Did Tata Sons’ Directors Violate Internal Rules by Sacking Mistry?

Do potential violations of Tata Sons’ Articles of Association give Cyrus Mistry grounds to challenge his removal?

The appointment of Mr Cyrus P Mistry as Deputy Chairman of Tata Sons is a good and far-sighted choice. He has been on the board of Tata Sons since August 2006 and I have been impressed with the quality and calibre of his participation, his astute observations and his humility. He is intelligent and qualified to take on the responsibility being offered and I will be committed to working with him over the next year to give him the exposure, the involvement and the operating experience to equip him to undertake the full responsibility of the group on my retirement.

Ratan Tata, Chairman, Tata Group

That was Ratan Tata’s comment on 23 November 2011, when announcing the selection of Cyrus Mistry as the next chairman of Tata Sons. Mistry, on the board of Tata Sons since August 2006, spent a year training with then chairman Tata before taking over in December 2012, on the veteran leader’s retirement.

Missing Committee?

Mistry was selected by a committee comprising of Tata himself and

• RK Krishna Kumar
• Noshir Soonawala
• Shirin Bharucha
• Lord Kumar Bhattacharya

His sacking too should have been done by a committee. That’s what Tata Sons’ Articles of Association Article 118 says.

118. Appointment of Chairman

For the purpose of selecting a new Chairman of the Board of Directors and so long as the Tata Trusts own and hold in the aggregate at least 40 percent of the paid up Ordinary Share Capital of the Company for the time being, a Selection Committee shall be constituted in accordance with the provisions of this Article to recommend the appointment of a person as the Chairman of the Board of Directors and the Board may appoint the person so recommended as the Chairman of the Board of Directors, subject to Article 121 which requires the affirmative vote of all Directors appointed pursuant to Article 104B.

The same process shall be followed for the removal of the incumbent Chairman.

There has yet been no mention of any such committee and the violation of this Article gives Cyrus Mistry ground to question the process of his dismissal. His case gets stronger upon reading Article 121B. The Article requires a minimum 15 day notice if any director wants to raise a matter or resolution for the deliberation by the board.

Why Use The Window When The Door Is Open?

So far it was understood that according to company law and accompanying guidelines the resolution to remove Mistry should have been listed on the board meeting agenda, to be circulated at least seven days before the meeting. Mistry says it wasn’t, a claim he reiterated last week.

The developments at the board meeting of the Tata Global Beverages Ltd. is nothing but a repeat of the illegality that the Board of Directors of Tata Sons Ltd. did on 24 October. There was nothing on the agenda about replacement of the Chairman just as there was nothing in the Tata Sons Board Agenda on 24 October. The Tatas continue to demonstrate the lack of respect for due process of law that they have displayed.

Statement from Cyrus Mistry’s Office (15 November)

An agenda item introduced without notice needed the due permission of the chairman, in this case Mistry, before being put it to vote. That legal requirement seems challengeable as no chairman would likely give permission to discuss his own sacking.

Had Mistry sought to challenge his dismissal on the grounds that he had denied permission and yet the resolution was put to vote, his case may have seemed weak even though legal process was not followed. But Article 121B changes that.

121B. Any Director of the Company will be entitled to give at least fifteen days notice to the Company or to the Board that any matter or resolution be placed for deliberation by the Board and if such notice is received it shall be mandatory for the Board to take up such matter or resolution for consideration and vote, at the Board meeting next held after the period of such notice, before considering any other matter or resolution.

The Article, inserted via an amendment in 2014, makes it mandatory for the board to consider any matter or resolution raised by any director.

This Article provides the six Tata Sons directors who wanted Mistry removed the opportunity to have placed the resolution before the Board fifteen days in advance, giving Mistry no choice but to allow the resolution to be voted on. That instead they chose to spring a sacking surprise on Mistry is puzzling. Mistry terms it as unique.

To “replace” your Chairman without so much as a word of explanation and without affording him an opportunity of defending himself, in a summary manner must be unique in the annals of corporate history.

Cyrus Mistry Letter To Tata Sons Board Members (25 October) 

So why didn’t the Tata Sons directors set up a committee to consider the removal of Cyrus Mistry as chairman, and why didn’t they use the company’s articles to avoid violating due process yet having their resolution heard and voted on?

All Tata Sons said in response to BloombergQuint is that “The process followed to replace Mr. Cyrus Mistry was in accordance with the Articles of Association of the Company read with the Companies Act, 2013”.

Read the full story on BloombergQuint.