Much ink has already been spilt over
the last three days following the revelation that the chairman of the Tata Sons
board, Mr. Cyrus Mistry, has been “replaced”, and that Mr. Ratan Tata has
returned to helm the affairs as interim chairman for a period of four months until
a successor can be found. This has not only sent the sprawling corporate group
into crisis mode, but it has led to considerable speculation on whether a
high-stakes corporate litigation is likely to ensue.
the last three days following the revelation that the chairman of the Tata Sons
board, Mr. Cyrus Mistry, has been “replaced”, and that Mr. Ratan Tata has
returned to helm the affairs as interim chairman for a period of four months until
a successor can be found. This has not only sent the sprawling corporate group
into crisis mode, but it has led to considerable speculation on whether a
high-stakes corporate litigation is likely to ensue.
Broad
Nature of Company Law Issues
Nature of Company Law Issues
From a technical perspective, the
legal issues surrounding Mr. Mistry’s replacement may not be all too
complicated. First, Tata Sons Limited is an unlisted company, and hence
governed by the provisions of the Companies Act, 2013. It is not subject to the
slew of corporate governance norms and securities regulation dispensed and
implemented by the Securities and Exchange Board of India (SEBI). Tata Sons is
a closely
held company with about 65% of the shares held by two Tata Trusts
controlled by Mr. Ratan Tata, with about 18.5% being held by the Shaporji
Pallonji Mistry group, to which Mr. Mistry belongs.
legal issues surrounding Mr. Mistry’s replacement may not be all too
complicated. First, Tata Sons Limited is an unlisted company, and hence
governed by the provisions of the Companies Act, 2013. It is not subject to the
slew of corporate governance norms and securities regulation dispensed and
implemented by the Securities and Exchange Board of India (SEBI). Tata Sons is
a closely
held company with about 65% of the shares held by two Tata Trusts
controlled by Mr. Ratan Tata, with about 18.5% being held by the Shaporji
Pallonji Mistry group, to which Mr. Mistry belongs.
Second, the Tata Sons’ board has only
replaced Mr. Mistry as the “chairman”, while he continues to be a non-executive
director of the company. Although the Companies Act envisages roles and
functions for a chairperson of a company, it does not stipulate the precise
mechanism for appointment and removal of such a chairperson. That is indeed
left to each company to frame in its articles of association. Hence, the likely
bone of contention has veered towards whether the board of Tata Sons complied
with its articles of association while replacing Mr. Mistry as its chairman.
Based on news reports (here
and here),
it appears that following Mr. Mistry’s assumption of chairmanship, the articles
of association of Tata Sons were amended to restrict the powers of the chairman
and to enhance the oversight and control exercised by the Tata Trusts. In that
sense, the board (including the directors nominated by Tata Trusts) may very
well have possessed the appropriate powers to replace Mr. Mistry as the
chairman.
replaced Mr. Mistry as the “chairman”, while he continues to be a non-executive
director of the company. Although the Companies Act envisages roles and
functions for a chairperson of a company, it does not stipulate the precise
mechanism for appointment and removal of such a chairperson. That is indeed
left to each company to frame in its articles of association. Hence, the likely
bone of contention has veered towards whether the board of Tata Sons complied
with its articles of association while replacing Mr. Mistry as its chairman.
Based on news reports (here
and here),
it appears that following Mr. Mistry’s assumption of chairmanship, the articles
of association of Tata Sons were amended to restrict the powers of the chairman
and to enhance the oversight and control exercised by the Tata Trusts. In that
sense, the board (including the directors nominated by Tata Trusts) may very
well have possessed the appropriate powers to replace Mr. Mistry as the
chairman.
This being the case, it is as yet
unclear whether the dispute will end up in litigation. In a letter
issued by Mr. Mistry to the board of Tata Sons, he has alleged that the
directors have failed to “discharge the fiduciary duty owed to stakeholders of
Tata Sons and of the group companies”. While available in theory, any action
surrounding breach of directors’ duties through a shareholder derivative action
ought to be brought in a civil court, and may not only be difficult to
establish, but may be inefficient given the costs and time involved in
successfully bringing such an action. A more appropriate action in such a case
would be one for oppression and mismanagement under section 241 of the
Companies Act, 2013. Any shareholder holding 10% of the shares of a company (in
this case the Shaporji Pallonji Mistry group satisfies the requirement) can
bring an action before the National Company Law Tribunal (NCLT) on the ground
that the affairs of the company are being conducted in a manner “prejudicial or
oppressive” to a shareholder, or that a material change has taken place in the
management or control of a company, which is likely to cause prejudice to
shareholders. The NCLT possesses wide-ranging powers to pass various kinds of
orders in an action involving oppression and mismanagement. Even here, the bar
to bring an oppression action is quite high, and ultimately it will boil down
to the specific facts and circumstances whether such an action can be
successfully availed of.
