Does The Law Allow For A Boardroom Coup?
As Chairman did Cyrus Mistry have no control over the events of the October 24 Tata Sons board meeting?
Cyrus Mistry’s letter to Tata Sons’ directors gives the impression that he was unaware of his impending dismissal. Sent a day after the Tata Sons board decided to replace him, the letter says Mistry was “shocked beyond words” at the happenings of the 24 October board meeting.
Apart from the invalidity and illegality of the business that was conducted, I have to say that the Board of Directors has not covered itself with glory.Cyrus Mistry’s Letter to Tats Sons’ Directors - October 25
To replace a Chairman “without affording him an opportunity of defending himself”, Cyrus Mistry said, must be “unique in the annals of corporate history”.
How Could Cyrus Mistry Have Not Known?
Law On Board Process
The Companies Act, 2013 lays down that a board meeting can be called by giving not less than seven days notice in writing to every director. It allows a meeting to be called at shorter notice to transact urgent business subject to the condition that at least one independent director be present at the meeting, explained Rajat Sethi, a partner at law firm S&R Associates.
If the independent director is not present in the meeting, then the minutes of the meeting has to be circulated to all the directors and must be ratified by at least one independent director so as to provide finality to the decisions taken at the meeting.Rajat Sethi, Partner, S&R Associates
Law On Circulation Of Agenda
On the matter of circulation of a board meeting agenda, the Companies Act, 2013 points to the secretarial standards issued by the Institute of Company Secretaries (ICSI).
The standards provide that the agenda, setting out the business to be transacted at the meeting, and notes on agenda, shall be given to the directors at least seven days prior to the meeting.
It also provides for supplementary notes on an agenda item to be circulated at or immediately prior to a meeting with the consent of a majority of the directors present at a meeting, including at least one independent director.
Even if an item is not already on the agenda or in the supplementary notes, it can still be taken up at the board meeting.
The secretarial standards provide that any item not included in the agenda may be taken up for consideration with the permission of the chairperson and with the consent of a majority of the directors present at the meeting, which shall include at least one independent director.Anshul Jain, Partner, Luthra & Luthra
Scenario One: Mistry Was Forewarned?
If the decision to review his performance was an agenda item (or in the supplementary notes) for the October 24 Tata Sons board meeting, then Mistry had little reason to be surprised at what went down. But in his letter Mistry refers to the “suddennes of the action” indicating that he had no advance warning.
Scenario Two: Agenda Was Vaguely Worded?
Sometimes agenda points can be written to conceal rather than reveal. The manner in which Cyrus Mistry was removed as Chairman of Tata Sons’ board reminds experts of another corporate coup of sorts back in 2004. At that time, Anil Ambani had claimed that the agenda item that redefined his role in Reliance Industries was vaguely-worded and not pre-circulated between the board members.
Scenario Three: The Sacking Was Not On The Agenda?
Was the resolution to review the chairman’s performance or dismiss him introduced only at the board meeting? If that was the case Mistry still had the opportunity to refuse permission and prevent it from being taken up for consideration. Then why did he not exercise that power?
If his claim that he had no “opportunity of defending himself” stands true, then it would be interesting to know how he was blindsided, as the law does not permit so in letter.
Tata Sons Strips Mistry Of Another Title
Meanwhile, 24 hours after Cyrus Mistry was removed as chairman of the board, Tata Sons re-designated him from executive director to non-executive director, reveals a filing to the ministry of corporate affairs (MCA).
Non-executive directors can either be independent or non-independent directors and other than attending the board and committee meetings of a company, they have no other executive role to play in the day-to day-affairs of a company, Anshul Jain, a partner at law firm Luthra & Luthra pointed out.
In terms of remuneration, they get only sitting fees, profit-related commission, etc and are neither employed by the company nor do they draw any salary from the company.Anshul Jain, Partner, Luthra & Luthra
But the lack of a salary may be the least of Cyrus Mistry’s worries right now. The scion to the Shapoorji Pallonji Group, which owns 18.5 percent of Tata Sons, is among the wealthiest men in the country.