Rising shareholder activism in India

There is a sudden spurt in shareholder activism in the country, due to a plethora of reasons such as economic slowdown due to the pandemic, better-informed investors, more institutional investors, changes in the company law regime under which corporate decisions are subject to greater scrutiny. Shareholder activism is good because it improves corporate governance. But what if, even if for better governance, the shareholders make demands which run against the law? Such a situation appears to have arisen between Zee Entertainment Enterprises Ltd (Zee) and its institutional investors, which includes Invesco Developing Markets Fund (Invesco) and OFI Global China Fund LLC (OFI).

The Zee-Invesco saga

The dispute began when Invesco and OFI, investor-shareholders in Zee with a 17.88 per cent stake, issued a requisition notice on September 11, 2021, to Zee to call an extraordinary general meeting (EGM). (An EGM can be requisitioned by a shareholder holding atleast a 10 per cent stake).

The requisition notice, amongst other things, sought the removal of Punit Goenka, the current MD and CEO of Zee, as a director. Further, the requisition notice contained six resolutions seeking the appointment of six named individuals as ‘independent directors’. As per the law, Zee would have had a 21-day window from the date of issuance of requisition notice until October 3, 2021, to call the EGM. However, on September 29, 2021, Invesco filed a petition before the National Company Law Tribunal (NCLT) seeking an order to call and hold the EGM of Zee on or before October 28, 2021.

While the matter before NCLT was pending following an order of the National Company Law Appellate Tribunal (NCLAT), Zee’s board held a meeting on October 1, 2021, from which Goenka recused himself. Based on the legal opinions received, Zee’s board concluded that the requisition notice was invalid. Accordingly, Zee expressed its inability to convene the EGM. The board also decided that Zee should approach the Bombay High Court to question the validity of the requisition notice. On October 1, 2021, Zee conveyed to Invesco its decision to not call an EGM. Zee’s reasons for not calling the EGM, amongst other things, included contravention of provisions carried under the Companies Act, SEBI Listing Regulations, Zee’s articles of association, SEBI Takeover Regulations and the Competition Act.

Further, as decided, Zee filed a suit against Invesco and OFI on the same day. Before the High Court, Zee sought a declaration that the requisition notice was illegal and incapable of implementation. Before the High Court, the question was whether a court (and not the board) can be asked to assess the validity of resolutions proposed at the requisitioned EGM even before the EGM is called and held. The High Court observed that Section 100 of the Companies Act was at the heart of the controversy.

Section 100 of the Companies Act provides that for a company with a share capital, shareholders holding at least 10 per cent equity can requisition a meeting. The said provision does not constrain the purpose of the requisition and only requires the numerical threshold of 10 per cent to be met. The High Court opined that there was equally nothing in Section 100 of the Companies Act which said that a resolution proposed by shareholders could never be called into question before the requisitioned meeting is held.

Upon hearing submissions of Zee, the High Court concluded that the resolutions proposed at the requisitioned EGM were plainly illegal. The High Court observed that no shareholder could be permitted to drive its company into a state of non-compliance with the law. Accordingly, the High Court granted an injunction in terms of the prayers of Zee restraining Invesco and OFI from taking any step in furtherance of requisition notice. Aggrieved by the decision, Invesco filed an appeal before the High Court’s division bench which is pending adjudication. Invesco and OFI based their case on multiple grounds, including (i) the lack of jurisdiction of the single judge to grant an injunction, (ii) the ‘10 per cent holding’ being the numerical threshold prescribed under the Companies Act, and (iii) the right of shareholders to call for an EGM. Against this backdrop, it remains to be seen how the Zee-Sony merger proposal pans out. The Zee-Invesco dispute has started a debate as to whether shareholder activism needs to be promoted and whether it has a beneficial impact on corporate governance. Sceptics of shareholder activism argue that institutional investors, lately, have been voraciously interfering even on regular day-to-day matters of companies.

A desirable phenomenon

Shareholder activism as a phenomenon is desirable and must be promoted. Companies, on their part, need to clearly communicate their goals and objectives to institutional investors. Furthermore, a company’s management should convey the rationale of its decisions and link them to the company’s objectives. As for injunctions, orders restraining the holding of a requisitioned meeting should not be passed as a routine exercise. The courts must be circumspect while passing any injunctions to ensure that shareholders are allowed to set the affairs of the company right.

The general judicial approach should be to not interfere with the internal governance of a corporation. However, if the resolution proposed to be passed is itself wholly illegal, then the courts may interfere and leave the board under no obligation to call the meeting.

The authors are advocates at Phoenix Legal, a law firm

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