unclear whether the dispute will end up in litigation. In a letter
issued by Mr. Mistry to the board of Tata Sons, he has alleged that the
directors have failed to “discharge the fiduciary duty owed to stakeholders of
Tata Sons and of the group companies”. While available in theory, any action
surrounding breach of directors’ duties through a shareholder derivative action
ought to be brought in a civil court, and may not only be difficult to
establish, but may be inefficient given the costs and time involved in
successfully bringing such an action. A more appropriate action in such a case
would be one for oppression and mismanagement under section 241 of the
Companies Act, 2013. Any shareholder holding 10% of the shares of a company (in
this case the Shaporji Pallonji Mistry group satisfies the requirement) can
bring an action before the National Company Law Tribunal (NCLT) on the ground
that the affairs of the company are being conducted in a manner “prejudicial or
oppressive” to a shareholder, or that a material change has taken place in the
management or control of a company, which is likely to cause prejudice to
shareholders. The NCLT possesses wide-ranging powers to pass various kinds of
orders in an action involving oppression and mismanagement. Even here, the bar
to bring an oppression action is quite high, and ultimately it will boil down
to the specific facts and circumstances whether such an action can be
successfully availed of.
These and other issues will certainly
be the subject matter of debate in the legal circles in the days to come.
be the subject matter of debate in the legal circles in the days to come.
Impact
on Corporate Governance
on Corporate Governance
My larger focus in this post is on the
impact this episode has on corporate governance in Indian companies generally. It
would be too simplistic to treat the Tata Sons boardroom crisis as one
involving an unlisted company that is bereft of public shareholders. Tata Sons
is the promoter (or controlling shareholder) of several listed companies within
its fold, and which in the aggregate represent about 7.5%
of the market capitalization on BSE. In such a scenario, the corporate
governance issues surrounding Tata Sons is no longer a matter within the house,
but one that involves the interests of minority shareholders and other
stakeholders of all listed companies within the Tata stable. In that sense, the
conduct of affairs on the Tata Sons board has a considerable impact on the
governance of all of those listed companies.
impact this episode has on corporate governance in Indian companies generally. It
would be too simplistic to treat the Tata Sons boardroom crisis as one
involving an unlisted company that is bereft of public shareholders. Tata Sons
is the promoter (or controlling shareholder) of several listed companies within
its fold, and which in the aggregate represent about 7.5%
of the market capitalization on BSE. In such a scenario, the corporate
governance issues surrounding Tata Sons is no longer a matter within the house,
but one that involves the interests of minority shareholders and other
stakeholders of all listed companies within the Tata stable. In that sense, the
conduct of affairs on the Tata Sons board has a considerable impact on the
governance of all of those listed companies.
Taking this into consideration, the
sequence of events that transpired over the last few days leaves much to be
desired. Even if the board of Tata Sons did legally possess the right to
replace the chairman, the manner in which that was accomplished does not
comport with basic principles of corporate governance. For instance, press
reports indicate that sufficient advance notice may not have been given to
Mr. Mistry and that the item regarding his replacement was included in the
agenda as part of “other items”, thereby springing a surprise on him (although
reports suggest that he was informed by one of the directors the day before the
meeting). While this may be legal due to the nature of Tata Sons as an unlisted
company, the impact of Mr. Mistry’s exit has been felt across all the listed
companies in the group, which have witnessed declines in the market value of
their shares.
sequence of events that transpired over the last few days leaves much to be
desired. Even if the board of Tata Sons did legally possess the right to
replace the chairman, the manner in which that was accomplished does not
comport with basic principles of corporate governance. For instance, press
reports indicate that sufficient advance notice may not have been given to
Mr. Mistry and that the item regarding his replacement was included in the
agenda as part of “other items”, thereby springing a surprise on him (although
reports suggest that he was informed by one of the directors the day before the
meeting). While this may be legal due to the nature of Tata Sons as an unlisted
company, the impact of Mr. Mistry’s exit has been felt across all the listed
companies in the group, which have witnessed declines in the market value of
their shares.
