decision. That
necessarily means that the shareholder has an inalienable right to ask
questions, seek clarifications and receive responses before he decides which
way he will vote. It may often happen that a shareholder is undecided on any
particular item of business. At a meeting of shareholders, he may, on hearing a
fellow shareholder who raises a question, or on hearing an explanation from a
director, finally make up his mind. In other cases, he may hold strong views
and may desire to convince others of his convictions. This may be in relation
to matters that are not immediately obvious to the shareholder merely on
receipt of written information or a notice. The right to persuade and the right
to be persuaded are, as I see it, of vital importance. In an effort for greater
inclusiveness, these rights cannot be altogether defenestrated. To say,
therefore, that no meeting is required and that the shareholder must cast his
vote only on the basis of the information that has been send to him by post or
email seems to me to be completely contrary to the legislative intent and
spirit to the express terms of the SEBI circular and amended Listing
Agreement’s Clauses 35B and 49.
that at the heart of corporate governance lies transparency and a
well-established principle of indoor democracy that gives shareholders
qualified, yet definite and vital rights in matters relating to the functioning
of the company in which they hold equity. Principal among these, to my mind, is
not merely a right to vote on any particular item of business, so much as the
right to use the vote as an expression of an informed decision. That
necessarily means that the shareholder has an inalienable right to ask
questions, seek clarifications and receive responses before he decides which
way he will vote. It may often happen that a shareholder is undecided on any
particular item of business. At a meeting of shareholders, he may, on hearing a
fellow shareholder who raises a question, or on hearing an explanation from a
director, finally make up his mind. In other cases, he may hold strong views
and may desire to convince others of his convictions. This may be in relation
to matters that are not immediately obvious to the shareholder merely on
receipt of written information or a notice. The right to persuade and the right
to be persuaded are, as I see it, of vital importance. In an effort for greater
inclusiveness, these rights cannot be altogether defenestrated. To say,
therefore, that no meeting is required and that the shareholder must cast his
vote only on the basis of the information that has been send to him by post or
email seems to me to be completely contrary to the legislative intent and
spirit to the express terms of the SEBI circular and amended Listing
Agreement’s Clauses 35B and 49.
Hence, the purpose of shareholder democracy
is not simply to exercise franchise but to meet, deliberate, persuade and be
persuaded as a collective, which is possible only when the facility of a
meeting is provided, and not simply when each shareholder casts a ballot in
isolation without interaction.
is not simply to exercise franchise but to meet, deliberate, persuade and be
persuaded as a collective, which is possible only when the facility of a
meeting is provided, and not simply when each shareholder casts a ballot in
isolation without interaction.
Possibility
of Amendments
of Amendments
An important aspect of shareholder
right is the ability to propose amendments to resolutions put forth at a
meeting. The court found that if the only facility provided is postal ballot
without a shareholders’ meeting, then it would take away the power of directors
or shareholders to propose amendments, as a result of which the resolution can
only be put to vote as originally proposed. This is not desirable. The schemes
of both the 1956 Act as well as the 2013 Act provide that schemes are “subject
not only to approval by voting but also, possibly, to an amendment at the
meeting itself”. The ability to decide upon the scheme along with amendments is
important for achieving a meeting of minds, especially on crucial matters such
as the share exchange ratio.
right is the ability to propose amendments to resolutions put forth at a
meeting. The court found that if the only facility provided is postal ballot
without a shareholders’ meeting, then it would take away the power of directors
or shareholders to propose amendments, as a result of which the resolution can
only be put to vote as originally proposed. This is not desirable. The schemes
of both the 1956 Act as well as the 2013 Act provide that schemes are “subject
not only to approval by voting but also, possibly, to an amendment at the
meeting itself”. The ability to decide upon the scheme along with amendments is
important for achieving a meeting of minds, especially on crucial matters such
as the share exchange ratio.
Broader
Corporate Governance Concerns
Corporate Governance Concerns
The court also expressed its views
on the broader governance impact that necessitates greater shareholder
participation in companies, especially on crucial matters such as amalgamations.
on the broader governance impact that necessitates greater shareholder
participation in companies, especially on crucial matters such as amalgamations.
