The order opens up unresolved questions pertaining to company law and corporate governance; india inc must now bring these into mainstream public discourse.
By Mukesh Butani and Tarun Jain
Last week, the National Company Law Appellate Tribunal (NCLAT) pronounced its verdict in the appeals referred by Cyrus Mistry against an order of the National Company Law Tribunal (NCLT) that had dismissed the claims of him being unjustly ousted as the Executive Chairman of Tata Sons Ltd, the flagship Tata Group company. There are several takeaways from the NCLAT order, which clearly won’t be the last word on this dispute. First, it reverses the NCLT order opining that the ouster was unlawful and, therefore, reinstates Mistry’s position as the Chairman. The order is significant, given the debate on corporate governance.
Given the state of affairs of Indian corporates, corporate governance has oft been deliberated by expert committees and analysed academically. This is a reality that emerges if the NCLAT order is adjudged on its face value. It is replete with instances on how the five-decade relationship, and trust, broke down, leading to an acrimonious relationship between the Shapoorji Paloonji (SP) group and the Tata group. Identifying the promoters and stakeholders by name and holding them directly responsible for one of the most ignominious episodes in the country’s corporate history, the NCLAT order recounts, in great factual detail, the circumstances leading to the trust deficit. Examined dispassionately, the NCLAT order is a case study that makes an intriguing contribution to an often-ignored area of company law jurisprudence—oppression and mismanagement of minority shareholders.
A student of company law attempting to enumerate the ways in which the minority interests can be oppressed or side-lined shall,thus, find several takeaways. First, stressing upon the veto clauses in the Articles of Association (AoA) of Tata Sons, the Tribunal has concluded that such clauses per se put minority interests in jeopardy. Second, nominee directors, who pull along the line of vested interests, can also cause oppression. Third, corporate decisions ‘out of the boardroom’ rendering the meetings mere rubber stamping exercises implies silencing the voice of the minority. Fourth, constant interference in executive functioning by the majority can often lead to disillusionment of senior professionals, and is another way to thwart balanced pursuit of the corporate agenda. Fifth, retribution against the executive board for taking tough and crucial decisions, repeated go-slows and pressure to turn around, cartelisation of board members, etc, are also instances that effectively undermine minority interests. Those at the fringes are also shareholders, thus, there can never be any overwhelming rationale for practices that scuttle minority interests.
This raises several questions. Are Indian companies really governed democratically? How meaningful are the roles and responsibilities of elected directors; are they expected to stand up to promoters when faced with dilution of shareholder interests, etc? While these come up routinely in corporate functioning, they are not systematically addressed. This despite the overhaul of corporate laws in the past decade—the 2013 Companies Act being the most significant—and several expert committees have made far-reaching recommendations on board governance. Even the empowered regulator hasn’t shied away from exercising its power. However, no external push to evolve governance style can ever be the solution. The underlying tenor of NCLAT’s order, no matter which side it endorsed, is clear: One cannot expect the dawn of professional standards in corporate management unless self-restraint is imbibed by influential board figures with an agenda, and, simultaneously, the boards are empowered to ensure businesses are managed professionally. Given that public funds are involved, it is incumbent upon the boards to keep personal prejudices aside, giving way to evolved and mature decision-making. At any rate, boardrooms should not become a wrestling theatre for testing dominance.
The NCLAT order puts a big question mark on the status of nominee directors. No doubt, they are expected to protect the interests of the institutions they represent. Does that imply, however, that interests of the entity and the shareholders can regularly be stonewalled? This is indeed a delicate balance. What happens in a situation where the interests of the institutions they represent conflict with the those of the investor board over which they preside? It is common to hold and exercise veto powers; can the exercise of such powers, if done under the company’s constitutional documents, become a means of oppression and mismanagement? The NCLAT order is silent on this aspect. Nominee directors ensure that decision-making is consultative, no matter how disjoint and varied the views. Even if the order of NCLAT is overturned in further appeal, it makes a compelling case for corporate India to evolve a framework that delineates the role and responsibilities of nominee directors. This is particularly important for institutional investors, especially when they preside over large PSUs and banks. As a start, they must appreciate that written notes of dissent appended to minutes of board meetings carry significance, and instil probity in corporate functioning rather than thwarting the decision-making altogether.
While the correctness of the NCLAT’s order will indeed be litigated, corporate India boards and lawmakers must not lose this opportunity to reinvigorate the debate on governance and bring it into mainstream public discourse. Anecdotally, Indian shareholders do not exhibit resilience in situations of governance deficit, unlike their western counterparts. Silence in instituting probing inquiries against under-performing or digressing boards should not translate to promoter groups viewing them as gullible. In the Tata-Mistry tussle, shareholders did not have a voice (at the NCLAT), much less a viewpoint. Such trends could witness a reversal, with shareholders exercising their rights by way of class-action lawsuits, or through other legal means that impact shareholder worth when boardrooms become a battleground of warring factions.
Another issue worth pondering is the fate of the decisions taken by the Chairman and Board that stand ousted by the NCLAT order. Ideally, the NCLAT should have made corollary observations regarding the validity and consequences of the actions of the Chairman and Board. In the absence of such observations, are those decisions per se invalid, or will third-parties who acted upon them continue to exercise rights, notwithstanding the declaration of illegality by the NCLAT? Experts will invoke the doctrine of ‘indoor management’ to opine that third parties, which are not concerned with the correctness of the composition the board, would not be affected by (past) acts of the erstwhile Board. There is no assurance that past actions will not be revisited in a manner that has a bearing on the rights of third parties. This is a crucial aspect that NCLAT ought to have addressed. Finally, we wonder if the order is practical in terms of its implementation. Historically, in such situations, company tribunals have tried to find a workable solution, like a group of majority shareholders buying the minority, for instance. How practical is it for Cyrus Mistry to return, and will that be a workable solution for the Tata Group? Perhaps, both sides may work out an ‘out of court’ settlement.
Authors are Partners, BMR Legal. Views are personal