Tata Sons v Cyrus Mistry : Decoding The NCLAT Verdict

The board room battles in Tata Sons Ltd have now become a high profile court room battle with the Supreme Court being moved against the National Company Law Appellate Tribunal's decision reinstating Cyrus Mistry as Executive Chairman of the company.

Here is a brief explainer about the background of the dispute and the reasons which weighed with the NCLAT.

Chronology

December 2012 : Cyrus Mistry from Shapoorji Pallonji group appointed as Executive Chairman, Tata Sons Limited. The board of directors then appointed Ratan Tata as 'Chairman Emeritus' an honorary title for his contributions to the Tata Group. Ratan Tata had stated that he would be available only for advice and there would be no overhang from his previous role.

October 2016 : Cyrus Mistry removed from the position of Executive Chairman of Tata Sons by the Board of Directors.

March 2017 : The minority shareholders of Tata Sons representing the Shapoorji Pallonji group - Cyrus Investments Pvt Ltd and Sterling Investment Corporation Pvt  Ltd - moved an application at NCLT, Mumbai under Sections 241-242 of the Companies Act, 2013  alleging prejudicial and oppressional acts by the majority shareholders. Tata Trusts has the majority shareholding in Tata Sons.

Another petition seeking waiver under Sections 244 which mandates the eligibility criteria for holding the requisite 10% shares for filing a plea under the Act is also filed. Tata Sons Limited is a group company comprising of Tata Trusts, Tata Family, Tata Group Cos. collectively hold over 81% of shares and Mistry with Shapoorji Group hold around 18%. However, SP holding falls down below 10% when preference shares are taken into account. Both petitions were dismissed by NCLT.

September 2017 : On Appeal, NCLAT directed NCLT to hear the matter as an exceptional case taking into consideration that SP have invested approximately Rs.1,00,000 crores out of Rs. 6,00,000 crores of total investment of Tata Sons Limited and for decades jointly conducted the affairs of Tata Sons Limited in an environment of mutual trust and confidence.

July 2018 : NCLT dismisses SP group's petition.

August 2018 :  Appeal field against NCLT decision. Mistry files a separate appeal against some adverse observations made against him by NCLT.

December 18th, 2019 : The NCLAT passed an order putting Cyrus back in the hot seat. The NCLAT also held the conversion of Tata Sons as a 'private company' illegal. 

The Issue

The main question which arose in the case was whether the company's affairs have been or are being conducted in a manner 'prejudicial' or oppressive to any member or members or prejudicial to public interest or in a manner prejudicial to the interests of the company under Sections 241/242 of the Companies Act 2013.

Tatas v Cyrus Mistry : 15 Grounds Of Challenge Against NCLAT Order

The Findings of the Tribunal

 Some of the findings of the NCLAT were as follows:

(i) The Articles of Association of Tata Sons became tools of prejudicial and oppressive interference as they provided a veto to the trustee nominee directors, on every decision taken by the Board of Tata Sons. This was primarily done to safeguard the interest of the Tata Company. However, this started being interpreted as a means of requiring prior consent and affirmation on whether matters could be brought before the Board of Directors of not only Tata Sons Limited but also of other Tata Group Companies (which was never the intention). This was also repugnant to the scheme of the Companies Act 2013, which for the first time required the Boards of certain large unlisted public companies to comprise of independent directors who inter-alia are duty bound to safeguard the interests of minority shareholders. The effect was that important matters which could rightly benefit from the deliberation by all members of the Board were deprived of any inputs by not even being brought before the Board. The court held that his amply demonstrated the pre-eminent position that the nominated Directors of Tata Trusts held on the Board. Therefore, independently, no majority decision could be taken either in general meeting of the shareholders or by majority decision of the Board of Directors.

(ii) The Tatas contended that the removal of Mistry was not on account of some personal ill will or animosity but due to his failure to deliver the promises that he had made at the time of his selection as the Chairman of Tata Sons Limited. It was alleged that Mistry also failed to establish a healthy and constructive governance relationship with Tata Trusts which caused an untenable trust deficit.

The NCLAT refuted this contention and stated that the hasty removal of Mistry by inter alia linking it to his alleged lack of performance had never been discussed or deliberated prior to the removal. Cyrus had presented the latest annual business plan to the Board of Directors of Tata Sons which was found lacking in several respects by fellow Board members, like shutting down the Nano project, cutting losses with decisions in other Tata Group Companies such as Indian Hotels Company Limited, Tata Teleservices Limited etc. Over 550 emails exchanged between Ratan Tata and Mistry demonstrated the scale of interference and which fostered a pattern of decision making that led to the Board of Tatas being undermined. This also included dictating the contents of minutes and directly interacting with officials of the Tata Group Companies, Nominee Directors stepping out of board meeting to take instructions from Mr. Tata on how to vote in a matter etc.