Nothing could be
more detrimental to shareholders’ rights than stripping them of the right to
question, the right to debate, the right to seek clarification; and, above all,
the right to choose, and to choose wisely. A vote is an expression of an
opinion. That vote must reflect an informed decision. Dialogue and discourse
are fundamental to the making of every such informed decision. [Counsel’s] submission
seems to me to relegate shareholders, in the guise of greater inclusiveness, to
a very distant second place in the scheme of corporate governance, seeing them
merely as a necessary evil. Nothing could be further from the mandate of
corporate law and governance. We strive today to greater transparency; that
means that more should be given the opportunity to speak and to exercise their
rights as shareholders. But that cannot come at the price of their right to
speak, to be heard, to persuade, even to cajole. What corporate governance
demands is the government of the tongue, not the tyranny of a finger pressing a
button.
more detrimental to shareholders’ rights than stripping them of the right to
question, the right to debate, the right to seek clarification; and, above all,
the right to choose, and to choose wisely. A vote is an expression of an
opinion. That vote must reflect an informed decision. Dialogue and discourse
are fundamental to the making of every such informed decision. [Counsel’s] submission
seems to me to relegate shareholders, in the guise of greater inclusiveness, to
a very distant second place in the scheme of corporate governance, seeing them
merely as a necessary evil. Nothing could be further from the mandate of
corporate law and governance. We strive today to greater transparency; that
means that more should be given the opportunity to speak and to exercise their
rights as shareholders. But that cannot come at the price of their right to
speak, to be heard, to persuade, even to cajole. What corporate governance
demands is the government of the tongue, not the tyranny of a finger pressing a
button.
Electronic
Voting at the Meeting
Voting at the Meeting
The court held that the facility of
electronic voting must be made available at the meeting itself for those who
wish to attend and vote at the meeting. In other words, electronic voting is
not limited only to those who are unable or unwilling to attend the meeting. The
objective behind this situation is that “[g]reater inclusiveness demands the
provision of greater facilities, not less; and certainly not the apparent
giving of one ‘facility’ while taking away a right.” Based on the court’s
reasoning, the voting options available to shareholders are as follows:
electronic voting must be made available at the meeting itself for those who
wish to attend and vote at the meeting. In other words, electronic voting is
not limited only to those who are unable or unwilling to attend the meeting. The
objective behind this situation is that “[g]reater inclusiveness demands the
provision of greater facilities, not less; and certainly not the apparent
giving of one ‘facility’ while taking away a right.” Based on the court’s
reasoning, the voting options available to shareholders are as follows:
1. Shareholders
may exercise their votes through postal ballot or electronic votes in advance
and not attend the physical meeting;
may exercise their votes through postal ballot or electronic votes in advance
and not attend the physical meeting;
2. Shareholders
may exercise their votes through postal ballot or electronic votes in advance
and nevertheless attend and speak at the physical meeting so as to be able to
persuade the other shareholders as to their point of view on matters discussed
at the meeting (but they cannot vote again at the meeting);
may exercise their votes through postal ballot or electronic votes in advance
and nevertheless attend and speak at the physical meeting so as to be able to
persuade the other shareholders as to their point of view on matters discussed
at the meeting (but they cannot vote again at the meeting);
3. Shareholders
may attend and speak at the meetings, and then vote electronically at the
meeting itself.
may attend and speak at the meetings, and then vote electronically at the
meeting itself.
This way, there could be a “single
integrated system of voting” for all shareholders who exercise their votes,
whether or not they attend the meeting.
integrated system of voting” for all shareholders who exercise their votes,
whether or not they attend the meeting.
Notification
of Rules under the 2013 Act
of Rules under the 2013 Act
Finally, the court was confronted
with some procedural issues relating to the notification of various provisions
of the 2013 Act as well as the Rules thereunder. It observed:
with some procedural issues relating to the notification of various provisions
of the 2013 Act as well as the Rules thereunder. It observed:
A final word about
the manner in which these rules and sections are purportedly being brought into
force. The website of the Ministry of Corporate Affairs has, on its front page,
a link to a single scanned PDF file entitled “COMPANIES ACT 2013 – STATEMENT OF
NOTIFICATION OF RULES”. Some 21 rules are listed. They are all said to be
effective 1st April 2014. Several of these are not yet gazetted; at least I
have not been able to find any gazette. I do not see how any such rules can be
made effective on this basis where a ministry simply puts up some scanned
document under the signature of one of its officers but sans any publication in
the official gazette. That publication is not an idle formality. It has a
well-established legal purpose. That purpose is not and cannot be achieved in
this ad-hoc manner. Therefore, till such time as these rules are gazetted, or
there is some provision made for the dispensation of official gazette
notification, none of the rules in the Ministry of Corporate Affairs PDF document
that are not yet gazetted can be said to be in force. [footnotes omitted]
the manner in which these rules and sections are purportedly being brought into
force. The website of the Ministry of Corporate Affairs has, on its front page,
a link to a single scanned PDF file entitled “COMPANIES ACT 2013 – STATEMENT OF
NOTIFICATION OF RULES”. Some 21 rules are listed. They are all said to be
effective 1st April 2014. Several of these are not yet gazetted; at least I
have not been able to find any gazette. I do not see how any such rules can be
made effective on this basis where a ministry simply puts up some scanned
document under the signature of one of its officers but sans any publication in
the official gazette. That publication is not an idle formality. It has a
well-established legal purpose. That purpose is not and cannot be achieved in
this ad-hoc manner. Therefore, till such time as these rules are gazetted, or
there is some provision made for the dispensation of official gazette
notification, none of the rules in the Ministry of Corporate Affairs PDF document
that are not yet gazetted can be said to be in force. [footnotes omitted]
These are significant questions,
which will require urgent attention of the Ministry of Corporate Affairs (MCA).
