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Unfolding boardroom embroil over Cyrus Mistry’s Exit

By Vanita Bhatnagar November 15, 2016

Scores of articles have been already penned down over the past few weeks on the change of stewardship at Tata’s. On October 24, 2016, the chairman of Tata Sons board Mr. Cyrus Mistry has been “replaced” and Mr. Ratan Tata has been appointed as an “interim chairman” for four months. This critical change at the helm has engulfed the Tata Group with considerable speculation as for, how companies can remove their chairman without notice, what are the remedies available to the chairman so removed and does the Companies Act, 2013 stipulates any specific procedure for removal of a chairman.

Before delving in the saddle of such questions let’s first decode the complex corporate structure of Tata Sons. Tata Sons Limited is an unlisted, closely-held company with about 65% of shares held by two Tata Trusts, i.e. Sir Dorabji Tata Trust and Sir Ratan Tata Trusts and 18.5% of the company's shares are held by the single largest shareholder, i.e., Shaporji Pallonji Mistry group to which Cyrus Mistry belongs.  

     

Let us answer the above questions by critically dissecting the Tata Sons Case.

 

Why First, how to remove a chairman?

The pivotal point one needs to understand beforehand is, who is the chairman of the company? Is it the director or a Key Managerial Personnel (KMP)? Interestingly, Companies Act, 2013 (Act) does not define a "Chairman".  

The top person on a board of directors is known as the chairman or chairman of the board. This person has the authority to call and lead meetings, sign documents and represent the company in public. He is a director of a company but he may or may not be a KMP. He can be an executive or non-executive director or even an independent director.

In the instant case, Tata Sons’ board has only replaced Mr. Cyrus Mistry as the “chairman”, while he still continues to be a non-executive director of the company. Although the Act envisages roles and functions for a chairman of a company, it does not stipulate a precise mechanism for appointment and removal of such a chairman. Companies through its own Articles of Association(AoA) sets down the procedure for appointment and removal of chairman. The removal process relating to a chairman is typically governed either by the AoA of a company or the terms of the contract by virtue of which he is appointed. The board has unfettered power to remove the chairman by passing a resolution backed by a majority vote unless the AoA provides otherwise. Further, the board is under no statutory obligation to provide any reason at the time of removal of the chairman.

 

Regarding the appointment process, the AoA of Tata Sons says as long as the Tata Trusts own and hold at least 40 percent of Tata Sons:

  1. A Selection Committee shall be constituted to recommend the appointment of a person.
  2. The Board may appoint the person recommended subject to the approval of a majority of the directors.

 

The AoA stipulates the same about removing a chairman of the board.

This implies that if there are nine members on the Tata Sons board, the removal of the chairman would require

a. At least 5 directors to vote in favour of the removal and

b. the support of all 3 directors appointed by Tata Trusts.

 

Though the press reports constantly harp upon the point that sufficient notice was  not given to Mr. Mistry, however, the requirement as per the Act is only to give an advance notice for conducting a board meeting. As per the press reports, Tata sons has duly adhered to this requirement and a due notice was given for calling a board meeting. However, the item regarding Mr. Mistry's replacement was included in the agenda as a part of “other items”, which made it a surprise. Otherwise, technically it was within the legal framework of company law.  

 

Further, the removal of Cyrus Mistry might be questionable as a matter of corporate governance practice. As per corporate governance, the board should discuss the matter and provide the reason for removal and give necessary opportunity to the chairman to represent his case. However, under company law, the chairman does not have any statutory right to represent his case before the board or to assert a defence. Also, since Tata Sons is an unlisted company, it does not require to adhere to corporate governance norms or SEBI regulations.

 

What are the remedies available to a Chairman who is removed in this manner?

 

First and foremost such a decision of removal can be challenged if it is not in consonance with terms of his appointment contract or it blatantly violates the provisions of AoA.

Secondly, an action can be brought for oppression and mismanagement under section 241 of the Act. Any shareholder holding 10% of the shares of a company (in this case the Shaporji Pallonji Mistry group satisfies the requirement) can bring an action before the National Company Law Tribunal (NCLT) on the ground that the affairs of the company are being conducted in a manner “prejudicial or oppressive” to a shareholder, or that a material change has taken place in the management or control of a company, which is likely to cause prejudice to shareholders. The NCLT possesses wide-ranging powers to pass various kinds of orders in an action involving oppression and mismanagement.

Thirdly, by the virtue of being an unlisted company the Tata Sons does not attract the principles of corporate governance prima-facie, but nonetheless, considering the fact that it is a holding company to a plethora of listed companies within its fold, it no longer remains the matter only about Tata Sons but involves the interest of every stakeholder of all the listed companies falling within its umbrella.  Therefore, the conduct of affairs by the Tata Sons board has a massive impact on the governance of all of those listed companies. Keeping this in mind, even if the board of Tata Sons did legally replace the chairman, the manner in which this was achieved is certainly not in consonance  with basic principles of corporate governance.

 

How does this case impact corporate governance practice in India?

Within 10 days of Cyrus Mistry’s unexpected exit, a Tata Group company. The Indian Hotels Company Limited (IHCL) notified the stock exchanges about a meeting held among the independent directors of the company to critically assess Cyrus Mistry’s performance. The Independent Directors unanimously supported him and appreciated his efforts and leadership style.

The critical question in this matter is, can independent directors take such actions. Can independent directors oppose a decision taken by the board?  Companies Act, 2013 and the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, envisage that the boards and independent directors should be proactive and take steps in the interests of minority shareholders and other stakeholders. In this light, the step taken by independent directors is extremely powerful and accentuates the corporate governance practice in India and brushes away the ambiguity associated with the role of independent directors.

 

How was Caveat used as tool in this case?

A caveat petition is filed under section 148 A of Civil Procedure Code. If a person apprehends that an application may be filed in pursuance of a suit instituted or about to be instituted, he may file a caveat petition in the court to avoid an ex parte decision of the application. Once such a petition is filed, the caveator (the one who files caveat petition) is sent a notice of the day of hearing of the application. The time period of validity of such petition is 90 days only. In the instant case, the Tata Sons have filed three caveats in Supreme Court, Bombay High Court, and NCLT.

Tags: company law , cyrus mistry , ratan tata , exit , cyrus mistry fired , cyrus mistry case , tata chairman fired


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