[By Mehek Wadhwani & Rishi Raj]
The authors are students at MNLU Aurangabad.
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Introduction
The globally revered tenet of good corporate governance combined with the incessantly increasing importance of Shareholders’ rights has ignited ‘Shareholder activism’ as a primary phenomenon in several developed markets such as the United States of America (“USA), the United Kingdom (“UK”), etc. This activism in the Asian markets is faced with cultural resistance and is subdued compared to its counterparts.
In India, Shareholder Activism is primarily facilitated by the Companies Act, 2013, and the Securities and Exchange Board of India (“SEBI”) regulations, which provide various rights and remedies for the Shareholders. The developments brought with the aim to bring the Indian corporate sector at par with the global standards, have strengthened the corporate governance standards, and the shareholders’ rights and remedies. This ultimately supports the rapid growth of shareholder activism in India. A recent instance of this activism can be seen in the corporate battle between Zee Entertainment Ltd. (“Zee”) and the US-based Invesco Developing Markets Fund (“Invesco”) that witnessed an interesting development, as Justice G.S. Patel of the Bombay High Court granted a temporary injunction in favour of the Indian television network, Zee.
The authors attempt to briefly describe the essential facts of the Controversy, delineate the crucial observations made by the High Court, and comment on the significance of the Order in accordance with our outlined theme, i.e., ‘resistance to shareholder activism, especially in Asia.’
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Synopsis of the Zee-Invesco corporate tussle
On 11th September 2021, Invesco holding 17.88% of Zee’s equity, requisitioned a meeting invoking Section 100(2) of the Companies Act, 2013 (“Act”). This section 100 of the Act is the “heart of the controversy” and it envisages the Shareholders’ right to requisition an Extraordinary General Meeting (“EGM”). The shareholders holding the qualifying equity of at least 10% can requisition the EGM. Thereafter, the Board ‘shall’ within 21 days of receipt of the Notice, proceed to call the meeting within the specified time, i.e., 45 days from the date of requisition notice. In the instance of failure of the Board to call the meeting within 21 days, the requisitionist shareholders ‘may’ call and hold the meeting themselves.
It is apparent that the requisition notice (“Notice”) is the subject matter of the controversy under consideration. The matters listed in the Notice inter alia provided for the removal of Mr. Punit Goenka, the Managing Director of the Zee, and the replacement of the members of the board with six independent directors, subject to the approval of the Ministry of Information and Broadcasting (“MIB”).
The refusal of the Board to call the requisitioned meeting resulted in the initiation of proceedings by Invesco on 29th September 2021, before the National Company Law Tribunal (NCLT) under Sections 98 (1) and 100 of the Act. Thereafter, the Board met on 1st October 2021 to consider the nature of matters listed within the notice. Deeming the matters to be ‘invalid’, the Board expressed its inability to convene the meeting to Invesco. Accordingly, Zee brought a civil suit against Invesco seeking an injunction against the said meeting on the ground that the requisitioned meeting is illegal since the matters which were set out in the notice were violative of various regulatory frameworks.
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Issues addressed
The interim application before the Bombay High Court considered Zee’s prayer for an injunction against Invesco, to prevent the operation of the Notice. The counsel for Zee sought to get a declaration against the notice, deeming it to be ‘illegal, ultra vires, invalid, bad in law and incapable of implementation’, to legally justify its inaction on the notice.
Invesco argued against the grant of an injunction by invoking the principles of ‘corporate governance’ and ‘indoor management, seeking to implement the shareholders’ rights to call an EGM under section 100. It was contended that the word ‘valid’ under the mentioned provision required satisfaction of the qualifying criterion, upon which the Board ‘shall’ call the meeting. The counsel argued that Invesco having satisfied the criterion stipulated within the section, the shareholders’ right could not be curtailed by the Board by prematurely declaring the proposed resolutions as invalid.
On considering the rival submissions and declaring that the Courts’ jurisdiction is not ousted in such instances, the court negated all the contentions raised and granted an injunction in favour of Zee. The Order restrained Invesco from taking any action in furtherance of the Requisition notice. Further, the present order didn’t curtail or abridge the shareholders’ right to call a requisition meeting but suggested the manner of requisitioning meeting that it must be legally compliant. It was unequivocally observed that the shareholders did not enjoy a greater immunity than the Board to propose infructuous or infirm resolutions.