The Tribunal noted that just three months prior, the Board of Directors had unanimously endorsed the recommendation of the Nomination Remuneration Committee (NRC) (a statutorily mandated committee under Section 178 of Companies Act, 2013 to review the performance of directors) to laud the performance of Cyrus Mistry and others and accorded a pay hike for all of them. This pay hike was unanimously approved by the Board of Directors of Tata Sons in its meeting held the next day and the performance of Mistry had been endorsed and praised by nearly 50 Independent Directors of Group Companies.

The three Directors who voted for his removal had been inducted into the Board of Tata Sons only on 8th August, 2016 i.e. after the appraisal report of NRC and they had attended just one Board meeting prior to the meeting held on 24th October, 2016. Further, two of these Directors were members of NRC who had praised his performance as Executive Chairman.

(iii) Cyrus as executive chairman had reiterated the need for development of a governance framework and volunteered to assist with the document on which Ratan Tata and others were working on. However, on examining the various emails from 2013 to 2016 it was reflected that there was complete confusion in the Board about the governance framework of the Tata Sons Ltd. Further, before deciding on any matter or for taking any resolution by the Board approval had to be taken from Mr. Tata as trustee. The members of the NRC also stressed the need for clarity on the functioning of the Board of Tata Sons Limited and the role of the Tata Trusts in relation to Tata Sons Limited and the Tata Group Companies.

(iv) Prior to the Board meeting of 24th October 2016, Ratan Tata in the presence of some directors had asked Mistry to step down from the post of the Executive Chairman reflecting the fact that Tata was determined to remove Mistry. Mistry refused to accede to such dictate in the absence of any ground or any decision of the Board. The majority shareholders of Tata Trusts' were well aware that advance notice was necessary for such a removal, therefore, opinions had been obtained in advance from eminent lawyers and an  ex- Supreme Court Judge on the same. No copies of the said opinions were circulated to the Board at the meeting but still the board continued with its proceedings.

(v) It was found that Tatas were well aware that the unprecedented removal would have global ramifications and would raise concerns and therefore decided to make a press announcement. The Company and its Board also understood that such removal may lead to a sense of uncertainty amongst the members, investors and interested parties of Tata Sons Ltd. and its Group Companies and may result in winding up. According to the NCLAT, the language of the Company in its 'Press Statement' reflects that they also knew that their action taken was prejudicial and oppressive.

(vi) The Tribunal held that there were no records to show that the Sir Dorabji Tata Trust or the Sir Ratan Tata Trust at any time expressed displeasure about the performance of Mistry. No records have been placed with regard to loss nor did any discussion take place in the Board Meeting of the Tata Sons to suggest that it was of serious concern. The correspondences from 2013 to 2016 amongst Mistry, Ratan and some other board members confirm that at all times Mistry had been raising concerns about some of the loss making Tata Companies and suggested for taking appropriate steps. In spite of such communications, the Board of Directors (which could take decision only with affirmative vote of nominee Directors of the Tata Trusts) did not take any decision for the revival or restructuring of loss making companies. If there was any failure and loss caused, the Tata Trusts or the Board of Directors could not be absolved of its responsibility, particularly when the nominee Directors of the Tata Trusts had affirmative vote to reverse the majority decision.

(vii) An attempt to convert Tata Sons Limited into a Private Limited Company was made. As a public company it would be subjected to a higher standard of governance and with a view to dilute these standards conversion was necessary. As per Section 14 of the Act if any Company decides to alter its articles having the effect of conversion of a Public Company into a Private Company, it is required to pass a special resolution and obtain approval from the Tribunal. Only after such an approval, the Company can proceed and request the Registrar to register the Company as Private Company. There is no provision under the Companies Act 2013 for automatic conversion of 'Public Company' to Private Company. Curiously, even after enactment of the Companies Act, 2013 which came into force on 1st April, 2014, Tatas did not taken any steps under Section 14. The NCLAT emphasizes that till date, no application has been filed before the Tribunal under Section 14 for conversion. The Registrar of Company has erroneously struck down 'Public' without following the procedure under law. The only motivation of the conversion was to marginalize and further oppress the only independent minority shareholder, held the Tribunal.

In a nut shell

The NCLAT held that the consecutive chain of events amply demonstrated the impairment of confidence of the minority shareholders with reference to conduct of affairs of company and that there was unfair abuse of powers on the part of the Tatas. The Press Statement of Tata Sons was an afterthought to put all blame on Mistry. The Board of Directors' majority decision (guided by the affirmative vote of the nominated members) have failed to explain as to why the Board failed in its duties and not notice the loss of any of the Tata Companies. The NCLAT declared the removal and other actions taken against Cyrus Mistry as illegal and restored his original position as Executive Chairman of 'Tata Sons Limited' and consequently as Director of the Tata Companies for rest of the tenure. As a sequel thereto, the appointment of N Chandrashekharan as 'Executive Chairman' in place of Cyrus Mistry was also declared illegal. The NCLAT further asked Ratan Tata to desist from taking any decision in advance which requires majority decision of the Board of Directors or in the Annual General Meeting. With a view to ensure smooth functioning of the Company, the order was put on hold for a period of four weeks.

The Tatas have now filed an appeal in the Supreme Court against the order of the NCLAT, saying that it undermines the principles of 'corporate democracy'.