[Umakanth Varottil teaches and researches in corporate law and governance.
Continued from Part I]
Where Does the Battlefront Shift?
Given the standoff at the board level, the battle for leadership of Tata Sons could move to the shareholders in general meeting, or to the courts or tribunals, or both. While the board of the company has taken the current decision to reappoint Chandrasekaran as the chairman, his appointment for the term as a director (which is a precondition to his being a chairman) has to be approved by the shareholders, for which a general meeting ought to be convened. At one level, there is a simple resolution to the matter, wherein Tata Trusts as a controlling shareholder would have the ultimate say on the matter. However, the situation has acquired an even greater deal of complexity since Sir Ratan Tata Trust has been barred by the Maharashtra Charity Commissioner from convening meetings of the trustees, which will in turn impede the ability of the Tata Trusts to nominate a representative to a general meeting of Tata Sons. As a result, the quorum requirement for holding a general meeting of Tata Sons would not be satisfied without the presence of a representative of the Tata Trusts, thereby effectively forestalling any decision-making at the shareholders’ level of Tata Sons.
The other possibility is for the scene to shift to the courts or tribunals. As happened in the previous dispute involving the Tata Group and Cyrus Mistry, the legalities could transition into the halls of the National Company Law Tribunal (NCLT) and make its way up to the Supreme Court for a judicial resolution of the logjam. This would require the Tata Trusts bringing an oppression, prejudice and mismanagement (OPM) action against the majority directors before the NCLT under section 241 of the Companies Act, 2013 with a view to reversing the decision taken at the 17 September board meeting. However, as discussed elsewhere, the threshold to be satisfied for a successful OPM action is rather high.
This approach has some similarities and significant differences in comparison with the ouster of Cyrus Mistry a decade ago that was ultimately upheld by the Supreme Court in Tata Consultancy Services Limited. The earlier episode was dubbed as a David-versus-Goliath battle with a minority shareholder (Cyrus Mistry and the Shapoorji Pallonji Group) seeking to assert rights and remedies against the controlling shareholder, the Tata Trusts. It was a classic legal conflict between the majority and minority shareholders.
But this time it is different. The odds are stacked up against the controlling shareholder in the form of the Tata Trusts (and its key representative, Noel Tata) relative to the actions of the majority of the board. While in the Tata-Mistry case, the board was aligned with the majority shareholder, in the present instance there is a chasm between the two. In that sense, it creates a conflict between the majority shareholders on the one hand, represented in the form of the Tata Trusts, and the majority of the directors on the board of Tata Sons on the other. Such a scenario portrays the majority of the directors as the villain of the piece and the controlling shareholders as the victim. This misalignment of interests is likely to continue so long as the decision-making by the Tata Trusts continues to be hamstrung, especially due to the embargo imposed by the Maharashtra Charity Commissioner, and also the difference of opinion expressed by the two nominees of the trusts. In that sense, it is not a typical case of a controlling shareholder being able to exercise full control over the board, but one that involves an incapacitated controller whose influence over the board of the company is significantly curbed.
Hence, even if Tata Trusts were to invoke the OPM under section 241 of the Companies Act, 2013, they would do so as a significant shareholder that has theoretical, but not practical, control over the company in which it holds a majority of the voting shares. While nothing in section 241 prevents majority shareholders from bringing such claims, that is far from the norm. The OPM remedy tends to be unavailable to shareholders who can exercise self-help, but the Tata Trusts’ hands are tied.
Broader Governance Considerations
Apart from the legalities discussed above, this episode generates a number of wider issues within the realm of corporate governance. A few are highlighted here briefly.
First, if one were to correlate the previous Tata-Mistry battle with the current one, the concern boils down to succession planning, and the associated differences of opinion among various decision-makers. The removal of Cyrus Mistry involved disagreements between him and the rest of the board along with the controlling shareholders, the Tata Trusts. The same issue of succession planning has manifested in a different way on this occasion. Now it is a question of whether there should be a continuation of the present leadership (decided in favour by a majority of the directors) over its revamp (preferred by the lone dissenting board member). Evidently, critical succession decisions in Tata Sons have constituted key governance pain points that have failed to be addressed satisfactorily by agreements between the individuals and institutions concerned. While it is too optimistic to expect an elimination of the succession problem altogether, it could have been mitigated to a great extent by greater planning and a robust succession framework that better aligns the interests of the board and the shareholders on the one hand, and among the shareholders themselves (majority and minority) on the other.
Second, and one that has been alluded to earlier, is the nature of the agency problem in corporate governance. With concentrated shareholding being the norm, Indian companies are prone to the agency conflict between controlling shareholders and minority shareholders. Increasingly, the regulation surrounding corporate law and governance, including the OPM remedies under the Companies Act, are attuned towards addressing this conflict. However, what has occurred in the current Tata Sons leadership impasse is the classic agency problem that is replete in companies with dispersed shareholding, namely the one between the board and the shareholders (primarily the majority shareholder). This is because the majority shareholder is unlike any other typical controller: the Tata Trusts are charitable trusts involved in philanthropy and fall within the regulatory domain of the Charity Commissioner of Maharashtra under the Maharashtra Public Trusts Act, 1950. This circumscribes their ability to act as shareholders on Tata Sons, including to participate in governance decisions, as currently being witnessed. Added to this is the deadlock among the representatives of the Tata Trusts on the Tata Sons board. This combination of circumstances leaves the majority shareholders unable to exercise their governance functions in the company and their representatives’ failure to speak in one voice, which have occasioned the present predicament.
Third, the ownership and holding structure of the Tata Group is such that discordance at the upper levels can percolate to governance impairments to the lower-level operating companies, several of which are listed and have public shareholders, whose value may be susceptible to erosion. The Tata Group can be considered to operate through three broad layers. The top layer comprises the Tata Trusts, who are the ultimate controlling shareholders. At the intermediate level lies Tata Sons which, as the holding company for the group, owns shares in a wide range of operating companies. Such a structure attracts twin agency problems: the first between the Tata Trusts as majority shareholders and Tata Sons (represented by its board), of the kind playing out at the moment; and the second between Tata Sons as a controlling shareholder and the operating companies (and either their boards or minority shareholders). While the present disputes are limited to the upper level, their impact would naturally affect funding and other major decisions across the corporate group, thereby jeopardising the interests of shareholders as well as other stakeholders, such as employees, creditors, and consumers. What looks to be a disagreement between key individuals at the controlling shareholder and holding company levels could have a seismic effect that reverberates across the entire conglomerate.
Conclusion
Given the high-profile nature of the corporate group and its importance to the Indian economy, the contest for the leadership of Tata Sons would likely continue to grab the headlines. While there will surely be efforts to mediate a truce between the warring factions, it is not unreasonable to anticipate the dispute landing up before the adjudicatory bodies. It is not only likely to test the legalities of processes followed for decision-making in the Tata Sons board, and possibly the shareholders in general meeting (if the matter were to be taken there), but it will also generate a conversation surrounding the resilience of unique governance frameworks of the type that exist in the Tata Group.
[Concluded]
– Umakanth Varottil