which will require urgent attention of the Ministry of Corporate Affairs (MCA).
Analysis
The judgment of the Bombay High
Court is a significant one as it clarifies the rights of shareholders to attend
and vote for (or against) resolutions proposed by the company, especially in
the case of court-convened meetings for schemes of arrangement (and
amalgamation). The courts grants wide amplitude to shareholder franchise and
re-emphasises that the methods of voting are a facility provided to
shareholders that cannot be circumscribed. Moreover, it highlights the
importance of deliberations at a general meeting and the power of persuasion,
both of which cannot be treated as empty formalities. This judgment also
provides further impetus to shareholder participation in corporate
decision-making, which is an important component of the overall phenomenon of
shareholder activism, which is gaining ample momentum in the Indian context.
Court is a significant one as it clarifies the rights of shareholders to attend
and vote for (or against) resolutions proposed by the company, especially in
the case of court-convened meetings for schemes of arrangement (and
amalgamation). The courts grants wide amplitude to shareholder franchise and
re-emphasises that the methods of voting are a facility provided to
shareholders that cannot be circumscribed. Moreover, it highlights the
importance of deliberations at a general meeting and the power of persuasion,
both of which cannot be treated as empty formalities. This judgment also
provides further impetus to shareholder participation in corporate
decision-making, which is an important component of the overall phenomenon of
shareholder activism, which is gaining ample momentum in the Indian context.
Furthermore, the judgment also
raises questions regarding the implementation of the 2013 Act and highlights
some key gaps such as the notification of the Rules. Such matters require
urgent regulatory attention.
raises questions regarding the implementation of the 2013 Act and highlights
some key gaps such as the notification of the Rules. Such matters require
urgent regulatory attention.
Although the judgment is only at the initial
stage of summons for directors (for convening class meetings in a scheme of
amalgamation), it raises significant issues that are pertinent more generally
to similar cases. The fact that the court has observed that the matter requires
fuller consideration and has sought to hear various interested parties such as
the Registrar of Companies, the Central Government (through the Additional
Solicitor General) and SEBI suggests that the issues will be subject to still
further scrutiny. The wider ramifications of the judgment are evident in the
observations of the court that “[o]n a prima-facie view that the elimination of
all shareholder participation at an actual meeting is anathema to some of the
most vital of shareholders’ rights, it is strongly recommended that till this
issue is fully heard and decided, no authority or any company should insist
upon such a postal-ballot-only meeting to the exclusion of an actual meeting.”
stage of summons for directors (for convening class meetings in a scheme of
amalgamation), it raises significant issues that are pertinent more generally
to similar cases. The fact that the court has observed that the matter requires
fuller consideration and has sought to hear various interested parties such as
the Registrar of Companies, the Central Government (through the Additional
Solicitor General) and SEBI suggests that the issues will be subject to still
further scrutiny. The wider ramifications of the judgment are evident in the
observations of the court that “[o]n a prima-facie view that the elimination of
all shareholder participation at an actual meeting is anathema to some of the
most vital of shareholders’ rights, it is strongly recommended that till this
issue is fully heard and decided, no authority or any company should insist
upon such a postal-ballot-only meeting to the exclusion of an actual meeting.”
[1] The
scheme was considered under these provisions of the previous 1956 Act as they
continue to be in force. The equivalent provisions of sections 230 and 232 of
the new 2013 Act are yet to come into force.
scheme was considered under these provisions of the previous 1956 Act as they
continue to be in force. The equivalent provisions of sections 230 and 232 of
the new 2013 Act are yet to come into force.
By extending the reasoning of requiring a gazzetted notification of the Rules in order for them to be in force, would the notification bringing into force the substantive provisions of the Act also need to be by way of a gazzetted notification?
Good judgment
Sort of unrelated, but isn't this is the first case on the new Act (and not amongst the first few cases)?
@Vatsala. That might very well be the case, although we have no way of confirming if any decisions have been issued by any of the other High Courts in the interim.