Nature of Tata Sons' partnership lies at the heart of Tata-Mistry drama

Ratan Tata does not think Tata Sons is 'quasi-partnership'; Cyrus Mistry does. The SC will have to sort out the vexed issue

The crux of the three-year-old Cyrus Mistry boardroom ouster drama seems to now rest on the answer to the question whether Tata Sons, the conglomerate’s holding company, is a “quasi-partnership” between the Tata and Mistry families.

The National Company Law Appellate Tribunal (NCLAT) alluded to the quasi-partnership character of Tata Sons in its recent order that called for reinstating Mistry, the ousted chairman and director, to Tata Sons board and the boards of other group companies. However, the Tata group, including Tata Sons Chairman Emeritus Rata Tata, in their pleas in the Supreme Court last week have emphatically challenged the very basis of the NCLAT order. Ratan Tata in his plea claims that the tie-up between the two groups was not a partnership and that the Shapoorji Pallonji Group was a financial investor in Tata Sons.

Legal experts say the answer to whether Tata Sons is a quasi-partnership could be a vexed one. The reason being there is no definition of a quasi-partnership under the Companies Act, 2013, and the concept is largely created through judicial precedents.

“It’s quite crucial to establish the character of partnership in this case. Only then, Mistry gets to contend that his minority rights were suppressed,” says Sandeep Jhunjhunwala, director, Nangia Andersen. A minority shareholder in a quasi-partnership who has been involved in the running of the business can claim protection from being ousted or excluded, without any good reason, from the ongoing management of the business, he adds.

Experts say the term quasi-partnership refers to the situations wherein in any company there are two groups having defined roles and responsibilities either through mutual understanding since the inception of the company or through some written agreements. “The concept is generally referred to in companies where there are equal shareholdings and a situation of deadlock arises if any group disagrees,” explains Daizy Chawla, managing partner in law firm S&A.

Experts point out that in the present case, the minority shareholder has not alleged breach of the Articles of Association of Tata Sons. Nor has it stressed on breach of the Shareholders Agreement. “Instead, the minority shareholder has argued that the company (Tata Sons) is in the nature of a quasi -partnership between two groups -- the Tata group and the Mistry group,” says Rajat Sethi, partner at law firm S&R Associates.

Experts say there is a difference in the treatment of minority shareholders in quasi-partnership firm. “Shareholders of a company that has the character of a quasi-partnership can be held to a higher standard of behaviour. Essentially, such an argument is based on a legitimate expectation that arises from an implied understanding (between partners),” says Sethi.

While it is important to establish the true character of such a company for any relief to minority shareholders, such principles cannot be liberally invoked. “The court cannot easily accept such a plea in every case,” adds Sethi. 

According to Umakanth Varottil, an associate professor of law at the National University of Singapore, the NCLAT judgment assumes that Tata Sons is a quasi-partnership through a simple statement, without analysing the issue in detail. “It does not establish on what basis it had reached that conclusion,” says Varottil.

Experts say the Tata-Mistry case highlights the need to reconcile the treatment of minority shareholders, based on facts rather than perception. “It cannot be a battle of perception, but a matter of legal right,” says Jhunjhunwala.

The promoter-driven or controlled companies must recognise the need for managing their businesses on legally established procedures and practices, and not on a "majority-oriented" approach, he adds.

Varottil feels the need for more clarity on how minority shareholder rights should be protected through a mix of legislative and judicial orders. Chawla is of the view that some defined criteria are required to protect the rights of minority shareholders when there is no written agreement or understanding.

The Supreme Court now has a chance to sort out the vexed issue of treatment of minority shareholder interest in a quasi-partnership situation.

The trouble with quasi-partnerships

• There are no definition of a quasi-partnership under Companies Act, 2013
• The concept is largely created through judicial precedents
• A higher standard of behaviour is expected from shareholders of a quasi-partnership company
• It is important to establish quasi-partnership character of a company for any relief to minority shareholders
• Principles of quasi-partnership can only be invoked on a case-to-case basis