Key
Lessons
Lessons
What lessons from this episode may be
relevant for the broader corporate governance framework in India? At the
outset, this continues to raise significant issues for promoter-driven
companies. Matters that affect promoters, including disputes among groups of
promoters, will directly impact the listed companies and their minority
shareholders and other stakeholders. Hence, the governance framework is
important not only at the listed company-level, but also at the promoter-level.
It is paradoxical that despite the establishment of a detailed governance
framework (albeit through the articles of association) in Tata Sons, such a
negative outcome was unavoidable.
relevant for the broader corporate governance framework in India? At the
outset, this continues to raise significant issues for promoter-driven
companies. Matters that affect promoters, including disputes among groups of
promoters, will directly impact the listed companies and their minority
shareholders and other stakeholders. Hence, the governance framework is
important not only at the listed company-level, but also at the promoter-level.
It is paradoxical that despite the establishment of a detailed governance
framework (albeit through the articles of association) in Tata Sons, such a
negative outcome was unavoidable.
Second, one cannot escape from the
fact that in promoter-driven companies, there could be multiple centres of
power. For instance, promoters themselves may have a governance framework (as
Tata Sons did), and decisions taken through such a framework would have
implications for all listed companies under it. However, there is a perceptible
governance gap here. Decisions taken by promoters (being either individuals or
unlisted companies) are not subject to the same level of transparency and
governance norms as listed companies are. For instance, even though Tata Sons had
a professional board with immensely competent individuals, the balance of power
stipulated in the articles of association swayed heavily in favour of the Tata Trusts,
thereby arguably impinging upon the exercise of powers of the board as a whole,
and the chairman in particular. Hence, decision-making at the promoter level was
not accompanied by any accountability to stakeholders of listed companies,
although they are considerably impacted by such decisions. Moreover, in the
Tata Sons episode, there was no advance warning to the markets about the
impending precipitous action that was taken by the board on 24 October 2016.
What began as a terse announcement of the chairman’s replacement then led to
speculation regarding the reasons behind such action. The lack of any legal
requirements on the part of Tata Sons to provide advance notice or sufficient
details following the action may have led to this situation.
fact that in promoter-driven companies, there could be multiple centres of
power. For instance, promoters themselves may have a governance framework (as
Tata Sons did), and decisions taken through such a framework would have
implications for all listed companies under it. However, there is a perceptible
governance gap here. Decisions taken by promoters (being either individuals or
unlisted companies) are not subject to the same level of transparency and
governance norms as listed companies are. For instance, even though Tata Sons had
a professional board with immensely competent individuals, the balance of power
stipulated in the articles of association swayed heavily in favour of the Tata Trusts,
thereby arguably impinging upon the exercise of powers of the board as a whole,
and the chairman in particular. Hence, decision-making at the promoter level was
not accompanied by any accountability to stakeholders of listed companies,
although they are considerably impacted by such decisions. Moreover, in the
Tata Sons episode, there was no advance warning to the markets about the
impending precipitous action that was taken by the board on 24 October 2016.
What began as a terse announcement of the chairman’s replacement then led to
speculation regarding the reasons behind such action. The lack of any legal
requirements on the part of Tata Sons to provide advance notice or sufficient
details following the action may have led to this situation.
Third, the absence of disclosure and
transparency requirements pertaining to the promoter (being an unlisted
company) has left the shareholders of the listed companies in the lurch and
kept them guessing about the reasons for the chairman’s replacement. This has
led to a lot of speculation both among investors and commentators. Added to
this are the allegations now made by Mr. Mistry in his letter to the Tata Sons
board, which is now available in the public
domain.
transparency requirements pertaining to the promoter (being an unlisted
company) has left the shareholders of the listed companies in the lurch and
kept them guessing about the reasons for the chairman’s replacement. This has
led to a lot of speculation both among investors and commentators. Added to
this are the allegations now made by Mr. Mistry in his letter to the Tata Sons
board, which is now available in the public
domain.
