Tata-Mistry War: The End Game

Are words Cyrus Mistry’s only ammunition?

There is no place for emotion in a boardroom battle. And when it ultimately comes down to shareholding, brute majority wins.

Tata Trusts owns 66 percent in Tata Sons. And Tata Sons owns between 33 percent to 74 percent in most listed Tata Group companies. So when shareholders of these companies meet at their respective extraordinary general meetings next month to remove Mistry as chairman, Tata Sons will come holding most if not all the aces. Especially because India’s institutional shareholders, having recently discovered their spines, will probably still be too chicken to pick a side in the Ratan Tata versus Cyrus Mistry war. Many may abstain, is the broad expectation of experts advising both warring sides.

But I’m hoping to be surprised. Not because I’ve picked a side but because it’s time investors put their mouth where their money is. Foreign institutional shareholders may be more vocal but it’s a tough decision to make, especially in the light of veiled threats by Tata Sons of withdrawing brand licences if a group company does not fall in line. Besides, nobody wants an endless battle to distract from pressing issues of untenable debt and falling profitability.

That said, it’s good journalistic practice to avoid jumping to conclusions, so I won’t. Allow me then to examine all options.

Ratan Tata Prevails

If he does, Cyrus Mistry will be booted out as director on the boards of all Tata Group companies except Tata Sons. Having reduced him to non-executive director, Tata Sons’ shareholders (Tata Trusts, Tata companies and Shapoorji Pallonji Group) have not yet moved to remove him as director.

The legal procedure to remove a director, whether of a listed or unlisted public company, is simple.

A company may, by ordinary resolution, remove a director....after giving him a reasonable opportunity of being heard.

So Mistry will get a chance to tell his story to shareholders, either via a written representation that the company has to send to all shareholders, or by making an oral representation at the shareholder meeting (extraordinary general meeting or EGM) or asking for his written representation to be read out at the meeting.

The stage seems set for high drama. Will Mistry personally attend each EGM and make his case? Or ask someone to stand in for him? Or let a written statement do the talking?

Probably the last, maybe neither.

Because the law also provides for the company or any other aggrieved person to apply to the National Company Law Tribunal (NCLT) to block Mistry’s representation (written or otherwise) on grounds that he’s doing so for “needless publicity for defamatory matter”. And yes, the NCLT can even order Mistry to pay the company’s costs on the application.

Some lawyers suggest that if at the EGMs of the various listed Tata Group companies a majority of shareholders, present and voting, support the resolution to remove Mistry as director, he’ll have little success in challenging that in court.

Mistry’s Tata Sons Directorship

The same procedure described above applies to any such vote at a Tata Sons EGM, except, as I said earlier, the company hasn’t yet moved to take away his directorship.

I don’t know why that is, but one reason could be that Mistry’s family business – the Shapoorji Pallonji Group – owns an 18.4 percent stake in the company. And while the articles of association don’t give the Shapoorji Pallonji Group any explicit rights to appoint a director, nor is there any shareholder agreement that grants the same, it has had a man on the board for decades now.

Some lawyers argue that removing Mistry from the Tata Sons board might give the Shapoorji Pallonji Group grounds to pursue legal action under the prevention of oppression and mismanagement provision in company law.

This provision can only be invoked by a minimum 100 shareholders or one-tenth of the total shareholders or a shareholder with at least 10 percent of the share capital. The Shapoorji Pallonji Group meets the criteria with its 18.4 percent shareholding in Tata Sons. But to succeed in such a legal action it will have to prove either of the two:

• that the the company is being run in a manner prejudicial to public interest or in a manner prejudicial or oppressive to a shareholder’s interests and that of other shareholders.
• that a material change has taken place in the management or control of the company and that such change will be prejudicial to a shareholder’s interests or that of other shareholders.

This is not an easy case to win, say others, because it isn’t premised on whether Mistry was treated fairly or not but on whether Tata Sons hurt the interests of Shapoorji Pallonji Group, the shareholder.

Besides, Tata Sons could argue that six of eight board members believed Mistry underperformed. But then Shapoorji Pallonji Group can argue that three of those directors had been appointed just two months ago. Add to that the new provision in company law that requires every director to “exercise independent judgment” and maybe the Mistrys have a case but not a slam dunk one.

“Invalid And Illegal”

The other legal option Mistry has is to contest the events at the 24 October board meeting of Tata Sons in which he was sacked. In a subsequent letter to the board, Mistry claimed the business conducted at the board meeting was invalid and illegal.

I was shocked beyond words at the happenings at the board meeting of 24 October, 2016. Apart from the invalidity and illegality of the business that was conducted, I have to say that the Board of Directors has not covered itself with glory.

Cyrus Mistry letter to Tata Sons directors and Tata Trusts trustees (26 October)

He said the same when he was removed from the board of Tata Global Beverages.

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 October 24. 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)

The guidelines accompanying company law state that the agenda of a board meeting has to be circulated at least seven days before the meeting.

To transact urgent business, the agenda may be given at a shorter period of time if at least one independent director is present at the meeting.

Any item not on the agenda maybe taken up with the permission of the chairman and the consent of a majority of the directors present, including at least one independent director.

This last provision will, I suspect, need reworking soon. Because no chairman will likely allow an agenda item that is detrimental to his interest. In which case how does a board deal with say a serious fraud allegation against a chairman?

Company secretaries suggest that maybe in such a case, the agenda item should be allowed to be introduced in the meeting on the approval of independent directors. Pending such a change, Mistry may head to court and challenge the the board meeting events that led to his ouster as chairman of Tata Sons and Tata Global Beverages, but he might not have much luck. Because a court may recognise the general defect in the guideline and because an overwhelming majority of directors voted him out.

Even if he does succeed, lawyers say, at best the court will ask the board to follow right procedure. That suggests a re-enactment of the sackings.

Words Are Cyrus Mistry’s Only Ammunition?

It’s then down to two legal options facing Mistry. Either he demands proper procedure be followed - but that may not alter his fate. And, or, his family and the Shapoorji Pallonji Group pursue an oppression and mismanagement case against Tata Sons.

But to what avail? Does Cyrus Mistry want to keep his seat on the Tata Sons board?

Words then might be Cyrus Mistry’s only ammunition.

The article was originally published on BloomberQuint.