Judicial Review of removal of nominated Executive Chairman of the Private Company

Removal of Cyrus Mistry from the Board of Tata Sons:

Companies Act, 2013 is focused on listed and unlisted public companies:

The requirement under Section 149(4) to have at least one­ third of the total number of Directors as independent Directors applies only to every listed public company. The requirement under Section 151 to have one Director elected by small shareholders is also applicable only to listed companies. The requirement to constitute an Audit Committee in terms of Section 177(1), a Nomination and Remuneration Committee and the Stakeholders Relationship Committee in terms of Section 178(1) are also only on listed public companies.

Duties of a nominated Director:

It is necessary that we balance the duty of a Director,under Section 166(2) to act in the best interests of the company, its employees, the shareholders, the community and the protection of environment, with the duties of a Director nominated by an Institution including a public charitable trust. They have fiduciary duty towards 2 companies, one of which is the shareholder which nominated them and the other, is the company to whose Board they are nominated.

The question as to (i) what is in the interest of the company, (ii) what is in the best interest of the members of the company as a whole and (iii) what is in the interest of a nominator,all lie in locations whose borders and dividing lines are always blurred. If philosophical rhetoric is kept aside for a moment, it willbe clear that success and profit making are at the core of business enterprises. Therefore, the best interest of the majority shareholders need not necessarily be in conflict with the interest of the minority or best interest of the members of the company as a whole, unless there is siphoning of or diversion. Such a question does not arise when the majority shareholders happen to be charitable Trusts engaged in philanthropic activities. It is good to wish that the creation gets liberated from the creator, so long as the creator does not have any control or ability to manipulate. In the corporate world, democracy cannot be seen as an ugly expression,after using the very same democratic process for the appointment of directors.

Concept of Minority Shareholder:

The Statute confers upon the members of a company limited by shares, a right to vote in a general meeting. And this right is proportionate to his shareholding as per Section 47(1)(b). Section 152 which contains provisions for the appointment of Directors, does not confer any right of proportionate representation on the Board of any company,be it public or private.

The maximum extent, to which the Parliament has gone under the 2013 Act, is to make a provision under Section 151,enabling “a listed company” to have one Director elected by such small shareholders in such manner and on such terms and conditions as may be prescribed.

One must be careful to note that both under Section 252(1) of the 1956 Act and under Section 151 of the 2013 Act, the spotlight was only on “small shareholders” and not on “minority shareholders” like the S.P. Group which holds around 18.37%.

Proportionate Representation on Board of Company:

Section 163 of the 2013 Act corresponds to section 265 of the 1956 Act. It enables a company to provide in their Articles of Association, for the appointment of not less than two ­thirds of the total number of Directors in accordance with the principle of proportionate representation by means of a single transferable vote. First of all, proportionate representation by means of a single transferable vote, is not the same as representation on the Board for a group of minority shareholders, in proportion to the percentage of shareholding they have. It is a system where the voters exercise their franchise by ranking several candidates of their choice, with first preference, second preference etc. Moreover, it is only an enabling provision and it is upto the247company to make a provision for the same in their Articles, if they so choose. There is no statutory compulsion to incorporate such a provision.

Whether a company is a private company or not, will be determined only by the definition of the expression“private company” found in section 2(68) of the 2013 Act. Abrogation of concept of deemed Public Company under Companies Act 2013.

Article of Association:

A person who willingly became a shareholder and thereby subscribed to the Articles of Association and who was a willing and consenting party to the amendments carried out to those Articles,cannot later on turn around and challenge those Articles. The same would tantamount to requesting the Court to rewrite a contract to which he became a party with eyes wide open.

Read full judgement of:
TATA CONSULTANCY SERVICES LIMITED Vs. CYRUS INVESTMENTS PVT. LTD.:

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s