Tata-Mistry: Mistry Legally Entitled To Attend Next Tata Sons Board Meeting

There are two important outcomes of Cyrus Mistry’s second-round win in the battle against Tata Sons.

One, Mistry is now legally entitled to attend a board meeting of Tata Sons. The National Company Law Appellate Tribunal order has restored his directorship on all Tata company boards (Tata International, TCS and Tata Teleservices) that he was earlier director on, before his dismissal on Oct. 24, 2016 as executive chairman of Tata Sons, the group’s holding company.

Mistry’s family, the Shapoorji Pallonji Group owns 18.7 percent of Tata Sons. He was director on Tata Sons board for several years before being appointed as executive chairman in December 2012, after incumbent chairman and group veteran Ratan Tata turned 75. In October 2016, Mistry was suddenly removed from that position. That set off a long legal battle in which Mistry filed a case of oppression and mismanagement against Tata Sons and 20 others. He lost the first round at the National Company Law Tribunal but has now prevailed at the appellate tribunal.

“Mr. Cyrus Pallonji Mistry is restored to his original position as Executive Chairman of ‘Tata Sons Limited’ and consequently as Director of the ‘Tata Companies’ for rest of the tenure,” the NCLAT held after having found the Tata Sons board’s decision to remove him to be illegal.

Though, after the judgment was pronounced in court yesterday, Tata Sons’ lawyers sought and got a stay on Mistry’s reinstatement as executive chairman. But the stay does not extend to his directorships.

Mistry’s intent is not to return as executive chairman of Tata Sons but the directorship allows him to represent the significant shareholding his family has in the group parent, said Somasekhar Sundaresan, one of Mistry’s lawyers, in an interview with BloombergQuint.

Two, the NCLAT also found Tata Sons’ affairs were conducted by its board, Ratan Tata and others in a manner “prejudicial” and “oppressive” to its shareholders, namely Mistry. It also determined the conversion of the company from public to private as illegal - Tata Sons did not follow due process under company law. And, it ordered that the company, its board and shareholders will not exercise power under Article 75 of its articles of association, unless under exceptional circumstances, and with reasons recorded in writing and shared with concerned shareholders.

Article 75 of Tata Sons’ articles of association permits the company at any time, by a special resolution of shareholders, to force a shareholder to sell his shares. The earlier deemed public company nature of Tata Sons prevented it from being used. But that bar was lifted when Tata Sons converted to a private company, soon after Mistry’s dismissal as executive chairman.

Mistry’s lawyer Janak Dwarkadas explained to BloombergQuint the implications of these findings of the NCLAT. He said in a phone conversation that...

“Having found that Tata Sons behaved oppressively and prejudicially, the NCLAT ruled against its conversion from a public company to a private company. This restoration of public company status, among other things such as a higher standard of governance and disclosure, reinstates certain rights of shareholders under law. As a result of these two decisions, the tribunal also circumscribed the power of the majority shareholder under Article 75, thereby putting in safeguards against any forced ouster of a minority shareholder. The latter two decisions are a consequence of having found oppression and mismanagement at Tata Sons.”

Interestingly, a third and less significant outcome is that NCLAT has also circumscribed, to an extent, the role that majority shareholder Tata Trusts (66 percent shareholder) plays in board decisions at Tata Sons. While the Trusts have nominee directors on the board to protect their interests, the tribunal found instances of board matters first being consulted with the Trusts and Ratan Tata. It has ordered a stop to that now.

Of course, all this stands until, and if, Tata Sons is able to win a stay on the entire order, which will be its next effort at the Supreme Court. While its lawyers were unreachable for comment, the company in a statement made clear that it will “take appropriate legal recourse”.

It also expressed surprise at the scope of the NCLAT order. “It is not clear as to how the NCLAT order seeks to overrule the decisions taken by shareholders of Tata Sons and listed Tata operating companies at validly constituted shareholder meetings. The NCLAT order appears to even go beyond the specific reliefs sought by the Appellant,” Tata Sons said in a statement.

Legal experts anticipate Tata Sons may soon move the Supreme Court, to first stay/suspend all outcomes of the NCLAT order, including the reinstatement of Mistry’s directorships, and also appeal the NCLAT order.

The final word in this boardroom battle that involves India’s largest conglomerate has yet to be said. When it is, it will set precedents for corporate governance, minority shareholder rights and corporate democracy.

