NCLAT’s Tata-Mistry Ruling Raises More Questions Than It AnswersBloombergQuintOpinion
In a significant ruling, the National Company Law Appellate Tribunal held that the removal of Cyrus Mistry as executive chairman by the board of Tata Sons was illegal, and called for his reinstatement to that position. It also decided that consequential actions taken in the interim, including the appointment of a new executive chairman were illegal. In doing so, the NCLAT overturned an earlier decision by the National Company Law Tribunal in Mumbai, which did not find any case of oppression in the conduct of the board and majority shareholders of the company.
It is hard to understate the significance of the ruling. Its impact reverberates across the entire Tata group of companies that spans several countries the world over as well as its myriad stakeholders, and it speaks to crucial issues of corporate law and governance in India. If one were to wear the hat of a governance enthusiast, there is cause for jubilation, as the ruling marks the vindication of shareholder rights and enhanced scrutiny over promoters who cannot simply trample upon the hapless minority. If, however, one were to view it through the lens of a corporate law aficionado, the NCLAT’s judgment leaves much room for discontent. It is to the conceptual aspects of corporate law emanating from the decision that I turn, without intending in any way to comment on or affect the merits of either party’s case on appeal.
Unpacking The Problem
At the outset, the dispute arose due to a claim for oppression that the Mistry group, as minority shareholders of Tata Sons, brought against the company, its controlling shareholders (the Tata trusts) and directors. The oppression remedy is a useful but somewhat controversial tool in the hands of the minority shareholders to assuage their concerns. Here, the role of corporate law is to maintain a delicate balance. On the one hand lies the underlying principle of corporate democracy whereby decisions are made by majority voting. This rule imbibes a dose of pragmatism, as it is inefficient to expect unanimity in corporate decision-making. On the other hand, minority protection rights and remedies ensure that the majority does not ride roughshod over the interests of the minority shareholders.
In this milieu, the oppression remedy tilts the balance away from the potential ill effects of an absolute majority rule principle. Under Indian company law, that remedy becomes available if a company conducts its affairs in a manner ‘prejudicial’ or ‘oppressive’ to its shareholders. The oppression remedy is contentious because what amounts to ‘prejudice’ is subjective in nature and, quite often, reliant heavily on the facts of each case. However, courts in the common law world have provided some guidance.
Oppression exists if the company or the majority shareholders breach any of the rights of the minority under contract, being generally the articles of association of the company. The remedy goes further than that. In the absence of a breach of the articles, one can establish oppression even if there is a breach of an implied or informal, i.e., unwritten, understanding between the parties, also equivocally referred to as ‘legitimate expectation’. However, this is possible only when the company in question is a ‘quasi-partnership’, i.e., one that is established as a company but effectively runs in practice on the same lines as a partnership.
If we were to consider the NCLAT’s approach against the framework constructed above, a number of issues arise. At the outset, the NCLAT does not discuss the law relating to oppression in the required depth. It is possible to contrast this with the ruling of the NCLT wherein the adjudicatory body took great pains to chalk out the evolution of the law and set out the jurisprudence. The NCLAT though assumes that Tata Sons is a quasi-partnership through a simple statement, without any rigour in analysis. It is not the Mistry group’s case that there has been a breach of the articles of association, but rather that the very existence of some controversial clauses and their operation is prejudicial. In such case, the determination of whether the company is a quasi-partnership forms the fulcrum for any analysis that remains.
It is true that oppression claims are unduly fact-centric, but a review of the NCLAT ruling gives it the colour of being altogether impressionistic in nature. For example, the decision goes to great lengths to quote correspondence between the various key actors, the minutes of the disputed board meeting of Tata Sons that eventful day in October 2016 and the press release issued by the company in the aftermath of the boardroom implosion. Select excerpts from select documents surely cannot form the basis for a finding of oppression.
Not only does the finding of oppression matter, but also the manner in which the tribunal arrived at it.
Designing A Solution
In a rudimentary sense, the role of the adjudicatory body in an oppression action is to find a resolution to the stalemate in the company arising from the acrimony between shareholders. This is evident in the company law statute wherein the tribunal can pass orders as it thinks fit “with a view to bringing to an end the matters complained of”. Although the tribunal is entitled to pass varied types of orders, the decision as to which order ought to be passed in a given case must be dictated by the aforementioned statutory guidepost. Often, the order in an oppression action might be that the majority shareholder purchases the minority’s stake at fair value or, in appropriate circumstances, that the company be wound up – ultimate solutions to shareholder bickering.
It is rather ironic that the NCLAT’s ruling in the Tata Sons case has the effect of perpetuating the stalemate rather than getting rid of it.
First, by holding that the removal of Cyrus Mistry as chairman is illegal, the tribunal has sought reinstatement of his position. It is a different matter that this order exceeds even the prayers made by the Mistry group before the tribunal. It is unclear how it would be practical, in such a belated fashion, for Mistry to reassume his position even if he wishes to. It would be overly aspirational to believe that the company’s affairs will proceed smoothly thereafter. Moreover, illegality and prejudice are in no way synonymous, but the tribunal appears to conflate the two in its analysis. A perfectly legal act can be prejudicial, while an illegal act need not necessarily be: it all depends upon the circumstances.
Second, and as a sequel, the tribunal has also declared the appointment of N Chandrasekaran illegal. This puts the management of Tata Sons and other group companies in limbo. Clearly, the investors appear to be unnerved by this outcome judging from the plunge in the stock prices. Whether a practical resolution can be found that is in investor interest after so much water has flown under the bridge is a complex question.
Third, the NCLAT ruling also declares illegal the removal of Cyrus Mistry from other Tata group companies and orders that those companies reinstate him as a director for the rest of his tenure. This not only militates against the philosophy of the oppression remedy discussed earlier, but is also erroneous given that the dispute related directly to the affairs of Tata Sons and the other group companies were not even a party before the tribunal. This remedy clearly exceeds jurisdiction.
Given the stakes involved, this dispute is certain to go to the Supreme Court. Apart from the broader corporate governance implications, one hopes that it will ultimately play a significant role in developing the jurisprudence in India on the minority oppression remedy.
Umakanth Varottil is an Associate Professor of Law at the National University of Singapore. He specialises in company law, corporate governance and mergers and acquisitions.
The views expressed here are those of the author and do not necessarily represent the views of BloombergQuint or its editorial team.