Bombay High Court on the Permissibility of Shareholder Representative Suits

Bar & Bench yesterday reported
that the Bombay High Court denied leave to certain shareholders of various Tata
group companies to bring a representative suit that made certain legal claims
in the aftermath of the ouster of Mr. Cyrus Mistry from the board of Tata Sons
as well as other Tata group companies. The order of the court in Pramod
Premchand Shah v. Rata Tata
is now available.
Facts and Ruling
Various shareholders of Tata group
companies brought a representative suit under Order 1 Rule 8 of the Code of
Civil Procedure, 1908 (the “CPC”) against Tata Sons, its directors and various
Tata group companies. The plaintiff shareholders’ claim was that Mr. Mistry was
wrongfully ousted as the chairman of Tata Sons, which then led to his removal
from the boards of various Tata group companies. These led to a massive decline
in the share value of the Tata group companies. As a result, the plaintiff
shareholders sought relief from the court to nullify Mr. Mistry’s removal and
they also claimed damages in the sum of about Rs. 41,832 crores. The plaintiffs
assert their rights as a representative of all “non-promoter shareholders” of
the Tata group companies.
The plaintiff shareholders
experienced temporary victory when on December 9, 2016 a judge of the Bombay
High Court granted leave under Order 1 Rule 8 enabling them to pursue the suit
on behalf of all interested persons. This is generally considered to be
significant as the decision to grant leave in a representative suit is an
important hurdle for plaintiffs to cross in such suits. This victory was
short-lived as another judge of the Bombay High Court by way of the present
order under discussion revoked the leave earlier granted to the plaintiff
shareholders, thereby putting an end to the current set of claims.
The Court was largely concerned
with the interpretation of Order 1 Rule 8, and whether all the shareholders of
the various Tata group companies enjoyed the same interest. For this purpose,
it would be useful to briefly set out the relevant text of Order 1 Rule 8,
which is as follows:
One person may sue or defend on behalf of
all in same interest.
(1) Where there
are numerous persons having the same interest in one suit,–
(a) one or more
of such persons may, with the permission of the Court, sue or be sued, or may
defend such suit, on behalf of, or for the benefit of, all persons so interested;
The Court sought to analyse the
background and the reason for the enactment of Order 1 Rule 8:
This scheme is an
exception to the general rule that all persons interested in the suit must be
made parties to it. The object of this exception is clearly to facilitate the
redressal of grievances in which a large body of persons are interested, but
where several practical difficulties would arise if every individual so interested
were to either join in one suit or file a separate suit under the general rule.
The Court placed considerable
emphasis on the terminology used in the legislative provisions, which is “same
interest in one suit”, and discussed relevant English case law at some length.
Thereafter, it applied the principles to the facts of the present case.
At the outset, a distinction was
sought to be made between rights and interest. All shareholders enjoyed the
same rights in the form of proprietary interest in the shares they held in the
various Tata group companies. However, when it came to interests, the
shareholders were found not to enjoy the same level of commonality. The Court
relied substantially on the perception that individual shareholders held not
only on the events that transpired on the board of Tata Sons and other group
companies, but also regarding the views of individual shareholders regarding
the acceptability of the consequent decline in the market value of Tata group
company shares. For instance, it was mentioned that long-term shareholders may
not necessarily view the temporary decline in share values of the companies
unfavourably. On this point, the Court concluded:
In short, each of
the non-promoter shareholders in the present case may have the same type of proprietary
right in the share and thereby, the same interest in protecting its value, but
so far as the complaint of prejudice to that interest is concerned, other
non-promoter shareholders may not have a common cause with the Plaintiffs. It
is this prejudice or accrual of liability arising therefrom, which forms the
subject matter of ‘interest in the suit’ and not the proprietary right per so
or the interest in protecting its value. …
Similarly, the Court found a lack
of commonality of interests in the two reliefs sought (as discussed above). For
these reasons, it concluded that the requirements of Order 1 Rule 8 did not
stand satisfied, and revoked the leave granted to the plaintiff shareholders.
Some Thoughts
At the outset, this decision calls
into question several considerations that arise when some shareholders bring a
collective suit to assuage the concerns of fellow shareholders with whom they
share a similar interest. Usually, this also depends upon the type of suit or
claim involved. Company law recognises specific types of shareholder suits. The
first is an action for oppression or mismanagement that is brought directly by
shareholders for their own benefit. It is uncommon for such actions to be
brought on behalf of shareholders other than those who brought them. These
rights are well-recognised under the Companies Act, 2013. The second is a
derivative action, which is brought by some shareholders, but on behalf of the
company. Such a claim is not codified in the Companies Act, 2013, and is still
premised upon Order 1 Rule 8. As a co-author and I have argued in this paper, the representative suit
under Order 1 Rule 8 is available for some shareholders (or other interest
holders) to bring suits on behalf of others similarly situated, while a derivative
action is brought on behalf of the company instead. Despite these
incongruities, there seems to be no legislative momentum to codify derivative
actions in India. Minority shareholders may instead derive some solace by the presence
of the third type of action statutorily provided in the Companies Act, 2013,
namely the shareholder class action. This is a direct action that shareholders
can bring on behalf of the entire class, and the mechanism for the same has
been elaborately set out in section 245.
The interesting aspect of the
present suit initiated by the shareholders of the Tata group companies is that
it falls in none of the well-recognised shareholder remedial mechanisms
provided under company law. In other words, it appears to be a sui generis claim. Understandably, it is
not structured as a derivative action because the benefits would have enured to
the company rather than the shareholders, thereby defeating the purpose of
their damages claim. It is not structured as a shareholder class action because
that requires the support of at least 100 shareholders or those holding at
least 10% of the share capital of the company. In the present case, obtaining
the support of shareholders holding at least 10% of the share capital will be a
daunting task, while obtaining the numerical support of shareholders may be
more likely, if at all. Given the broad scope of claims that can be initiated
through the class action mechanism, that may be a more appropriate route to follow
in circumstances as the present one. On the other hand, even assuming the
hurdle of obtaining leave of the court to bring a representative suit can be
crossed, the substantive issues surrounding a sui generis claim could give rise to interesting but challenging
legal issues.

