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It’s a curious twist. Now, on the one hand Tata Sons can force estranged shareholder Cyrus Mistry to sell his shares, and on the other, if the company succeeds in converting to private limited, it can impose further restrictions on Mistry’s ability to sell shares.
But the same forces working against Mistry, could also turn into his most effective weapon against Tata Sons. Here’s how it came to this.
It’s not unusual for companies to prefer being private limited. Company law imposes fewer restrictions on the functioning of private companies, especially regarding related-party transactions, participation of interested directors, restriction on managerial remuneration and other such corporate matters.
But Tata Sons is no ordinary company. It’s the principal holding company for the Tata Group which has over 100 companies, with a combined revenue of over $100 billion as of financial year 2016-17. As a private company, fewer legal and governance provisions would apply to it. Yet, the board says the move is in the company’s “best interests”.
While the full details of the proposal to change status are not available, the person quoted above also explained that Tata Sons intends to maintain certain governance requirements, such as having an audit committee, independent directors, and procedures applying to related-party transactions, as a public limited company would.
Corporate lawyer Sanjay Asher points out that the provision in law that forced Tata Sons to become a deemed public company was deleted in 2000, and yet the company didn’t avail the opportunity to go private, until now.
He also argues that the change in status may curb the company’s fund-raising options, which when combined with the information that it may maintain governance norms, makes the shift difficult to understand.
Asher also said, “Because you are a private limited company, you don’t have to comply with a lot of provisions of law. That can’t be the only reason you want to convert the company into a private company. I’ve (Tata Sons) been a public company all along and I have found no difficulties in my operations, whether as Tata sons or for the purpose of controlling the operating companies, then why the sudden change?”
So why after 42 years of existence as a public limited company does Tata Sons want to change its status to private limited? Especially since it had the opportunity to make the change for 17 years, and hasn’t chosen to do so.
Mistry’s family has been a Tata Sons shareholder since 1965. It owns 18.4 percent of the company, with Tata Trusts at 66 percent, and few other individuals and Tata companies holding the rest.
As a private limited company, Tata Sons can restrict the right of its shareholders to transfer shares. And though such restrictions may already exist in the company’s articles, the status of private limited makes it difficult for Mistry to challenge them, says Sethi.
Mistry has opposed Tata Sons’ move on exactly those grounds. Cyrus Investments, the company via which he holds shares in Tata Sons, said in a letter to the Tata Sons board that “the true effect of converting the status of Tata Sons into a private company is to introduce/reintroduce restrictions on transferability of shares, which today – otherwise – are void and unenforceable under law and norms applicable to public companies; and which ought to never have been included in the Articles of Association of a public company in the first place”.
But with his effort to move an oppression and mismanagement lawsuit against Tata Sons stymied by the National Company Law Tribunal, and the appeal on maintainability still pending order at the appellate tribunal (NCLAT), Mistry may not have much room to manoeuvre.
Asher says Mistry can object to the conversion when approval is sought from the National Company Law Tribunal.
Mistry can also question Tata Trusts’ decision to vote in favour of a change in status on two grounds, says Asher. One, that it may hamper Tata Sons ability to raise funds, especially as the Trusts can hardly fund the holding company themselves. And two, that the transferability restrictions may also hurt the Trusts in the future if they ever want to sell shares to raise funds.
Such an objection would have to be filed with the Charity Commissioner of Maharashtra.
Curiously, Tata Sons’ articles also include a provision that says the company can, by passing a special resolution, ask shareholders to sell their shares. That suggests the majority shareholders, aka Tata Trusts, can vote in favour of squeezing Mistry’s family out.
Either all this sticks Mistry in legal gridlock, or he can parlay it to support his argument regarding oppression and mismanagement. If at all he succeeds in launching that case.
On BQ Live, Sanjay Asher and Rajat Sethi discuss the implications of Tata Sons’ move to convert to a private limited company:
(This story first appeared on BloombergQuint and has been republished with permission)
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