Zee Vs Invesco: Shareholder Rights Score A Win At The Bombay High Court

In upholding Invesco's case against Zee Entertainment Enterprises Ltd., the Bombay High Court this week gave a fillip to corporate democracy and shareholders' rights.

And even though Invesco Developing Markets Fund has decided against pursuing its extraordinary general meeting resolutions, the high court order is significant in affirming shareholders' statutory rights.

To recap, on Oct. 26, a single-judge bench of Justice Gautam Patel had granted an injunction in favour of Zee Entertainment restricting Invesco from acting on its September requisition to call an extraordinary general meeting.

This week, the division bench set aside the single-judge order underscoring shareholders' rights to call an extraordinary general meeting under the Companies Act, 2013. In its written order, the bench outlines three key reasons for allowing Invesco's appeal:

• EGM requisition can be tested only on numerical threshold.

• Bar on high court's jurisdiction.

• No illegalities within the resolutions.

Invesco had argued that the "validity" of a requisition issued under Companies Act can be tested only against prescribed numerical and procedural requirements. And not with reference to its object.

Zee countered it by saying the "validity" needs to be examined, not just for the numerical threshold but also "matters for consideration". The single judge had agreed with Zee's argument.

But the division bench took a different view.

Pointing to Section 100 of the Companies Act, the high court said that a company’s board has no power to sit in judgment over “any matter” for consideration for which a meeting is requisitioned.

Section 100 allows shareholders with more than 10% stake to requisition an EGM. It adds that:

• The requisition shall set out the matters for consideration for which the meeting is to be called.

• Board shall call a meeting once a valid requisition is made.

• If the board doesn’t call an EGM basis a valid requisition, the requisitionists can do so themselves.

The high court noted that the language used in the section aids corporate democracy and protects the rights of shareholders.

The term “valid requisition” means numerical and procedural compliance and nothing further. Secondly, no court or tribunal can restrain the holding of an EGM, the high court concluded.

Explaining its view, the high court noted that civil courts will grant injunctions at the ad-interim stage and thereafter, will proceed to analyze whether the resolutions are legal or not. Only after this entire process would the injunction be vacated, the bench stated. This cannot be allowed, the bench said.

Invesco had argued that civil courts don't have the jurisdiction to hear matters that fall under the National Company Law Tribunal's purview, according to Section 430 of the Companies Act.

The single judge bench had said that the NCLT rules framed by the central government provide the list of provisions over which the tribunals have jurisdiction, and this does not include Section 100, among others.

Disagreeing with the single judge’s rationale, the division bench opined that there is an absolute bar on high courts to adjudicate on issues where NCLT has jurisdiction.

Though Invesco would be within its rights to call and hold the requisitioned EGM, it is impracticable for it to hold such a meeting. Accordingly, they moved the NCLT to do so under Section 98 of the Companies Act. The provision deals with the power of the tribunals to call for meetings of members (except an AGM) when it's impracticable.

With regard to the alleged illegalities in Invesco's resolution, the court identified three issues:

• Ministry of Information and Broadcasting's regulations.

• SEBI’s listing regulations.

• Procedure for appointment and removal of directors and independent directors.

MIB Guidelines

The single judge bench had upheld Zee's argument that MIB regulations mandate the ministry's prior permission before effecting any change in the CEO/Board of Directors.

The division bench, however, took a contrary view, saying MIB’s permission is required only in case of appointments, and not for the removal/resignation of a director.

Considering the nature of Zee’s industry and business, the MIB deemed it fit to follow a process of vetting a person, prior to such person being entrusted with the charge of the board of a broadcasting company, the bench explained.

If Zee's argument is appreciated, then even prior to the company's general body vote on the proposed resolution, it will have to obtain MIB's permission. As opposed to after the passing of that resolution. The latter appears to be a more workable and practical reading of the guidelines, the court said.

Appointment of Independent Directors

The single-judge order had upheld Zee's argument that SEBI's listing regulations lay down a Nomination and Remuneration Committee-led process for the appointment and removal of directors, including independent directors.

Invesco argued before the division bench against this conclusion saying shareholders don't need the NRC's approval as they have an absolute right in calling an EGM.

The division bench concurred saying there is no bar on a shareholder to appoint an independent director.

The division bench also delved into Section 160 of the Companies Act, which deals with the right of persons other than retiring directors to stand for directorship.

As Invesco correctly pointed out, the single judge has obliterated Section 160 of the Companies Act, the court said, while adding that the section makes no distinction between an independent director or otherwise. "On a plain reading of section 160, a company shareholder clearly has the right to propose the appointment of an independent director."

Further, the court said if Zee’s arguments are considered, then effectively, even a majority shareholder of a listed company cannot suggest/appoint a director without NRC's approval. This is not the intent of the Act, the court held.

Managerial Void

The single judge bench had ruled that Zee's managing director and chief operating officer Punit Goenka cannot be removed as a director because it would leave a "managerial void", as he is the only whole-time director in the board, which also has six other independent directors.

This will make the company non-compliant with SEBI's regulations, which mandate the board of directors of a listed entity to have an optimum combination of executive and non-executive directors, Justice Patel had concluded.

The division bench didn't agree. The single judge has obliterated a shareholder’s fundamental right to remove a director merely because he happens to be Zee’s only executive director and CEO, the division bench pointed out.

With these observations, the division bench set aside the single judge's order. However, at Zee's request, the court further held that the single judge's order would continue for three weeks.