Setting precedents

Post the Supreme Court (SC) verdict in the Tata-Mistry case the focus is all on Cyrus Mistry and his options ahead. But this judgement also sets important precedents on questions of law relating to what constitutes minority shareholder oppression, their proportional representation on company Boards, governance as it applies to public versus private companies and the fiduciary duties of directors. These mustn’t fly under the radar. In its order, the SC has restricted itself mainly to questions of law raised by these appeals, taking the view that as the NCLT has already gone into the governance issues flagged by the Mistry camp (such as the Corus buy, Nano failure and transactions with the Sterling group), it had no reason to intervene in these ‘business decisions’.

The most important takeaway from the judgment is that the Articles of Association is supreme and once investor-shareholders sign up for it, they cannot later on turn around and challenge it. The Articles constitute the bedrock of the shareholders’ contract and all actions of the company’s Board vis-a-vis its members and shareholders shall be guided by it. This is an important reiteration of what has been well enshrined in the law. The judgment has also clarified on what constitutes “oppression” of the minority by the majority shareholder. The Board losing confidence in an individual and removing him from Chairmanship, does not constitute an act of ‘oppression’ that would merit winding up a company — which is the primary relief offered under sections 241 and 242. The takeaway for minority investors is that screaming “oppression” will not fly just because they are minority shareholders; there have to be genuine grounds for the Court to act. There is an important takeaway on proportional board representation where the court has clarified that the provision applies only to listed and public limited companies — Tata Sons is a private company and therefore the SP group’s demand is invalid.

The contentious part of the judgment comes where the Court held that representatives of the Tata Trusts — being philanthropic organisations with a 66 per cent stake in Tata Sons — were well within their rights to exercise affirmative votes and also put their fiduciary duties to their Trusts ahead of those to the company whilst voting on affairs concerning Tata Sons. Of course, every shareholder with a board seat has fiduciary duties to the organisation he represents but how can they assume precedence over the interests of the company? Don’t the interests have to be aligned? Isn’t a well-governed and run company important to the interests of the shareholder, irrespective of whether he represents a trust or a private equity investor? And what if the shareholder’s interests run counter to the best interests of the company? These are troubling questions that need to be answered by legal minds in the days ahead.

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