Indian Shareholder Activism: Approaching a Turning Point?

[Karan Anand and Bhaskar Vishwajeet are students at Jindal Global Law School]

 The unsuccessful merger between Zee Entertainment Enterprises Limited (“ZEEL”) and Culver Max Entertainment Private Limited (“SPNI”) has reignited the debate on the status of shareholder activism in incomplete mergers in India. In the wake of the termination of the merger, some of SPNI’s institutional shareholders sought to approach the Securities and Exchange Board of India (“SEBI”) to investigate the delay in consummating the much-awaited merger between the two media giants. It must be noted that the definitive agreements signed between the two parties stipulated January 20, 2024, as the deadline for the merger to consummate, yet the two parties could not agree to do so, leading to the fallout.

This post aims to assess reported claims of shareholder oppression due to delay in finalizing the ZEEL-SPNI merger and measure its impact as an instance of shareholder activism. The authors also supply a jurisdictional comparative to ascertain whether the current precedent on shareholder activism is at par with jurisdictions like the United States, which is known for its well-defined jurisprudence on shareholder-company disputes.

Shareholder Claims in ZEEL and SPNI’s Failed Merger

One of the chief claims reportedly made by some investors of ZEE concerned the delay in finalizing the scheme of the merger. Inordinate delays to complete restructuring/transactional schemes of companies is well recorded in Indian jurisprudence. Minority shareholders, specifically, have the legal standing to sue a company in India for such delays. The Companies Act, 2013 (“Act”), through sections 241 to 246, provides a robust legal framework for the protection of minority shareholders against oppression and mismanagement. These protections include the ability to challenge actions that are prejudicial to shareholder interests, such as excessive delays in restructuring processes. In Pramod Jain v. SEBI, the Court noted that delay by the regulator (SEBI) to greenlight an open offer was not justified as it could frustrate the objectives of the restructuring process. Additionally, the Court in In Re: Reliance Communications Limited, observed that speculative objections that have no substance and run counter to approvals from relevant regulators and shareholders are delaying tactics to defeat the purpose of a scheme. While a regulator was the subject in these cases, the instruction is clear – delays are not appreciated.

That said, some notable precedents impose a high burden of proof on shareholders in such situations. The Supreme Court in TATA Consultancy Services Limited vs. Cyrus Investments Pvt Ltd underscored the high standard of proof required to prove an oppression claim brought by minority shareholders. Per the Court, it is not only important to prove the shareholders have been prejudiced, but, additionally, the situation must warrant a winding up of the operations. This presents a challenge in terms of relying on the equitable jurisdiction of the National Company Law Tribunal to provide relief to shareholders for delays, as Indian courts, in comparison with courts in the United States, have not evolved a proper business judgement rule.

The Business Judgement Rule and the Indian Position

The business judgement rule (“BJR”) becomes an extremely important consideration in the context of this discussion. The inception of the rule can be traced to the Delaware courts, in the case of Aronson v. Lewis. The Court in this case acknowledged the managerial prerogatives under section 141(a). The Court held that the directors had acted in good faith and in the best interest of the company.

The rule states that the board of directors, while taking decisions that they believe are in the best interest of the company shall not be penalized for any bad business decision. However, this is contingent on the directors acting in good faith and an informed basis. The rule evolved as a means of protection from the constant fear of lawsuits in an ever evolving and inherently risk intensive business environment. 

The BJR is sacrosanct in the US and has been furthered by a myriad of decisions since its inception. The courts in the case of Cede v. Technicolor, further considered the elements of due care and loyalty. The element of due care states that actions must be performed by the directors after due care and consideration. The element of loyalty, on the other hand, stipulates that the director’s loyalty must be towards the company, and they must not have any ulterior motives.

