A comprehensive win for the Tatas

They stand vindicated in the Mistry saga, but what is legally sound may not conform to the best standards of governance

In October 2016, Cyrus Mistry was removed as executive chairman of Tata Sons, the holding company of the Tata group. A huge controversy erupted thereafter.

Mr Mistry claimed that he was removed because he was trying to set right many things that were wrong with the Tata group, including questionable business decisions and transactions of the past. He said his removal as executive chairman without any notice and without any explanation was illegal.  

Mr Mistry moved the National Company Law Tribunal (NCLT) in the matter. In July 2018, the NCLT dismissed his petition. He then moved the NCLT Appellate Tribunal (NCLAT) against the NCLT order. In December 2019, the NCLAT granted Mr Mistry’s appeal and ordered that he be restored as executive chairman of Tata Sons.

Last month, the Supreme Court (SC) ruled in the matter. It set aside the orders of the NCLAT and  rejected all the substantive contentions of Mr Mistry/the Shapoorji Pallonji (SP) group. The Tata group could not have asked for a more comprehensive win. However, the implications of the verdict for important questions of corporate governance are somewhat unclear.

The SC’s verdict may baffle many who have watched the long drawn-out battle between Ratan Tata and Mr Mistry. Common sense suggested that some of Mr Mistry’s complaints, especially the one about his summary removal as executive chairman, had substance. Alas, common sense is no guide to the law. The SC’s 282-page, rigorously argued order is worth reading. It makes clear that the law is emphatically in favour of the Tatas. Students of company law will especially find the references to the evolution of company law and judicial precedents compelling.

In its petition to the NCLT, the SP group had made serious allegations about various transactions and business decisions of the Tata group, such as those related to the Sterling group of companies, the acquisition of Corus in the UK and the Nano car project.  The NCLT rejected these allegations. The NCLAT did not overturn the findings of the NCLT on these points. Nor did the SP group, in its appeal to the SC, question the failure of NCLAT to do so. The SC takes the position, therefore, that the NCLT findings in respect of the allegations made by the SP group are final.  

One of the key issues in the tussle between Mr Mistry and Mr Tata was the suddenness of Mr Mistry’s ouster as executive chairman in October 2016. There had been no indication of any dissatisfaction with Mr Mistry’s leadership until then. The Tata group had performed well under his stewardship. The Nominations and Remuneration Committee of the board of Tata Sons had endorsed his performance and recommended a pay hike. Mr Mistry contended that the manner of his removal was oppressive and unfairly prejudicial to minority shareholders. The SC’s response to this point is interesting. It suggests that if there had been oppressive conduct on the part of the Tatas, the group could not have done well under Mr Mistry’s stewardship. Nor could the board members and Mr Mistry have formed themselves into a “mutual admiration society” until his ouster.

The lay person may well ask: How did the “mutual admiration society” dissolve all of a sudden in October 2016? What exactly were the grounds for Mr Mistry’s abrupt removal? The Tatas told the SC they had lost trust and confidence in Mr Mistry. At what point did this happen and why? We do not have an answer.  

Illustration: Binay Sinha

The SP group contended that no advance notice was given to Mr Mistry regarding his removal, nor did the item figure on the agenda of the meeting in which he was removed. The SC takes the view that, according to the Articles of Association of Tata Sons, advance notice is required only where a director wants to raise a particular matter at a board meeting. There is no such requirement for the board taking up an agenda. A sense of unease remains. The abrupt removal of Mr Mistry may have been in conformity with the law. But can we say that it conforms to the best standards of governance?  

The relationship between Tata Trusts and Tata Sons has been very much in the limelight. Two Trusts of the Tatas have the right to nominate one third of the directors on the board of Tata Sons. At Tata Sons, matters that required the approval of the majority of board members required the affirmative votes of the directors nominated by the Tata Trusts. In effect, the two Tata Trusts exercise veto powers on the board of Tata Sons. The SP group argued that such a situation was against the norms of good governance. But the norms of good governance under the Companies Act 2013, the SC points out, apply to public and listed companies. A private company such as Tata Sons is not subject to these norms.    

The SP group had argued that the nominees of Tata Trusts on the board of Tata Sons were conflicted between their obligations to the Trusts and those towards Tata Sons. The SC thinks that the conflicting obligations of Tata Trusts’ nominee directors are inevitable and not inconsistent with the statutes.

The SC notes that Tata Trusts are charitable trusts. Tata Sons is a holding company and is not engaged in any business activity. The nominee directors of Tata Trusts on the board of Tata Sons are thus not on the same footing as a company’s directors appointed at a general meeting of the company. The SC goes so far as to suggest that it may not be practical to expect all directors on a board to exercise independent judgement. If they did so, there would be no need for a category called “independent directors”! 

These observations raise interesting questions. Can promoters operate through trusts, holding companies and nominee directors and render themselves exempt from conflicts of interest? Can directors other than independent directors in non-holding companies allow their obligations to promoters to override those towards other shareholders? Can the government’s nominee directors on public sector companies claim a similar exemption?

Mr Mistry had asked for proportional representation on the board for his group. The SC makes it clear that there is no such provision under law for a company, whether public or private. At the most, small shareholders in a listed company can be enabled to elect one director. 

The Tatas stand vindicated in the matter. They will find most gratifying the SC’s point that Tata Sons has been well ahead of the legal curve in respect of the functioning of its board. But what is legally sound does not always conform to the best standards of governance. Many will wish the Tata group to stay ahead of the governance curve as well. One way to do so may be to unilaterally subject Tata Sons to even higher standards of governance by making Tata Sons a public, listed company.

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