Will SC uphold minority shareholders’ rights in Tata Sons case at Bombay House?

In a landmark judgment last month, the National Company Law Appellate Tribunal [NCLAT] held as illegal the decision of Tata Sons Limited [TSL] in its board meeting on October 24, 2016 to remove Cyrus Mistry from his position as chairman of TSL as also from the boards of three group companies -- Tata Consultancy Services [TCS], Tata Motors Ltd [TML], Tata Steel Ltd [TSL]. The NCLAT directed immediate reinstatement of Mistry.

The tribunal also held illegal the decision of TSL shareholders at the AGM in September 2017 to convert TSL from extant ‘public limited company’ status to a ‘private limited company’ and change its name from TSL to Tata Sons Private Limited [TSPL] by amending the Articles of Association [AoA].

On January 3, TSL challenged the order ‘in its entirety’ in the Supreme Court. On January 10, the SC stayed the order on reinstatement of Mistry and issued a notice to the latter. Prima facie, it found fault in the order saying, “NCLAT delivered what was not even asked for by the petitioner.”

The proceedings in the top court will take their own sweet time. Meanwhile, let us take a close look at three key aspects: (i) removal of Mistry as Executive Chairman; (ii) oppression of minority shareholders; (iii) conversion of TSL to ‘private limited company.’

TSL is the primary holding company of the Tata Group. It has controlling interest in high profile companies such as TCS, Tata Power Ltd [TPL], India Hotels Co. [IHC], Tata Chemicals Ltd [TCL], etc. In TCS, with 73% shareholding, TSL has majority control on its own; in other companies, its ownership ranges from 22-31%, which enables it to exercise full control, acting in concert with institutional investors.

TSL, in turn, is majority-owned and controlled by the Tata family-owned trusts, with a shareholding of 66%. The remaining 34% is with minority shareholders. This includes 18.4% with the family of Cyrus Mistry or Shapoorji Pallonji Group [held through Sterling Investment Corporation and Cyrus Investments]; 11.4% held by five listed Tata Group companies -- TCS, TML, TCL, TPL and IHC -- and 4.2% with some members of Tata family and a few individuals.

The above shareholding structure enables Tata Trusts to call the shots in running TSL and all other companies under the Tata brand. All along, a person at the helm of TSL was also the chairman of Tata Trusts. The person occupying both the positions was always from the family. The tradition was broken in 2012 when Mistry was anointed chairman, TSL. However, the family person -- Ratan Tata -- continued to be chairman, Tata Trusts.

At the time of incorporation, the AoA of TSL had features of a private limited company. In May 1975, it became a “deemed public company” under the Companies Act, 1956. Thereafter, under the amended Companies Act, 2000, TSL was required to clarify to the RoC whether it was ‘public limited’ or ‘private limited’ as under the new dispensation, ‘deemed public limited’ status could not be allowed. Yet, for several years, it kept the position ambiguous till it decided to go private on September 21, 2017.

With these basic facts, let us analyze the events. During four years at the helm, since 2012, Mistry’s performance was commended by the promoters of TSL as well as independent directors of all leading group companies. Yet, he was removed in a meeting of TSL board in October 2016 by moving a resolution under ‘any other item’ in the agenda. He was not even given an opportunity to defend himself, violating the principles of natural justice.

The trigger was Mistry’s review of the decisions taken under the previous dispensation led by Ratan Tata, such as the acquisition of Corus Group [2007], the mis-handling of issues with NTT-DoCoMo in its telecom joint venture and projects like AirAsia and Vistara Airlines; and Mistry’s objection to continuing with the ‘Nano’ car despite losses. The removal was justified saying that he did not enjoy the trust and confidence of shareholders.

Earlier, the National Company Law Tribunal [NCLT] in its order of July 9, 2018, used this very argument to dismiss the petitions filed by Mistry. The former saw no merit in the latter’s contention that there was oppression of minority shareholders, mismanagement, interference by Tata Trusts and breakdown of governance. It also saw nothing wrong in the decision of TSL to convert itself into a ‘private limited’ company. These averments are untenable.

How could a person who enjoyed the confidence of shareholders for several years as a director and then as chairman have suddenly lost it? Merely because on one fine morning a majority shareholder expressed lack of trust in him cannot be taken to mean that he committed something horribly wrong. The reality is that Tata Trusts were exercising undue interference [with some members acting as super-directors] in the functioning of TSL, which was resisted by Mistry.

As regards oppression, minority shareholders have 34% ownership in TSL. This includes 11.4% held by millions of retail investors through their investments in five listed Tata Group companies. Now, if the company suffers erosion in wealth primarily due to the wrong decisions and irregularities resulting from undue interference by the majority owner, these minority shareholders suffer.

The oppression was taken to its nadir when in September 2017, TSL changed its status to a ‘private limited’ company. With this, all minority shareholders -- including listed firms -- would need to get TSL’s board approval to sell or transfer their stake. What sort of ownership is this whereby the person owning the share does not have the right to decide what to do with it?

The market capitalization of all 28 listed Tata Group companies is close to Rs 11 lakh crore. Of this, about a third, or Rs 3.66 lakh crore, belongs to minority shareholders. The change of status has meant that such a mammoth investment will in effect be at the mercy of the Tata family trusts as those shareholders will need its nod. It is like running a public limited company as the fiefdom of a family. This is bizarre.

The NCLAT declared, and rightly, as illegal both decisions of TSL – the removal of Mistry as well as change in its status to ‘private limited’ company. Will the top court protect the rights of minority shareholders or will the adage ‘might is right’ prevail, remains to be seen.