Indian jurisprudence, unlike in some jurisdictions in the West, does not have a rich history of shareholders filing suits in the form of derivative lawsuits against the directors upon the breach of their duties. Furthermore, Indian jurisprudence has not directly acknowledged the BJR or considered its applicability in any case. As such there is no prerogative of legal intervention in the commercial decisions taken in a business, regardless of their detriment to shareholders. That said, the BJR has been adopted implicitly in the Indian context. The tradition of safeguarding directors for decisions made in good faith has been established since the enactment of the Companies Act of 1956. Section 463 of the Companies Act 2013, which mirrors section 633 of the 1956 Act, permits officers of the company to avail protections under the section if they have acted in good faith. However, the application of the provision isn’t the same as enumerated in the US. As established in Jagjivan Hiralal Doshi v. Registrar of Companies, section 463 of the 2013 Act grants protection at the discretion of the court based on the facts and circumstances, unlike the presumption of good faith under BJR.

Lastly, in Miheer H Mafatlal v. Mafatlal Industries, the Supreme Court held that it would refrain from intervening if a director’s actions were deemed “just, fair, and reasonable” in the eyes of a reasonable businessperson, particularly when making decisions beneficial to the company. This ruling offers support to directors who can prove they acted diligently and in the best interests of the company, without personal motives influencing their decisions.

It must be noted that while the regime in India is different from the United States, criticism of the same rests on the uncertainty of protections due to lack of legislative codification in India. In the absence of explicit provisions in company law, judicial decisions often become key in deciding the fate of prospective shareholder challenges to company decisions. In ZEEL-SPNI’s context, the absence of such codification is realized in a more visceral manner due to earlier precedent from Invesco Mutual Fund’s requisition to remove a key ZEEL executive. In 2021, the then minority shareholder, Invesco Mutual Fund called upon an EGM to oust the executive to push for ZEEL’s merger with Reliance’s Viacom18. Invesco had more than 10 per cent equity (minority threshold) and could call for an EGM per section 100 of the 2013 Act. Eventually, through appeal, Invesco obtained relief from the courts, however, they later withdrew their requisition notice seeking removal of  ZEEL’s MD and CEO. Invesco’s decision being what it was, this case helped solidify a crucial aspect of shareholder requisitioning of general meetings with the chief achievement being a cap on a board’s power to decide the legality of a requisition notice.

Recent Developments in Indian Class-Action Jurisprudence and Concluding Notes

It is evident that shareholder activism has dispersed recognition in Indian jurisprudence. That said, India’s corporate governance landscape has undergone a massive transition with the minority shareholders of Jindal Poly Films filing India’s first-class action suit against the company. This legal action underscores the growing importance of protecting minority shareholder rights and ensuring accountability among corporate entities as well as an opportunity for improving BJR jurisprudence in India.

Class action lawsuits empower minority shareholders to collectively address grievances against the company or its officials for alleged wrongdoing. In the case of Jindal Poly Films, the shareholders claimed substantial losses totalling approximately ₹2,500 crore, allegedly stemming from actions taken by the company’s promoters and directors. The minority shareholders led by Ankit Jain have taken a proactive stance in seeking redress for perceived injustices, under the 2013 Act.

This development is particularly noteworthy in light of past corporate scandals like the Satyam scam, where thousands of small investors and minority shareholders in India suffered significant financial losses without adequate recourse. In contrast, investors in the United States who filed class action suits against Satyam managed to secure substantial compensation worth $125 million dollars. This jurisdictional contrast highlights the importance of providing avenues for minority shareholders to seek justice and recover losses in cases of corporate malfeasance.

The Jindal Poly Films class action lawsuit signals a step in the right direction for India’s corporate governance framework and also provides a fresh canvas for Indian shareholder activism to draw on. While India had no prior history of class action suits, for minority shareholders the device is an additional tool which can be used to enforce their rights against company/ies. It is yet to be seen what this suit results in, however, one can safely assume that the courts are not far from developing a domestic brand of interpretation for BJR.

– Karan Anand & Bhaskar Vishwajeet

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