[By Yagn Purohit and Vishesh Gupta]
The authors are students at the Institute of Law, Nirma University.
Introduction
In India, the directors are bound to call and convene an EGM on requisition made by shareholders under section 100 of the Companies Act, 2013 (hereinafter CA, 2013) if such requisition is compliant with procedural requirements u/s 100. However, Zee v. Invesco saga has reignited the debate on corporate democracy and has disturbed the already settled legal position laid down by the Hon’ble Supreme Court concerning the validity of requisition made u/s 100 of CA, 2013. Invesco (shareholder of Zee) had filed a requisition for calling an EGM u/s 100 of CA, 2013. The requisition was fulfilling the criteria of 10% as given u/s 100. Zee filed for an injunction against the requisition before the Bombay HC which was granted by the Single Judge (hereinafter SJ).
Section 100 of CA, 2013 promotes corporate democracy by establishing the right of shareholders to regulate the working of the company by calling Extraordinary General Meeting (hereinafter EGM) by submitting a valid requisition. The question then is whether there exists a test to determine the validity of a requisition and whether the directors are empowered to refuse such a requisition? In the case of Zee v. Invesco SJ and Division Bench (hereinafter DB) adopted contrasting approaches. This article analyses both the positions to determine their alignment with the existing legal framework in India.
Ruling by Single Judge
The SJ held that the requisition made by shareholders must be valid from a procedural perspective and the objective of the requisition should be capable of being carried out legally. If the objective of the meeting cannot be carried out lawfully, then such a requisition is invalid and the board has the right to reject it.
The court observed that if under Section 100, only procedure, i.e., the numerical threshold of shareholders is considered to deem it to be a valid requisition and mandate the board to convene an EGM of the company, then it would mean that a group of qualified shareholders can propose any sort of resolution, regardless of its legality, and force this to be considered by the general body at an EGM. The court explained this with an example of online gambling. It took a scenario where a group of qualified shareholders could propose that the company take up the business of online gambling. The court applied null hypothesis testing which says that an argument must be tested for falsification or failure, just like any other hypothesis in philosophy. Therefore, SJ granted an injunction restraining the shareholders to hold the EGM.
Ruling by Division Bench
The DB overturned the judgment of SJ and held that shareholders cannot be restrained from holding EGM. Court placed reliance on two judgments: LIC v. Escorts and Cricket Club of India v. Madhav Apte to hold that (i) validity means procedural and numerical compliance with the conditions mentioned in Section 100 and not the substance of the requisition (ii) BOD has no discretion to sit in judgment over resolutions proposed by requisitionists, (iii) reason for resolutions are not subject to judicial review and (iv) If requisition complies with the procedure and numerical requirement u/s 100, the board is mandated to call the EGM.
The court further noted that Section 100 aids corporate democracy and protects shareholder rights and this intent of the legislature must be taken into consideration for interpreting section 100. Therefore, DB did not grant an injunction as it would have hampered corporate democracy.
Analysis
The SJ heavily relied on foreign judgments for interpreting the power of the Board to refuse the requisition made by shareholders. In the author’s opinion, DB was correct in not relying on such judgments. There are two reasons for the same:
Firstly, there exists a binding precedent of the supreme court of India, i.e. LIC v. Escorts according to which, directors are bound to call EGM on the receipt of a requisition which is only subject to the numerical requirements provided u/s 100.
Whereas, the DB has rectified this by taking a procedure-centric definition of a valid requisition which is in consonance with LIC v. Escorts. DB correctly noted that the purpose-centric definition propounded by the SJ will lead to a string of appeals, opening floodgate of litigation and rendering the corporate democracy nugatory.
Secondly, UK Companies Act, 2006 is not pari materia with the Indian CA, 2013 with respect to law on shareholder requisitioned meeting. Section 303(5) of the UK Companies Act, 2006 provides for a ground that if the resolution proposed by the shareholder is ineffective, if passed, then the board has the ground for not moving such resolution in the meeting.
Whereas in the Indian CA, 2013, this ground doesn’t exist for repudiating a resolution. To stop a resolution proposed by shareholders, the board must apply to the regional director u/s 111(3) of CA, 2013. Such application can only be filed on the ground that the requisition is for needless publicity for defamation. If valid is interpreted according to the reasoning of the SJ, it would lead to adding words to Section 111 of the CA, 2013. Therefore, foreign laws and judgments should not be preferred over LIC v. Escorts to interpret the validity of a requisition for EGM in India.
Further, The SJ has contradicted his observations in the judgment. SJ noted that the requisitionists have been bestowed with the power of the EGM themselves if the board refuses or fails to call an EGM. This power is taken away the moment SJ granted an injunction to Zee restraining Invesco and other requisitionists from calling an EGM of the company. As a result of this injunction, the shareholders have no remedy left, and their statutory right to call an EGM is taken away. The court recognized the shareholder rights with one hand but snatched them away with the other.
However, it is important to note that the SJ raised an important issue by taking a purpose-centric approach to a valid requisition. Making the directors of a company bound to convene a meeting may open a pathway for frivolous requisitions which even if accepted, could not be implemented legally or even go against the interests of the company. One of the consequences may be a waste of costs and logistics for convening an EGM, especially for a small or medium-sized company.
It is pertinent to note that the numerical threshold of shareholders acts as a primary safeguard to exercise the right to call EGM. This prevents a shareholder with minimal holding to interfere with the working of the company through EGM. Further, the law has put another safeguard to ensure that shareholders’ right to call EGM is not abused against the interests of the company. By the virtue of Section 111 of CA, if shareholders with 10% or more shareholding file an EGM with a mala fide intention, BOD can apply to the regional director to stop the circulation of the resolution
Further, passing injunctions before a meeting even takes place will set a wrong precedent, which has been clearly highlighted by DB. Merely because a meeting has been called doesn’t necessarily mean that the resolution will be passed in that meeting.
In a meeting, shareholders have the right to ask questions and discuss all aspects of a resolution so as to take an informed decision that is beneficial to the company. Directors, rather than filing an injunction, can bring the attention of shareholders to the legal infirmities of the proposed resolution in the meeting itself. They can also disclose about this in the explanatory statement attached to the notice of the meeting. This approach is preferable compared to such injunctions because this approach does not hamper corporate democracy and further prevents pre-emptive litigation.
Conclusion
Shareholders are the true owners and the ultimate beneficiaries of a company. They have been bestowed with the right to keep a check on the directors and the overall functioning of the company so as to protect the interest of the company and shareholders. Right to call EGM is one such fundamental right and stands as a pillar of corporate democracy in any corporation. The court should not interfere in the internal management of the company to the extent of taking away all the rights from the shareholders to keep a check on the management of the company. The decision of DB is in harmony with the principles of corporate democracy and the existing laws in India and upholds the interpretation and right of shareholders as laid down in the case of LIC vs. Escorts.