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Corporate M&A : Tata-Mistry NCLAT Judgment: For Boardrooms & Governance

Whatever the outcome of the Tata-Mistry feud, it will greatly impact the way majority shareholders conduct themselves and the way boards are managed in India going forward...

The order of the National Company Law Appellate Tribunal (NCLAT) in Cyrus Investments Pvt. Ltd Vs. Tata Sons Ltd. & Ors. (Company Appeal (AT) No. 254 of 2018) is landmark and one that compels a relook at boardrooms and corporate governance. Following his removal, Mistry, pursuant to the decision of the Board of Directors’ of M/s. Tata Sons Limited, dated 24th October, 2016 as its ‘Executive Chairman’, Mistry/Minority group of shareholders had moved the NCLT alleging prejudicial and acts of oppression by the majority shareholders backing Tata. Upon the NCLT rejecting the pleas of Mistry/Minority shareholders, Mistry had appealed to the NCLAT. The NCLAT, in its order finds fault with the conduct of Tata/Majority shareholders in as much as the affirmative voting power of the nominated Directors of the ‘Tata Trusts’ over majority decisions of the Board. Such affirmative voting power has been seen as going against the spirit of independent and effective functioning of Boards. Such voting rights are thus against the spirit of transparent board functioning as managements and boards are expected to conduct themselves as trustees for all stakeholders. The recent recommendations of the Kotak Committee on corporate governance give strength to this expected line of conduct of boards. The NCLAT order therefore suggests that the fact that the Company (‘Tata Sons Limited’) has suffered loss because of ‘prejudicial’ decisions taken by the Board of Directors. The conduct of the board in the manner in which Mistry was suddenly and hastily removed without any reason and the absence of any discussion in the board meeting followed his removal as Director(s) of different ‘Tata Companies’ did not meet the requirements of transparent and independent functioning of the board. The NCLAT finding the entire chain of events having a cumulative effect establishes ‘prejudicial’ and ‘oppressive’ action by Tata/Majority shareholders against Mistry/Minority shareholders makes it amply clear that despite pressing reasons, majority shareholders need to be cautious in resorting to indiscriminate and drastic actions for change without covering the ground with proper deliberations leading to conclusions followed by actions. In acute emergencies also, the test would be greater accountability and transparency through an expert/appropriate committee to cover the ground as against merely taking note that articles do not require the same and therefore move forward with straight line decisions without deliberations. Therefore, where does the NCLAT decision declaring the Resolution dated 24th October, 2016 passed by the Board of Directors of Company removing Mistry as the ‘Executive Chairman’ of the Company (‘Tata Sons’) illegal leave Tata? Where does this development leave the subsequent Executive Chairman N Chandrasekharan?

The NCLAT order declaring the cumulative effect of Tata actions up to the removal of Mistry has, as a logical consequence, upset the appointment of Chandrasekharan as well. A failure in transparent working of the board as taken note of by the NCLAT has resulted in also nullifying its subsequent action of appointment of the next chairman. While majority shareholders have their right to vote basis their majority holding, if their action is seen as colored in malice against the minority shareholder and lacking due deliberations justifying such action, the management and boards would leave a lot to be answered to their stakeholders including the minority shareholders. Further, the NCLAT’s direction to the ‘Tata Group’ being the majority group to consult the minority group i.e. Mistry/Minority shareholders appointed such person as Executive Chairman or Director as the case may be, on whom both the groups have trust in the interest of the Company, to protect of interest of all stakeholders and to safeguard the interest of minority group strengthens the need of managements ad majority shareholders controlling boards to illustrate effective working of boards as trustees for all stakeholders. Thus, the NCLAT order therefore finds the NCLT judgement dated 9th July, 2018 lacking principles expected in conduct of majority shareholders and board functioning while setting aside the NCLT order upholding the removal of Mistry as Executive Chairman on finding no merit in the contentions of Mistry alleging Tata/Majority shareholders of conducting the affairs in a manner prejudicial/oppressive to Mistry/Minority shareholders. With a 30-day window, Tata has weighty work on its hands to prefer an appeal, but the question that remains to be addressed by Tata is whether the majority shareholders’ discretion is subject to the essential principle of conduct of managements, majority shareholders and boards and whether the conduct of Tata’s meets such test. Tata’s contention that in a span of four years as Chairman, Mistry had completely lost the trust and confidence and that he had failed to deliver the promises that he made at the time of his selection and Mistry’s actions as the Chairman of admittedly sending company information to the Income Tax Authorities, leaking company information to the media and openly coming out against the Board are sufficient grounds to sidestep such principles? Whether technicalities of requirements of articles of association with respect to appointment of chairman or the lack of it with respect to removal of chairman is subject to such essential principle of conduct of managements, majority shareholders and boards as set out in the NCLAT’s order? Whether technicalities of whether the articles of association articles of association only provide for affirmative vote that is permissible under the law and grants no special right to ensure any particular Board Resolution is passed or action/course is taken up is subject to such essential principle of conduct of managements, majority shareholders and boards as set out in the NCLAT’s order? The present judgment by the NCLAT is a landmark leap in the jurisprudence relating to minority shareholders rights, transparent and accountable conduct of managements and boards, and takes forward the emerging corporate governance regime for managements and boards in India towards a trust, transparency and accountability based governance and conduct of majority shareholders and their nominee directors on Boards. The Tata-Mistry feud now enters its last lap, and whatever the outcome, it will greatly impact the way majority shareholders conduct themselves and the way boards are managed in India going forward.

(This article was originally published in Legal Era Magazine -



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