Zee Vs Invesco: Shareholders Have No Greater Immunity, Bombay High Court Says
Sometimes, it happens that a company must be saved from its own shareholders, however well-intentioned, the Bombay High Court held in the dispute between Zee Entertainment Enterprises Ltd. and Invesco Developing Markets Fund.
The high court granted an injunction in favour of Zee restricting Invesco to act on its requisition notice for an extraordinary general meeting. Invesco and OFI Global China Fund LLC, together holding a 17.88% stake in the media major, are locked in a dispute with the company's current board and Managing Director and Chief Executive Officer Punit Goenka. The two funds are seeking to oust Goenka and appoint six new independent directors.
If a shareholder resolution is bound to cause a corporate enterprise to run aground on the always treacherous shoals of statutory compliance, there is no conceivable or logical reason to allow such a resolution even to be considered, the high court said.
Shareholder primacy or dominion does not extend to permitting shareholder-driven illegality.Bombay High Court Order
Explaining its conclusion, the high court said a perfectly legal resolution, if carried, may well result in the diminution of the company’s profits or business. That is not a court’s concern. But the resolution must be legal, it said.
The court said it cannot see how Goenka can be removed at all, leaving a managerial void only to be possibly later filled. His removal causes an immediate vacancy and non-compliance.
How this is to be done without prior permission of the MIB is also unclear. I see no method of circumventing the NRC or directly proposing named persons as ‘independent directors’.Bombay High Court Order
That came in response to Zee's arguments that Invesco's requisition suffers from legal infirmities, including violation of guidelines requiring a prior approval from the Ministry of Information and Broadcasting for any board changes. And SEBI's Listing Regulations which lay down a Nomination and Remuneration Committee-led process for appointing independent directors.
Juggernaut’s Crushing Wheels
At the heart of this case is Section 100 of the Companies Act, 2013 which, among other things, says:
Shareholders with more than 10% stake can requisition an EGM.
The requisition shall set out the matters for the 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 requisitonists can do so themselves.
Invesco had argued that the section says board "shall" call a meeting if the requisition is "valid". And validity, it stated, means the numerical shareholding threshold must be met. Zee countered it saying the "validity" needs to be examined not just for the numerical threshold but also "matters for consideration".
The high court found merit in Zee's argument.
First, it said, the section itself provides for a situation where the board does not convene the EGM. And so, it dismissed Invesco's argument that revolved around the word 'shall' in Section 100.
Second, it pointed out, the interpretative question is not over the word "valid" but about the matters proposed to be considered at a requisitioned EGM.
Companies today operate in tightly regulated fields and Companies Act, other laws demand compliance. "It is invalid or illegal; what of it?” is not and cannot be a sound answer, the court pointed out.
An illegality might, as it does in this case, result in a wholesale disruption of the company’s essential business purely for the reason of non-compliance, the high court said.
These regulatory statutes are often binary: a company is either compliant or it is not. If it is not, the juggernaut of offences and penalties rolls. No shareholder can, I think, be permitted to force his own company under that juggernaut’s crushing wheels.Bombay High Court Order
The court clarified that this is not merely a question of form or substance, or one versus the other. This is a case where the form must follow the substance. "If the substance is illegal, the form is illegal. The substance of the proposed resolution will dictate its form."
Shareholders Have No Greater Immunity
The Bombay High Court also dismissed Invesco's argument that the contents of a shareholder requisition are not justiciable. The argument is fundamentally flawed, it said.
This assumes that resolutions at an EGM requisitioned by shareholders are somehow special or more sacrosanct than resolutions proposed by the board itself. There is no warrant for this, said the court order.
The court explained that if these resolutions were proposed by the board itself, a shareholder with sufficient legal standing or in a derivative action could approach the court for a similar injunction.
The source or provenance of the resolutions is entirely immaterial. Shareholders have no greater immunity. If the board cannot propose resolutions that are infirm or ineffective, neither can shareholders.Bombay High Court Order
Relying on several decisions by English courts, it pointed out that a court’s jurisdiction is not ousted. In some scenarios, a court is not forbidden, either expressly or by necessary implication, from intervening, the high court concluded.
"It can, and must, when presented with a case like this, perhaps an outlier, consider whether the resolutions proposed would be ineffective, that is to say, not merely undesirable or sub-optimal, but ones that cannot in law be given effect to." -Bombay High Court
If a resolution cannot in law be given effect to, courts must intervene, it said.
That said, the high court added, it's not that shareholders’ rights are curtailed or abrogated, or that they cannot seek what they now do. But the manner in which they go about doing it must be legally compliant.
A distinction needs to be drawn between resolutions that are irregular undesirable or unpalatable to the board versus those that are illegal, the high court said.