Former Tata Sons chairman Cyrus Mistry said the National Company Law Appellate Tribunal’s (NCLAT) verdict delivered Wednesday that holds his removal from office "illegal" was a “vindication” of his stand and a “victory for the principles of good governance and minority shareholder rights".

Mistry’s statement termed the appellate tribunal’s verdict a landmark judgment for minority shareholder rights. “Today’s judgment is not a personal victory for me, but is a victory for the principles of good governance and minority shareholder rights,” Mistry said. “For over fifty years, the Mistry family, as the significant minority shareholder of Tata Sons, has always endeavoured to play the role of a responsible guardian of an institution that the entire nation is proud of.”

The former Tata Sons chairman further added: “For the Tata Group to prosper as an institution, it is important that the management of individual companies, their Boards, the management of Tata Sons, the Board of Tata Sons and the shareholders of Tata Sons, all work harmoniously within a robust governance framework, that in substance and form, protects the rights of all stakeholders, including shareholders, investors and the Tata Groups employees, who represent the strongest asset of the Group.”

In response to the NCLAT verdict, Tata Sons' group general counsel, Shuva Mandal said in a statement: "Tata Sons has received and is analysing the order of the NCLAT. It is not clear as to how the NCLAT order seeks to over-rule the decisions taken by shareholders of Tata Sons and listed Tata operating companies at validly constituted shareholder meetings. The NCLAT order appears to even go beyond the specific reliefs sought by the appellant. Tata Sons strongly believes in the strength of its case and will take appropriate legal recourse. Tata Sons assures its various stakeholders that it not only has always operated in a fair and equitable manner but also acted in accordance with the law and will continue to do so."

Mistry said that the time had come for all stakeholders to work together for the sustainable growth and development of the Tata group, “an institution that we all cherish.”

The statement issued by Mistry wasn’t clear on what his future course of action would be. There is a line of thought that holds that Mistry may not want to come back as executive chairman as long as his stand is vindicated and he is compensated for loss of reputation and remuneration. It merits mention that, as Tata Sons chairman, Mistry had shared a cordial relationship with current Tata Sons chairman N. Chandrasekaran, who was ably leading Tata Consultancy Services (TCS) before this. Under Chandrasekaran’s leadership, TCS had emerged as the business group’s best-performing company and the largest contributor to the holding company’s dividend income.

Many of the decisions that Chandrasekaran has taken after becoming Tata group chairman to shut non-remunerative businesses and streamline operations, were in line with what Mistry was planning to do as chairman himself.

However, with the NCLAT holding Mistry’s removal as illegal and, consequently, Chandrasekaran’s appointment as chairman also illegal, it remains to be seen who remains the actual chairman of Tata Sons?

A closer look at the NCLAT verdict passed by Justice S.J. Mukhopadhaya, shows that the four-week stay on the implementation of its order offered by the tribunal was in response to a request by the counsel for the respondents (Tata Sons and its directors and Tata Trusts and their trustees). The tribunal allowed this for the “smooth functioning” of Tata Sons. However, the judgment is clear that Mistry is to be reinstated as a director on the board of Tata Sons and three other Tata group companies, from which he was earlier removed, forthwith.

The NCLAT judgment contains some scathing commentary on the way in which business affairs were being conducted in the Tata group, and also in the way Mistry was removed. The appellate tribunal also slammed the NCLT for the language it used in its order, which the former set aside.

For starters, the NCLAT judgment recognises Tata Sons as a “quasi-partnership” between two groups of stakeholders – the Tata Trusts and family members on one side, and the Shapoorji Pallonji Group on the other. “Albeit a two group company, in effect, the affairs of Tata Sons entail exercising control over the affairs of over a 100 operating companies which is why it is imperative that Tata Sons should effectively operate as a two-group company to provide checks and balances in its conduct of business rather than applying a simple majority rule which would mean that one group can unilaterally determine the destiny of over a 100 operating companies including the 29 listed companies and millions of stakeholders,” the order reads.

The judgment also recognises that despite retiring, Ratan Tata, N.A. Soonawala and nominee directors of the Tata Trusts sought to interfere in the operations of the Tata Sons and, in turn, the operating companies.

“Faced with having to deal with a formal institutionalising of a governance framework involving Tata Trusts, Tata Sons and Tata group companies…an overnight coup coupled with a purge of the entire senior management was effected on 24th October, 2016 i.e.an action which as the record shows was surreptitiously planned in advance,” the order stated.

While addressing the issue of whether due process was followed when it came to removing Mistry as chairman, the NCLAT order observed that requisite compliance with Article 118 of the Articles of Association (AoA) of Tata Sons was “given the go-by” as no committee was formed for the removal of the incumbent chairman.

The court’s commentary also indicated that it found merit in the appellant’s argument that Article 121 of Tata Sons’ AoA, which was misused to interpret it as a provision that required prior consent and affirmation even as to whether matters could be brought before the board of not only Tata Sons, but also the group operating companies. Mistry and his family firms that collectively own 18% in Tata Sons had contended that this article gave the Tata Trusts scope for interfering in the day-to-day operations of the business group.

The appellate tribunal also came down hard on the Registrar of Companies for classifying Tata Sons as a private limited company, without the tribunal’s approval. This was in response to a move whereby Tata Sons sought to convert itself from being a public limited company to a private limited company.

“The aforesaid action on the part of the company, its board of directors to take action to hurriedly change the company from ‘Public Company’ to a ‘Private Company’ without following the procedure under law, with the help of the Registrar of Companies just before filing of the appeal, suggests that the nominated members of ‘Tata Trusts’ who have affirmative voting right over the majority decision of the board of directors and other directors/members, acted in a manner ‘prejudicial’ to the members, including minority members (Shapoorji Pallonji group) and others as also ‘prejudicial’ to the Company (Tata Sons), justifying us to hold that the appellants have made out a clear case of ‘prejudicial’ and ‘oppressive’ action by contesting respondents,” the appellate tribunal observed.

The NCLAT also directed the respondents to not invoke the use of Article 75 of Tata Sons’ AoA against the Shapoorji Pallonji Group. Article 75 empowers Tata Sons to transfer ordinary shares of any of its shareholders without following the normal procedure of transfer. Theoretically, the Mistry and his family could be forced to sell their stake in Tata Sons by the use of this article.

The NCLAT also advised the majority shareholders of Tata Sons (the Tata Trusts and Tata family members) to consult with the minority group (Shapoorji Pallonji Group) when it came to the appointment of chairman and directors for better protection of the interest of all stakeholders and creating a healthy atmosphere that would remove mistrust between the two groups.

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