#BQDebates: Tata Trumps Mistry In Supreme Court—What Happens Next?
Tata Sons Pvt.'s victory at the Supreme Court against Cyrus Mistry and the Mistry family’s entities significantly alters the dynamics of the ownership negotiations between the two parties, and also sets a precedent for future corporate disputes that head to the courts, according to leading lawyers and corporate governance experts that have followed the dispute closely since 2016.
How The Dynamics Change At The Negotiating Table
Tushad Cooper – Advocate, Bombay High Court
It is a thumping victory obviously for the Tata Group and a very disappointing outcome for the Mistry Group. Obviously, if it dismisses the charges of oppression and mismanagement which were levied by the Mistry Group against the Tata Group, the question of then granting any further relief to the Mistry group could not arise. Obviously, once the Mistrys have failed in their oppression and mismanagement proceedings which they had launched, the question of them obtaining any relief thereunder obviously disappears. So, this is the first aspect.
The second aspect is, what does the Mistry group do now? Where do they go now? I haven't examined their case too well, and of course, we have to wait for the details of the order. Legally, I don't see too many legal options open to them. Of course, they can file a review petition, but reviews have very very rarely been ever entertained, so I don’t see too much promise in that avenue. Perhaps they will file a review petition, [or] perhaps they will accept the verdict now and seek in some form to settle with the Tatas.
It is obvious that the Tatas will approach the negotiating table from a position of strength, but it perhaps might be in the long-term interest of the Tatas to put an end to this bitter battle by arriving at some form of settlement with the Mistrys whereby, over a period of time, they buy out the Mistrys and part ways. Whether they will in fact do so or not, I don’t know. How unfavorable or favorable these terms will be to Mistrys, I don’t know.
Insofar as the conversion of Tata Sons into a private company is concerned, there are two aspects. One is its legal entitlement to convert itself and the other challenge was that the procedure was not followed. Now, I am assuming that the Supreme Court has negated both the challenges from the fact that they have dismissed the proceedings. If that is so, then obviously, the conversion by Tata Sons from a public company to a private company stands upheld. Now, if it is a private company, there is a restriction on the sale of shares to any outsider. If that is so, the difficulty in the Mistry camp would be two-fold.
One is the legal hurdle of being able to pledge its shares because such a pledge would necessarily create a right in a pledgee to have the shares sold, which would, in turn, entail outside shareholders coming into the company.
The second and more fundamental and practical difficulty would be, which outside investor is going to come into the company and invest in shares, which it will then find an impossibility to exit.
So, these are two problems and major hurdles which the Mistry group will face going forward in the light of the fact of the company being allowed to be converted into a private company.
What is possibly worse for the Mistry group is that ultimately, the return on the investment (which the Mistry camp values at Rs 1.75 lakh crore) is going to be in question because ultimately dividends are declared at the discretion of the board of directors. If Tata Sons decides that rather than declare dividends, it will use the profitability which it gets through the income which flows to Tata Sons, to bolster the shareholding of the Tata Sons in its various companies, then obviously dividends may also not be declared. This would be perhaps an occasion for the Mistry group to take out another application for oppression, but how far that will succeed or not is another question mark, but that’s something for the lawyers to consider.
Ultimately, I don’t think that the Mistry group could compel the Tatas to buy over their shares. So, the question of valuation is secondary, the first thing is would the Mistry Group have a right to tell the Tata Group that you have to buy over our shares. Now that would come about if there were acts of oppression and mismanagement, which the NCLT felt was justified, or the NCLAT felt was justified, which the NCLAT did in this case. Now, once there is a finding that there was oppression and mismanagement, the NCLT and NCLAT have wide powers to put an end to those acts.
Now one of the ways they can put an end to such acts could be to say, all right, we would give the injured party, which the NCLAT did — a right of say in the management of the company. The other way is to bring about a divorce. A divorce would have entailed the Tata Group buying out the shares held by the Mistry Group. The question then would be on what basis, on what formula, etc. The Mistry Group suggested a formula which they believed was fair. But this was opposed by Tata Group for various reasons. Therefore, it is not naïve of the Mistry group to say that this is a viable formula to value our shares. Whether it would work, whether it is something which would be accepted, whether it was justified, those are different questions, but they are not naïve in proposing a formula.
The Tatas could use [choking the dividend outgo to the Mistrys] as leverage, but in the process, they would be hurting themselves, because ultimately the majority shareholders of Tata Sons are the charities. For their functioning and working, those charities require that money. So literally they would be, in a sense at least in the short term, cutting their nose to spite their face. I don’t think they will take that route because they will also hurt their own small shareholders who hold small fractions in Tata Sons.
I personally believe that the Mistry camp will seek an amicable resolution. How amicable or on what terms it is, will depend on the reaction of the Tata group which I cannot predicate.
Precedent For Future Corporate Disputes
- Anand Desai – Managing Partner, DSK Legal
This has been a very high profile and highly publicised dispute. The Supreme Court has, by answering the points at issue, laid down an important precedent on the various points raised by the respective parties. As the size of business houses keeps growing in India, this judgment will have a significant impact on disputes of this nature in the corporate sector.
‘Can’t Expect Supreme Court To Get Into Valuation Exercise’
- MR Prasanna – Independent lawyer and formerly General Counsel at a large conglomerate
There is no doubt that the apex court has upheld the legality of the removal and has also left it to the parties to decide on the manner in which the SP Group may exit and I think that is the right approach because the Supreme Court is not expected to get into a valuation exercise. Insofar as the actual process followed for removing Cyrus Mistry, whilst it has been found to be in conformity with due process of law, one would still have a doubt as to whether due process of governance could also have been followed.
‘Valuation Remains Biggest Bone Of Contention’
- Shriram Subramanian – Founder, InGovern
By staying the NCLAT order, the Supreme Court has given the Tata group a big relief and dealt the SP Group a major blow. By allowing Tatas and Mistry to work out their separation terms, but not commenting on the valuation terms, the Supreme Court has again gone in favour of the Tatas as the biggest bone of contention will be the valuation.