The courtroom battle in the Tata Sons case has come on the sixth day of continuous hearings of the parties. A bench of three judges chaired by the President of the Supreme Court of India, SA Bobde, heard arguments put forward by Mr. Shyam Divan, another lawyer who presented himself on behalf of Cyrus Mistry.
Mr. Divan presented his arguments on three aspects. First, 10 main aspects relating to corporate governance and the relationship between SPG and Tata Sons; second, two articles of the AoA and three, statutory provisions of the Companies Act, 2013. According to Mr. Divan, the following were the main points of consideration in the case:
- The essence of the case is based on the concept of corporate governance and how law has evolved from corporate majority to corporate democracy towards a higher set of values and a higher standard that ensures transparency.
- Sec. 135 of the Law that speaks of Corporate Social Responsibility, Section 149 which provides for the provision relating to the Board of Directors and art. 151 provides that directors are elected by small shareholders. This also includes the duties of the directors and the internal control committee. “All this is a bouquet of provisions to strengthen corporate governance”. Mr. Divan said.
- The law requires companies to be managed within a prescribed statutory framework managed by the Board of Directors and by no one else.
- The fiduciary role and the responsibility of the Directors to the Company is the highest level of duty that the law imposes on them. A trustee cannot delegate his duty of loyalty to the company alone.
- Violation of the Statute and their abuse. These violations affect the essential understanding between two groups.
- The lack of integrity or honesty in relationships is much wider than the siphoning of money.
- Long relationship of good faith between the two groups that has developed over decades. “It developed in the context of a specific regulatory framework operated between 1964 and 2000 that limited public trust activities.” Mr. Divan said.
- The importance of Tata Sons’ status as a controlling entity and its actions on the board of directors have also impacted minority shareholders, group entities and employees of other group companies.
- The provision requested as regards the proportionate representation that applies to the listed company is consistent with Sec 163 and Sec. 242 of the law dealing with the alteration of the AoA.
Mr. Divan began by discussing the point of corporate governance and how the Cyrus Mistry removal process goes against the concept of corporate democracy. He called the removal procedure as prescribed by the AoA as a “express supply black letter”. The provision requires that in order to remove a president, the same appointment process must be followed as was not done in the present case.
According to Mr. Divan, the management of the Company must be controlled by the Board of Directors in accordance with the AoA and the Companies Act. “In our case we have the executive president, Cyrus Mistry. If his term is to be revoked for any reason, this must be done in accordance with the article that is not being done.” claimed.
Mr. Divan upheld the importance of the duties of the Directors pursuant to Sect. 166 of the law. “Directors must act in accordance with the articles and must act in good faith for the benefit of its members as a whole, employees, shareholders and communities.” claimed. He underlined the importance of exercising the independence of judgment of the directors. “If you are not an administrator, you cannot violate or encourage the violation of the statutory provision. You can suggest or advise but you can dictate, coerce etc. The answer is no.“He continued.
Mr. Divan then discussed the relevance of Sect. 118 of the law that minutes the work of the general assembly, the board of directors and other meetings and resolutions approved by postal ballot. “This is a mandatory provision as it used the word ‘must’. The mandatory meeting notice for the meeting held in 2016 was not served. This is not in accordance with the provision.” Claimed.
According to his arguments, Mr. Ratan Tata exercised preponderant authority over the decisions of the Board of Directors. He informed the Banco that communications between the year 2013 and 2016 show that there was complete confusion in the Board. All decisions were made by Ratan Tata himself. “The 28th June 2016, the Board did not have any complaints from Cyrus Mistry. The board noted that Mistry did indeed work for the well-being of the company, and the board applauded his contribution. There is no agenda for the removal of its termination. There were no reasons for removing Mistry. One of the directors was a Tata Trust candidate. Another 2 were named as a personal appointment by Ratan Tata. 2 others who voted for his removal had only 4 months before the removal praised his work. No reason was given by them about their vote. “ He argued.
Sofa: The importance of selecting the president of Tata Sons is crucial because it affects shareholders and other entities. Mr. Ratan Tata is not the board member on December 18, 2012. He did not attend any meeting until October 2016. He is not subject to the regulations of the sec. 166 of the Companies Act. Subedar, secretary of the company, informed the board that during the meeting, Ratan Tata sent 2 letters while in the position of shareholder asking other directors, namely Shrinivasan and Piramal, to take the necessary actions. Mr. Cyrus Mistry was the executive chairman on this date.
On the importance of the fiduciary duties of directors, he referred to the evolution of company law from the corporate majority to corporate democracy. The provisions governing corporate governance were absent from the previous Companies Act. He referred to the Kotak Committee’s suggestions on the “Raja model” and the “custodian trustee model”. “The committee is about the trust model for corporate governance.” claimed.
Sofa: Between 1964 and 2000, as per the previous companies law, there was a special regime across India for trust interests (Tata Trust in the case). The central government has appointed an official called the public trustee. If you wanted to vote on the shares, this trustee would have voted. The vote could not have been done by the Tata Trust. But this trustee would vote only on your instructions. Imagine you have shares but you don’t have the right to vote. It was under these circumstances that the Tata trust requested a reliable entity and then sold shares to SPG with whom it had a very longstanding relationship. You would need someone trustworthy, someone with integrity who can vote on your behalf. And that’s how we became that trustworthy trust. In 2000 the condition was lifted.
CJI: is there a difference between shares held by trusts and shares held by trustees?
Sofa: A trust has no independent significance under the law. If you are a fiduciary public, you are directly affected by these provisions. And this was the circumstance in which SPG intervened.
A special feature of Mr. Divan’s arguments was the importance of a special, lasting, and good faith relationship between SPG and Tata Sons. He read an important chronology of events which indicated the relationship in relations between the two groups from 1964 to 2000. “The events reflect the utmost good faith and a strong bond between two partners.” He said.
CJI: There is no doubt about the stability of their relationship.
Sofa: This is exactly the point Your Lordship. Thanks. Even NCLAT records that this is so short on the part of Tata Group, which has such a dignified reputation in the global world.
Hello: These are new topics and new documents that have been registered.
At this stage, CJI SA Bobde asked Mr. Divan to assist the desk regarding the presence of items in the AoA dealing with meeting irregularities or non-conformities in the Board. The court then ruled on the issue of proportionate representation of Cyrus Mistry and asked Mr. Divan why NCLT followed the change application authorization procedure in lieu of filing affidavits and additional responses. “NCLT found out about the strength of its experience and recorded that it only allowed us to file additional affidavits. So the case went one step further. So NCLT allowed the change application to be filed.“Mr. Divan replied.“We intend to make some comments on how these courts should follow up on these matters. An explanation tomorrow.” CJI responded.
At the end of the hearing, Banco asked Mr. Divan to summarize his arguments at the next hearing in order to save time for the rest of the parties.
CJI: Sacrifice some time tomorrow, Mr. Divan.
Hello: For our part, only one lawyer argued. Two eminent elders argued on their side. At least on one side we should have 40 minutes to bring our arguments forward.
The matter is slated for hearing tomorrow.