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Comments
The material elements of the controversy outlined in the above discussion give us the appropriate foundation to comment on two significant aspects. First, to conclude on the correctness of the Order.. Second, to comment on the significance of this order in light of the broader theme of ‘resistance to shareholder activism’ in India.
In the given case, Invesco prima facie attempts to place six independent directors of their choice on the Board by proposing the resolution to remove Zee’s Managing Director. This was to ensure adherence to the 12 members Board requirement envisaged under the Articles of Association of Zee. The authors find this to be in contravention of the Companies Act, 2013. The proposed appointment of the independent directors directly by the shareholders doesn’t find favour with the statutory framework for appointment of independent directors under s. 150 of the Act. Further, the non-compliance with s. 203 of the Act is a valid point raised by Zee, considering that the resolution to remove the MD without replacement, makes the directors and the key managerial persons open to liabilities and penalties. The authors find that the resolutions proposed by the Invesco activist shareholders raise several red flags in terms of statutory and regulatory compliance with the Indian corporate laws. Thus, on this account, the decision of the Court to side with Zee is justified. The actions by Invesco may have found favour in the American jurisdiction where such a vigorous form of shareholder activism is entertained. However, the claim of an ‘unfettered’ right to propose a resolution at the EGM, irrespective of its ineffective consequences and resultant statutory non-compliance, could not have been sustained.
Lastly, the authors consider the correctness of the interpretation of ‘valid’ under s. 100 of the Act and the pivotal issue as to whether the court had the authority to intervene and review the validity of the proposed resolutions, and deem them as invalid or ineffective before the requisitioned EGM was conducted. The counsel for Zee argues that for the requisition to be valid it must be “legally feasible and effective.” Oppositely, Invesco emphasizes meeting the qualifying criterion stipulated therein to establish the validity of a requisition. This view is supported by the decision of the Bombay High Court in Cricket Club of India Ltd v. Madhav Apte, wherein it was held that the term ‘valid’ under the s. 169 (Companies Act, 1956) referred to the requirements mentioned in the section, rather than the objective or validity of the resolution itself. Significantly, in Centron Industrial Alliance Ltd v. Pravin Kantilal Vakil & Anr., the learned single bench of the Bombay High Court relied on the observation made in the English case Isle of Wight Railway Co. v. Tahourdin, which emphasized that ordinarily, the court must not intervene in the internal management of the company. Thus, refusal to hold the meeting requisitioned by the shareholders could not be made merely on the argument that the proposed resolutions are irregular. Nevertheless, this would not defeat the power of the court from restraining such meetings when the proposed resolution is illegal.
The authors agree with the reliance placed on Centron (supra) because in the instant case the requisitioned meeting does not merely pertain to the internal management of the company, but it also interferes with the statutory obligations of Zee under the Indian laws. Therefore, the authors agree with the distinction drawn between ‘irregular’ and ‘illegal’ resolutions in the requisition notice, and the grant of injunction as the instant case is an example of the latter.
The second aspect that requires due consideration is the relevance of the Order with respect to the phenomenon of shareholder activism. Such activism includes the efforts of the shareholder activists in gathering the support of other shareholders to bring about the preferred changes in the control and management of the company. There is a plethora of objectives such as enforcing good corporate governance, environmental concerns, the business model of the company, profit distribution, merging with a particular company, etc. These shareholders buy minority equity shares of a corporation and use various methods and tactics ranging from using media pressure to litigation threats, to force a particular change in the company.
The instant case has been identified to reflect the importation of US-style proxy wars in the Indian corporate domain. The authors observe that in this case, the aggressive activism by Invesco has met with traditional resistance, which is a common occurrence in the Asian markets. As seen in this case, the courts and the statutory roadblocks stand in the way of such radical activism. In the concluding part of the instant judgment, the learned judge remarked that in certain cases the company needs to be saved from its own shareholders, before granting the injunction in favour of Zee.
The authors opine that while the instances of shareholder activism are positively increasing, the Indian corporate markets will continue to resist the aggressive forms of activism witnessed in the American markets. The decision of the Division bench of the Bombay High court in the appeal made by Invesco will be crucial in validating our assertion. Further, it will reflect the extent of reverence given to shareholders’ rights and shareholders’ democracy in India. Lastly, the authors firmly believe that shareholder activism emboldened by strengthening shareholders’ rights is a constructive development for corporate India, nevertheless, it will continue to face hurdles in the Indian markets.