The Tata - Mistry Judgment Leaves Open Key Corporate Governance Points
Lawyers and members of the media assemble outside the Supreme Court in New Delhi. (Photographer: T. Narayan/Bloomberg)

The Tata - Mistry Judgment Leaves Open Key Corporate Governance Points

Should it matter what type of company it is when determining the duties of its directors? What is the fiduciary duty of nominee directors? And, do directors nominated by charitable trusts have a wider responsibility to the public than other directors?

While the Supreme Court awarded a resounding win to Tata Sons in the oppression and mismanagement case filed against it by Cyrus MIstry, it left a few important questions on corporate governance unanswered. Worse still, some of the Court’s commentary may have confused some long standing governance principles, say experts.

Section 166 of the Companies Act lays down the duties of directors. A director of a company,

  • shall act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of environment.

  • shall exercise his duties with due and reasonable care, skill and diligence and shall exercise independent judgment.

The discussion on the role of directors emanated from the challenge by Mistry to affirmative voting rights granted to Tata Sons directors nominated by Tata Trusts, on grounds they are oppressive and prejudicial. The argument was that such rights and the pre-consultation by such directors with Trusts’ officials on matters to come up before the Tata Sons board are in contrast with the duties of the directors to uphold the interest of the company and exercise independent judgment.

While deciding this question three observations by the Court have attracted attention:

  1. The court distinguished Tata Sons from other companies by virtue of it being an investment holding company.

  2. It suggested that Tata Sons’ nominee directors need not make independent decisions.

  3. And, it suggested directors nominated by a charitable trust have a much wider duty towards public interest.

Also read: Tata Vs Mistry: Why Mistry’s Oppression Case Failed In The Supreme Court

Nature Of The Company

Tata Sons is a principal investment holding company and is not engaged in any direct business activity, the Court noted more than once in the order. This distinction in the context of affirmative voting rights is hard to comprehend, wrote Umakanth Varottil, Associate Professor at the Faculty of Law, National University of Singapore in his blog.

“...because the duties of directors under company law bears no correlation to the business or activity in which the company is involved, at least as far as the core of directors’ duties is concerned.”

Duties Of Directors
The Court then went on to say that because the affirmative rights are enjoyed by directors nominated by philanthropic charitable trusts, they are not like other directors appointed in shareholder meetings. It questioned whether every director in a company is duty bound, as the law provides, to promote the objects of the company and exercise independent judgment, among other things. If that were to be the case, then why does the law separately provide for the appointment of independent directors, the Court posed.

If all Directors are required under Section 166(3) to exercise independent Judgment, we do not know why there is a separate provision in Section 149(4) for every listed Public Company to have at least 1/3rd of the total number of Directors as independent Directors.
Supreme Court Judgment

In saying this the Court created a distinction that does not exist in law.

Such a stance represents a diminution in the role of directors’ duties as a primary tool of corporate governance when it comes to non-independent directors, and undermines with one fell swoop the legislative and regulatory efforts over the last couple of decades to enhance the roles, responsibilities and liabilities of directors on the boards of Indian companies, wrote Varottil.

The Court’s observation does not set a differing standard of independent judgment from different directors but it only seems to be hinting towards the understood position that the nominee directors have to cater to both sides, counters Sameer Jain, founder and managing partner at PSL Advocates & Solicitors.

In any case, this comparison is more in the nature of observations which would not have made any difference to the final outcome of the case, Jain adds.

The court while examining affirmative votes already says that it is a globally accepted norm. If a nominee director can address the general interest of the company and then look out for gains for the nominators, there is nothing wrong in that approach.The ratio of the current judgment does not alter this position in any way.
Sameer Jain, Managing Partner, PSL Advocates & Solicitors

Also read: Tata-Mistry Case: A Bittersweet Victory For The Tata Group

Duty Towards Public Interest
A director nominated by a charitable trust “also holds a fiduciary duty with the Trust, and a fiduciary duty towards the nameless, faceless beneficiaries of those Trusts,” the Court opines.

The Court has held that in such situations, you cannot take a purely commercial approach that these directors should only be focused on making money but that they also are right to trying to protect the interest of the trusts, explains Anand Desai, managing partner at DSK Legal.

Yet, in emphasising that a director nominated by a charitable trust must act in “pure, unadulterated public interest” the Court has created opened up at least two debates, according to Varottil.

Can directors nominated by public entities prefer their nominator’s interests?

“For instance, would this not allow nominee directors of the Government in public sector undertakings to further the interests of the Government (on the ground that this represents public interest) and ride roughshod over the interests of the company and its other stakeholders, including the shareholders, Varottil asked.

Worse still, could it expand the liabilities a director faces if they act in the interest of the company instead?

...the Court’s interpretation would endanger nominee directors who may act in the interests of the company with potential liability for not acting in the interests of their nominators even though conventional jurisprudence offers precedence to the interests of the company (whether that may be private or public).
Umakanth Varottil, Associate Professor - Faculty of Law, National University of Singapore

Duties of directors are not only laid down in company law but also understood via common law jurisprudence. In this judgment the Supreme Court has raised many questions that will have to be satisfied by a future bench. Till then, they will stand.

Also read: Tata Vs Mistry: Out Of The Dust Of The Battles Of Giants ... Nothing

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