Watch | Somasekhar Sundaresan on the implications of the NCLAT order

Edited transcript of the interview with Somasekhar Sundaresan.

Menaka Doshi: You won on every ground—that the dismissal of Cyrus Mistry was illegal, that there was oppression and mismanagement at Tata Sons and the shift to a private company from public too was illegal.

Somasekhar Sundaresan: Yes, that is correct.

The NCLAT found the Tata Sons board Nomination and Renumeration Committee, just months before Mistry's dismissal had found his performance as executive chairman to be excellent. That there was no suggestion then of any of the accusations subsequently made against Mistry. That three of the board members that voted for his dismissal were only appointed shortly before board meeting in which he was ousted.

That was the real crux of what was argued. This was not really a dispute for the reoccupation of office. This was a dispute for the legal nature of the conduct of the governance of the company. The Nomination and Renumeration Committee lauds his performance and the board accepts it, and within weeks you say he lost the confidence. The arbitrariness of it... (inaudible due to poor connectivity) ...seemed larger than the craving for an office. So therefore, that part been vindicated is a welcome measure for us.

You made an important point that Mistry was not seeking his return as the chairman of Tata Sons. Can you explain what will be the outcome of the order? The operationalisation of it.

On the limited issue of whether he is reinstated as chairman, a stay has been granted for four weeks. It is clear from both sides that he was not seeking reinstatement. But the courts restored status quo ante, they put the company back in the same position it was in before these actions were initiated. That is part of the outcome. Any case he had a residual tenure of just a few months at that time. It was the lack of grace with which it (dismissal) was handled that underlined the arbitrariness of that conduct. So, it is not as if he would be desirous to go back as executive chairman. The operationalising of the order, practically speaking, is not something that would work even if he desired reinstatement in office. The key question is board representation for the other shareholder in the company which is the Shapoorji Pallonji Group. That part has not been stayed. Therefore, the real question is not about the executive chairmanship, that's not being discussed overnight anyway, but to put the minority shareholder back in the position it was in before this saga started. That is the real outcome of the proceedings.

Mistry had voluntarily stepped down from boards of a few group companies, while he was voted out from Tata Sons' board. Now with this order does he automatically get restored with those directorships? So, say tomorrow if a board meeting is called by Tata Sons or any of the group companies that he earlier was a director of, would he now be able to attend as director?

The position, as far as Tata Sons is concerned, the order is that he is restored as a director, or that the minority shareholder's directorship is restored. The removal as a director was only a consequence of removal as the executive chairman. Therefore, the order essentially puts him back on the board. Whether he wants to become the chairman or not is his sovereign decision. That's a call he will take. We’ve said that we are not craving for that office. But a substantive shareholder with 18 percent, not being represented on the board, was an oppressive act. And that reinstatement is not stayed.

Hypothetically, if a board meeting is called tomorrow, Mistry by virtue of this NCLAT order will be able to attend?

That would be the position in law.

And that would apply to various other boards of Tata group companies, where he was director and he had either stepped down or was asked to go?

That's correct.

The next question is about the outcome of Tata Sons being restored to public company status. The NCLAT has said that as of today, the Registrar of Companies will make a correction in its record showing the company as a public company. That will mean, as we stand, Tata Sons has been restored to public company status?

That's correct.

What is the gain for Cyrus Mistry or any of the minority shareholders from such a move? Can you explain why this is a good outcome for your side?

Frankly, that was one of the vital facets of the proceedings. The governance standards at a public company are far superior to the governance standards at a private company. So for a public limited company, the law requires far greater accountability and oversight by an effective board as compared to a private limited company. There is also the part about external implication. In fact the whole insurance sector was in jeopardy because the monies that had been lent to a public limited company suddenly became monies that are lent to a private limited company. That inflicted a lot of cost and losses. Those debentures and debt had to be offloaded or repaid. This restoration is a very important measure from the governance standpoint. The very fact that a private limited company is lightly governed as compared to a public company, what you see manifesting in insurance law which says an insurer must not subscribe to debentures of a private company. This is a very important development. A very important facet of the challenge that was involved in the proceedings.

There is also possible restriction on the sale of shares of a private company versus in a public company and therefore this reversal status for Tata Sons will be beneficial for a shareholder, like Cyrus Mistry, even though I am not suggesting that he is looking to sell shares.

That could be consequential fallout. That is not a driver. This was a important facet from a governance point of view.

I also understand that certain shareholder rights are different for public companies versus private companies. And therefore, this goes in favour of Mistry.