Fourth, and more importantly, what is
the role of the boards of various listed companies within the group? At one
level, the board’s attention may not be called for as the various events have
occurred at the promoter level. The listed company boards have neither
considered nor taken any decision. But, that would be too simplistic and naïve an
approach. Given that the recent string of events have a direct impact on the
shareholders and stakeholders of these listed companies, the boards must state
their position and clarify the issues and assuage the concerns of investors. An
additional complication is that Mr. Mistry continues to be the chairman and
non-executive director of various listed companies within the Tata Group. Will
this affect the functioning of the boards of the Tata Group when there is a
battle for control and management of the promoter company? These are important
questions that the boards will have to consider and answer. To that extent, the
move by the stock exchanges in writing to the Tata Group companies to explain
and clarify the events and their impact on each company is a welcome one.
the role of the boards of various listed companies within the group? At one
level, the board’s attention may not be called for as the various events have
occurred at the promoter level. The listed company boards have neither
considered nor taken any decision. But, that would be too simplistic and naïve an
approach. Given that the recent string of events have a direct impact on the
shareholders and stakeholders of these listed companies, the boards must state
their position and clarify the issues and assuage the concerns of investors. An
additional complication is that Mr. Mistry continues to be the chairman and
non-executive director of various listed companies within the Tata Group. Will
this affect the functioning of the boards of the Tata Group when there is a
battle for control and management of the promoter company? These are important
questions that the boards will have to consider and answer. To that extent, the
move by the stock exchanges in writing to the Tata Group companies to explain
and clarify the events and their impact on each company is a welcome one.
The Way
Forward
Forward
In all probability, the issues
surrounding Tata Sons will be resolved one way or another, and the companies
within the Tata Group will move on with their businesses. But, the lessons
learned so far (there may be much more after a deeper analysis) cannot be
ignored. From a governance perspective, this calls for a more focused approach
towards promoter-driven companies, especially those run by business families.
In such cases, governance oversight must extend beyond listed companies and
into the domain of promoters. Issues affecting promoters cannot be isolated
from their impact on listed companies. Hence, this raises a question whether
some types of governance norms must be imposed on promoters themselves, in
addition to the listed companies. Even if there is no need for a slew of corporate
governance norms extending their reach towards promoters, decision-making by
promoters ought to be made more transparent. More importantly, listed companies
and their boards must be in a state of preparedness to deal with issues that
occur at the promoter level, whether it be succession or any other disputes.
surrounding Tata Sons will be resolved one way or another, and the companies
within the Tata Group will move on with their businesses. But, the lessons
learned so far (there may be much more after a deeper analysis) cannot be
ignored. From a governance perspective, this calls for a more focused approach
towards promoter-driven companies, especially those run by business families.
In such cases, governance oversight must extend beyond listed companies and
into the domain of promoters. Issues affecting promoters cannot be isolated
from their impact on listed companies. Hence, this raises a question whether
some types of governance norms must be imposed on promoters themselves, in
addition to the listed companies. Even if there is no need for a slew of corporate
governance norms extending their reach towards promoters, decision-making by
promoters ought to be made more transparent. More importantly, listed companies
and their boards must be in a state of preparedness to deal with issues that
occur at the promoter level, whether it be succession or any other disputes.
OFFHAND (sporadic thoughts to share):
“More importantly, listed companies and their boards must be in a state of preparedness to deal with issues that occur at the promoter level, whether it be succession or any other disputes.”
None,particularly the stakeholders with ultimate vested interests,let alone the promoters, including minority shareholders, by reason of the multiple facets of the mind boggling nature of the intricacies involved, may not prudently wish to go into/ get embroiled in the ongoing controversy; that is, about the propriety in/ legality of the removal of the person from his prestigious position in the no less prestigious corporate group.
Nonetheless, the ball of controversy having been kicked and set rolling, there is, in one’s independent perspective, a very important facet that could be expected to be raised and thrashed out. That is, the aspect covered in the media report, varyingly, for instance HERE "Gloves come off as Mistry levels grave charges against Ratan Tata" (Businessline).
What calls for a special focus is two dimensional:
A) The propriety or legality of such statements openly made, more so by a person who has been on the Board and occupying a seat of ‘trust’; and
B) its potential for but seemingly inevitable consequences,in the long run,to the detriment of the outstanding good image of each and every one of the group companies, and in turn, impairing the interests, in terms of simply money value, of the stakeholders.
May be, truly enlightened , eminent experts on company law wish to address the above mostly-common- sense viewpoints , in a better perspective , for sake of clarity as may be found wanting.