Tata Group Companies: “Long-Term Interests” the Key Touchstone

The episode surrounding the Tata Group has taken further twists
and turns. After several Tata Group companies expressed their support in favour
of Mr. Mistry, who continues to be chairman of several of those companies, one
company – Tata Global Beverages – adopted a different stance. In a board
meeting held this week, the
directors of Tata Global Beverages decided
by a 7:3 majority to replace Mr.
Mistry as chairman of the company. At one level, this might come as a surprise.
Why did the board of this particular company adopt a stance that is different
from the other companies? Is it possible that there could be divergence of
opinion among the boards (particularly independent directors) of different
listed companies within the Tata fold? Should there not be a uniform approach?
The answers to these questions lie in the fact that the board of
directors of each of the Tata Group companies is bound by duties imposed under
company law. In any actions they undertake, especially in crisis situations
like the present one, they ought to be guided by those duties, which are now
(at least partially) codified in section 166 of the Companies Act, 2013.
According to this provision, a director must act in good faith for the benefit
of the shareholders as a whole, and also in the best interests of the company.
In addition, such director must also consider other stakeholder interests, a
matter that I shall touch upon momentarily.
Interests of the Company or
the Group?
It is an elementary principle of company law in India that
directors owe their duties to the company, and not directly to shareholders. This
includes the duty to act in the interests of the company. Although simple to
begin with, the issue can get somewhat compounded in case of corporate groups
such as the Tata Group of companies. The question then arises whether the
directors of each of the group companies are to act in the interests of the
company of which they are directors, or whether they are to act in the
interests of the group as a whole. Here, the basic principle of company law
that each company is a separate legal personality steps in. Hence, directors
are to act primarily in the interests of the company as a separate entity. They
may take into account the interests of the group as a whole, so long as those
interests are consistent with, or operate in furtherance of, the interests of
the individual company. If the group interests conflict with the interests of
each individual company, then the directors must prefer the company’s own
interests rather than the group.
Although these issues have not been put to significant test
before Indian courts, they are coming alive in the Tata episode. Ultimately,
the board of each company would have to take a decision that is in the
company’s own interests. Some might see merit in aligning their own interests
with that of the Tata Group (as the board of Tata Global Beverages has clearly
done), while others may view the relationship as one of conflict whereby they
will have to prefer their own interests and repose faith on the management of
individual companies rather than the group as a whole (as some of the other
companies have done).
Group considerations can be manifold. For instance, the support
of a corporate group might be advantageous to a company in terms of raising
finances, taking advantages of synergies within the group such as sharing of
talent and other resources, use of a common brand. On the other hand, in some circumstances,
being part of a group may turn out to be a hindrance if a company’s destiny is
driven by group considerations. Ultimately, the board of each group company
will have to decide, as some have already begun to, on what is in the best
interest of such company.
Shareholder Interests:
Short-Term or Long-Term?
Generally, in the case of solvent companies, the company’s
interests tend to be synonymous with shareholder interests, although the
reference is to shareholders as a collective body and not to each individual
shareholder. However, there is less guidance when it comes to whether the
shareholders’ interests need to be considered in the long term or the short
term. Although this issue becomes more acute in the case of a takeover, the
structure of the duties imposed on directors in section 166 of the Companies
Act, 2013 seem to point towards the need to consider the long-term interests of
the company (and hence the shareholders). Therefore, when directors consider
their duties, they ought to keep a long-term perspective in mind, taking into
account the interest of the present and future shareholders of the company in an
extended time horizon. This is especially so in case of a corporate battle that
is riddled with uncertainties regarding the future of the management.
Stakeholder Interests?
Even though in the past it was open to directors to take into
account the interests of stakeholders such as creditors, employees, consumers, environment
and the community, it has now been imposed as a requirement by virtue of
section 166. Hence, in taking any action, the directors must also consider
these non-shareholder constituencies. For example, in the present scenario, the
interests of the employees regarding the future prospects of the company become
quite important. Similarly, the interests of banks and financial institutions
as creditors to various Tata Group companies are crucial. Arguably, these are
consistent with a longer-term outlook to be adopted by the directors. In that
sense, there may be a great level of congruence between the long-term interests
of the shareholders and those of the other stakeholders.
As would be evident from the above brief discussion, directors
of each individual company within the Tata Group are faced with a number of
considerations arising out of the present state of affairs. Although there is
some level of guidance available under company law, it is arguably general in
nature. Hence, the directors carry a daunting task of doing what is best for
each company, by using its “long-term interests” as a touchstone. Unlike other
jurisdictions such as the United States (Delaware) and the United Kingdom,
there is scant guidance from the courts in enabling a more specific application
of various directors’ duties. Hence, directors of the Tata Group companies will
have to exercise their best judgment and in good faith, keeping in mind these
broad principles. It is due to the subjective nature of this area of the law
that we might see different approaches being taken by various Tata Group
companies, as we have already witnessed.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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