All shareholders.

My next point is about the case of oppression and mismanagement that you’ll brought against Tata Sons, which has succeeded at NCLAT. What does the outcome result in?

The fact that it has been a watershed event for governance of an important institution, we are talking of a systemically important financial institution. And governance of such an institution is vital and has come to fore in recent times as some systemically important financial institutions are going through governance related proceedings. That's the most important element. On a personal level too, it is also cathartic to be vindicated for having been wronged and that being articulated well in an appellate decision.

Is there any material benefit?

Substantially. A future chairman shouldn’t undergo what he (Mistry) underwent. That is a very important development in the history and life of any institution. And governance is at the heart of all this. If the governance of the company can be arbitrary, despite being a systemically important financial institution, and you get a declaration that such conduct is not in consonance with law, it is a very important watershed for tenure protection, effective governance, effective administration in the hands of future chief executives of the company.

There is one more observation that the NCLAT has made and I wonder if it is a restraint of sorts on the powers of Tata Trusts, which are the majority shareholders of Tata Sons. It has said that Ratan Tata and the nominees of Tata Trusts, these are the directors that Tata Trusts nominates to sit on the board of Tata Sons, shall desist from taking any decision in advance which requires majority decision of the board of directors of Tata Sons or in the annual general company. This seems like some sort of restraint on the ability of the nominee directors or even the Tata Trusts, including Ratan Tata, to pre-approve any decision that is going to come in front of the Tata Sons board. Can you explain this?

The grouse at the heart of the issue was about extra constitutional authority being wielded on the functioning of the board governance. If the decisions about the company are all taken in advance outside and they merely run through the motions of a board approval, that’s what been barred. What it essentially means is that don’t just use the board as a formal instrumentality without the board being the governing foundation for the governance of a company.

This is consequent to the arguments you have made that there was considerable pre-approval required from Tata Trusts officials including Ratan Tata before agenda items could be considered and decided upon by the Tata Sons board. This is in response to that?

That is correct. Loosely speaking, we could call it interference, pre-consultation, degrees of how benign or horrible you want to picture it. These were the phrases used on both sides. Essentially, what this relief underlines is that the governance of a board rests in the office of the directors of a company and not outside.

It is clear that Tata Sons will seek to appeal this decision at the Supreme Court and none of us know how that will turn out. In the interim, based on our conversation I gather the only thing that Cyrus Mistry is probably seeking is a return of his directorships on the board of Tata Sons and maybe other Tata Group companies and that is something he will hope to actualise as an outcome of this decision, if not stayed by the Supreme Court.

That is correct. You cannot be a 20 percent owner with no insights. In a majoritarian governance, the minorities have a voice. The minorities can be outvoted but they have a voice. What has happened in this scenario is, not only can the minorities be outvoted, they did not even have a voice. So, if you don’t even get to know what the board is doing despite owning one-fifth of the company, that’s the remedy that has been obtained. In the interim, having an insight into what is going on and contributing to the governance is an important part of this outcome. And of course, the other point that is the heart of ensuring that the board is an effective platform of governance and not forces outside the board.

Since October 2016, we have seen a new chairman installed at Tata Sons, N. Chandrasekaran. This is going to be an uncomfortable moment for him, right? Not because his position is under threat, as we have already explained that Cyrus Mistry is not seeking to return as executive chairman but Mistry’s return to the board as a director - will that be a difficult situation for the current management and board of Tata Sons to overcome?

I don’t think so. At the end of the day these are commercial business people who acted emotionally and arbitrarily instead of in a measured manner. Businessmen are used to disputes and disputes having an outcome. I think the time is now right to sit back and introspect and work harmoniously in the best interest of the institution, which as I said is as serious as a systemically important financial institution, whose governance is at the heart of the system. Time is now to be constructive, work harmoniously and examine how shareholder value and stakeholder value be protected and enhanced in a harmonious manner.

So two big takeaways from this decision, notwithstanding what the NCLT has already said a year ago and not withstanding what the Supreme Court may say, are that Cyrus Mistry’s directorship on the board of Tata Sons and other Tata Group companies gets restored and he will actualise that so as to be able to protect his shareholding in Tata Sons. The second is that you think that this serves as a precedent for governance levels in companies and groups similar to Tata Sons and Tata Group - you believe that the finding of oppression and mismanagement serves as a caution or a warning to other boards on how to better improve their board procedures. Correct?

That’s correct.