On the substance of the Bombay High
Court’s decision itself, there remains the issue of whether “perception” of
shareholders can be treated as a significant criterion for determining whether
they share a common “interest” for purpose of passing the bar set by Order 1
Rule 8. The difficulty with excessive reliance on perceptions is that they are
bound to differ when one considers a group of persons such as shareholders.
Some might be in favour of legal action, while others may not (and may even
accept the circumstances as they are). Hence, caution needs to be exercised
while using investor perception as a criterion to determine whether shareholders
constitute a common interest group for bringing representative suits.

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.

3 comments

  • I think it is extremely disturbing that the court set such a high standard for what constitutes 'common interest'. According to this judgment, for all practical purposes, if an individual shareholder wants to bring a representative suit on behalf of 10000 other shareholders, then he/she has to prove beyond all reasonable doubt that ALL 100000 of them had the exact same interest arising out of the subject matter.

    Not only is this practically impossible but also a marked deviation from the holding of Karia District Cooperation case. In this case, the court accepted without hesitation that vegetarianism is the 'common interest' of all jains with much less degree of proof.

    Your thoughts on this sir?

  • I think the court has set a disturbingly high standard for what constitutes 'common interest' for a class of individuals. Its rejection of the suggestion that aggrieved parties of the class can merely contest the suit indicates that the court holds interests of a class 'same' only if each and every one of the individuals in the class have the exact same interest. Additionally, the court merely considered the hypothetical possibility of alternative 'views' and 'perceptions' as sufficient ground to conclude that there is no common interest among the class. A conjoint reading of these two observations, in all practicality would mean that if a few shareholders seek to bring a representative suit in favour of 10,000 shareholders of a company, then the only way they succeed is if they prove beyond reasonable doubt that every single one of them have the exact same interest in the matter and that it is not even perceivable that any one of them have a different interest

    This is not only impractical but also a marked deviation. In the Amul case that is referred to in this judgment itself, the court very unhesitantly concluded that vegetarianism is in the common interest of every individual in the Jain community without requiring the high standard of proof to be satisfied as in the Pramod Premchand Case

    You thoughts?

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