The Hindu Business Line : Family settlements

Sibling rivalries are common in family-controlled companies. The family settlement between the feuding Ambani brothers, Mukesh and Anil, hammered out in 2005 far from fully addressing their grievances alas became a source of fresh conflict — the agreement as per Mukesh gives him the First Right of Refusal (FROR) in Reliance Communications should the promoters at any time decide to part with controlling interest. Anil denies the very existence of such a clause.

Given the invariable desire underpinning such agreements to eliminate cross-holdings in order to give each side a clear-cut and well-demarcated fiefdom, prima facie one is inclined to disbelieve the existence of such a clause.

Enforceability of agreements

The law on enforceability of shareholders’ agreements, that is, private agreements between two groups in a company was laid down by the Supreme Court in VB Rangaraj vs VB Gopalakrishnan (1991 6 CLA 211) where it was seized of a matter involving transfer of shares in a private company in a manner provided by the private agreement between the feuding siblings outside of the charter of the company — Memorandum and Articles.

Giving its thumbs down to this practice, the Supreme Court ruled that such agreements cannot hold sway unless they are reflected in the charter of the company. In other words, such an agreement in the eyes of the Indian judiciary is otiose. In the event, FROR clause flaunted by Mukesh in support of his claim for asking Reliance Communications to first offer him the shares before they are allotted to the South African telecom giant MTN in a reverse merger agreement apparently is not sustainable in law because:

The agreement apparently is not a part of the Articles of Reliance Communication; and

The agreement would be repugnant to the company law.

Section 81 of the Companies Act, 1956 says that in case of a public company, which Reliance Communications is, the norm is rights issue whenever the share capital of the company is sought to be increased. In other words, the FROR or the right of renunciation is vested in all the shareholders in proportion to their shareholdings.

In the event, the claim of Mukesh for a special right is repugnant to Section 81 unless Reliance Communications gives him such special rights through a special resolution passed by its members in terms of the exception carved out by Section 81(1A) designed to bail out companies from the straightjacket of the rights norm.

Parliamentary intervention

It is only when the matters come to head that the parties head for arbitration or judicial redress. Now that MTN and Reliance Communications have abandoned their talks for merger, the dispute arising out of the alleged FROR clause in the family settlement arrangement effectively stands resolved at least for the nonce. But there is no guarantee that similar fracas would not break out between the same siblings or others in future.

Parliament therefore needs to take a stand on the sanctity or otherwise of shareholders’ agreement because the Supreme Court verdict in VB Rangaraj (supra) was rendered in the context of a private company that too in the pre-liberalisation era. Moreover, thanks to such agreements, foreign companies especially have been able to get away with veto power in favour of its nominee in the board of directors of the companies with which they have collaboration agreements. This practice has been decried by the Ministry of Company Affairs. But this will not do. What is required is application of mind by Parliament to this seminal issue.

(The author is a Delhi-based chartered accountant.)

More Stories on : Accountancy | Corporate Disputes | Contra Entry

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Pakistan, US and the Afghanistan quagmire

Guarded confidence

Why the dithering on CTT?

Family settlements

The Fannie-Freddie accounting jumble

Use `weather derivatives' to weather droughts

Skeletons in M&A cupboards

Solar power

Hidden costs of hedging