Tata vs Mistry: Minority shareholders cannot claim board seat, says SC

The Supreme Court verdict on the Tata versus Mistry case has clarified the point that the minority shareholders cannot get a seat on a private company’s board unless the firm’s articles of association or the majority shareholders back them.

While the Companies’ Acts 1956 and 2013 recommend a director on the board to be elected by small shareholders in listed companies, the court has made it clear that Mistry Group is not a small shareholder and a board seat cannot be allotted to it contractually or by law.

‘Small shareholders’ are defined in the Companies Act as those holding shares of a nominal value of not more than Rs 20,000 or any other prescribed sum.

Lawyers say shareholders in private unlisted companies like Mistry Group must in future incorporate their rights in the articles of association of the company or else they will have no ‘right’ to appoint a director or directors.

“In a private company, additional directors are appointed by the board. They hold office till the next annual general meeting when the shareholders can appoint them or any other persons offering themselves for appointment, by a majority shareholders vote. The right of certain shareholders, by name or percentage shareholding, to nominate a director can be incorporated in the articles of association of the company. Otherwise minority shareholders of a private company have no ‘right’ to appoint a director or directors,” said Anand Desai, managing partner of DSK Legal.

In its order the court said the right to claim proportionate representation was not available even to a minority shareholder statutorily.

“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 SP Group, which holds around an 18.37 per cent stake. In fact, admittedly the value of this 18.37 per cent of shareholding of SP Group, as of March 2016 was around Rs 58,441 crore. It is claimed that the purchase consideration of these shares at the relevant point of time was Rs 69 crore and that during the period from 1991 to 2016, SP Group had received aggregate dividends to the tune of Rs 872 crore. We do not know whether this kind of a huge return on investment and the skyrocketing of the appreciation of the value of investment are due to oppressive conduct, or despite oppressive conduct,” the court said.

The right to claim proportionate representation is not available even to a minority shareholder statutorily, both under the 1956 Act and under the 2013 Act. It is available only to a small shareholder, which SP Group is not, the court said.