Tata-Mistry: Value Of A Company Lies With Equity Shareholders Or Preference Shareholders?

The legal battle between Tata Sons, Ratan Tata and Cyrus Mistry resumed at the National Company Law Tribunal (NCLT) on Monday; seven days after Mistry was voted off the board of Tata Sons, the holding company of the over $100-billion Tata Group.

Both the NCLT and the National Company Law Appellate Tribunal (NCLAT) had earlier refused to grant Mistry a stay on the extraordinary general meeting that resulted in his ouster.

Mistry’s main case though is one of oppression and mismanagement by Tata Sons and Ratan Tata. It was filed by the two Mistry family entities – Cyrus Investments Private Ltd. and Sterling Investment Corporation Ltd. – that hold his family Shapoorji Pallonji group's 18.4 percent equity stake in Tata Sons. The two entities have filed a petition alleging mismanagement of Tata Sons under Section 241 and Section 242 of the Companies Act, 2013.

In Monday’s hearing the NCLT had to consider two core issues that will help decide if the case moves forward or not.

1. The maintainability of Mistry’s petition: The Companies Act, 2013 provides that an oppression and mismanagement case can be filed by 100 shareholders or 10 percent of the shareholders, whichever is lower, or by any shareholder holding not less than 10 percent of the “issued share capital of the company”.
Mistry’s counsel argued that the two Mistry entitites together hold 18.7 percent of equity shares in Tata Sons and meet the eligibility criteria. Tata Sons contended that “issued share capital” includes issued equity capital and issued preference capital; and according to this calculation, the two Mistry companies hold less than 3 percent of the issued share capital rendering them ineligible to file the case.

2. If the petition is not maintainable, then should Mistry’s waiver application be allowed? An application has been filed for the waiver of the 10 percent threshold limit necessary to bring a case of oppression and mismanagement.

Here are the key highlights of the arguments made by the counsels of Tata Sons and Cyrus Mistry firms.

Abhishek Manu Singhvi argued on behalf of Tata Sons and said:

1. The objective of Section 244, that lays down the 10 percent eligibility criteria, is to prevent frivolous lawsuits. The legislature did a cost-benefit analysis and concluded that the harm to a company will be greater compared to the benefit that might result if shareholders with less than 10 percent interest are allowed to bring an action of oppression and mismanagement.

2. The Companies Act, 2013 does not make a distinction between equity shareholders and preference shareholders as far as the definitions of issued share capital, member of a company and stock of shares are concerned. These are definitions relevant to sections that lay down the law of maintainability.

3. With just 2.17 percent of the issued share capital, the Cyrus Mistry firms do not have substantial interest in Tata Sons as claimed by them. If the Mistry petition is upheld, it will create a distinct threshold of 10 percent for equity shareholders. He also argued that Section 241(1)(b) is identical to Section 398(1)(b) of the 1956 Companies Act and it lays down that if a company is acting in the interest of any class of shareholders, debenture holders and creditors, any material change will not amount to mismanagement.

4. The language, under both the Companies Act, 2013 and Companies Act, 1956 is 'issued share capital' under Section 244. The Bombay High Court has held that issued share capital includes preference shares and equity shares. This argument has been affirmed by the Supreme Court and hence, the NCLT is bound by this jurisprudence.

5. Finally, Ravi Kadam, also arguing on behalf of Tata Sons, said that if the petitioner's ground is that the company's actions are prejudicial to a class of shareholders, then that entire class should be aggrieved which is not the case as the remaining voted in favour of the removal of Cyrus Mistry from Tata Sons' board.

Aryama Sundaram, arguing on behalf the Cyrus Mistry firms, responded by saying :

1. There is a departure in the legislative intent under Section 241(1)(b) in as much as that the relevant section under the Companies Act, 1956 only addressed public interest or interest of the company while assessing a claim of oppression and mismanagement. The 2013 Act expands the scope to any class of shareholders, debenture holders and creditors. And so the threshold of 10 percent should be looked at qua that class.

2. If the calculation of the respondent is upheld, then the shareholding of the two Mistry firms can be reduced to even 1 percent from 18 percent if the majority decides to issue more preference shares.

3. Value of a company lies with equity shareholders and not preference shareholders. Here, Sundaram referred to the argument by the Tata Sons counsel that action lies with shareholders who have substantial interest. This substantial interest, Sundaram argued, lies with equity shareholders and not preference shareholders.

4. The Accounting Standards, 2016 treat compulsorily redeemable preference shares as debt. But share capital can never be treated as debt. Hence, preference shares cannot be included in share capital.

5. Since the Companies Act, 2013 gives the NCLT the power to grant a waiver, the 10 percent threshold requirement cannot be mandatory.

Sundaram ended his argument for the day by pleading that “Silence should be filled in by a Tribunal to safeguard a class”.

Both sides will continue their arguments at the NCLT on Tuesday.