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Zee, Dish, and shareholder rights: Tail can’t wag the dog

Speaking on the basic rights of shareholders in a company, the Supreme Court opined in a decision rendered in 1986 that “(o)n an overall view of the several statutory provisions and judicial precedents…. The rights of a shareholder are (i) to elect Directors and thus to participate in the management through them; (ii) to vote on resolutions at meetings of the company; (iii) to enjoy the profits of the company in the shape of dividends; (iv) to apply to the court for relief in the case of oppression; (v) to apply to the court for relief in the case of mismanagement; (vi) to apply to the court for winding up of the company; (vii) to share in the surplus on winding up.” This statement on shareholders’ rights has been reiterated from time to time.

The Invesco – Zee Entertainment Enterprises Ltd. and Yes Bank Ltd. – Dish TV Ltd. disputes, where shareholders have requisitioned their respective boards to hold extraordinary general meetings, bring to focus points (i) & (ii). These two episodes find mention only to illustrate the legal propositions.

So far as EGMs go, the Act while providing discretion to the board to call an EGM “whenever it deems fit”, also casts a duty on the board to call such EGM upon a requisition being made on that behalf by one or more shareholders holding at least one-tenth of the company’s paid-up share capital. Such requisition by shareholders to the board must set out the matters for consideration at the meeting that is to be called. The mandatory nature of ‘duty’ cast on the Board is also underscored by the fact that directors who are in default of calling such EGM are liable to have their fee and remuneration deducted to reimburse the expenses that may be incurred by shareholders in calling the EGM on their own if the board fails to implement their requisition.

Shareholders’ rights are rarely absolute. Restrictions and conditions which meet constitutional standards may be imposed by law. However, these restrictions and conditions cannot be interpreted in the manner that would make the right itself a mirage.

Companies Act and takeover code provisions
When shareholders requisition an EGM to consider certain matters regarding the management and operations of a company, those matters may concern or trigger myriad laws and regulations, including under the Companies Act itself.

For instance, the election of independent directors requires an opinion from the board that the independent director possesses the qualifications required under the Act, inter alia about integrity, relevant expertise, and experience. Does this responsibility cast on the board to opine on the qualifications of an independent director imply that shareholders can elect only those independent directors that are certified by the board? A more harmonious interpretation may be that if the board—upon due requisition and notice by shareholders—refuses to opine on a putative independent director, shareholders would be entitled to make the appointment, leaving it for aggrieved parties to challenge such appointment before the appropriate regulatory or judicial forum. One cannot leave the tail to wag the dog.

Shareholders’ acts and omission at any general meeting could lead to changes in the board of directors or key management of a company such that SEBI’s Takeover Code may be in play. The significant question to be asked is whether the shareholder’s right to requisition and vote at the EGM is made ‘contingent’ to the provisions of the Takeover Code, or is the Takeover Code meant to regulate the exercise of those rights.

It has been held that “(T)he scheme of the Takeover Code is meant to ensure… that the small investors are given an option to exit, that is, they are offered a choice to either offload their shares at a price as determined in accordance with the Takeover Code or to continue as shareholders under the new dispensation. (It) is meant to ensure fair and equal treatment of all shareholders in relation to substantial acquisition of shares and takeovers and that the process does not take place in a clandestine manner without protecting the interest of the shareholders”.

If a majority of public shareholders vote at a general meeting in favour of a resolution requisitioned by a single shareholder with 18% voting power, one may legitimately ask if there remains anything clandestine about the process or the outcome. The idea of “persons acting in concert” is not about a fortuitous relationship coming into existence by accident or chance. The relationship can come into being only by design, by the meeting of minds between two or more persons leading to the shared common objective or purpose of acquisition or substantial acquisition of shares, etc. (control) of the target company.

SEBI’s regulations (which are subordinate legislation), or for that matter the executive guidelines of the Ministry of Information & Broadcasting of the Indian government, “may further be questioned on the ground that it is contrary to some other statute. This is because subordinate legislation must yield to plenary legislation”.

Hence the provisions in the Companies Act providing for shareholders’ right to requisition and to vote at an EGM would take precedence.

Compliance with all laws and regulations would of course have to be ensured vis-a-vis the outcome of the vote, but failure to comply or its consequences can be seen subsequently by the relevant authorities.

Competition Commission’s role
The relevant regulations mandatorily oblige an enterprise that proposes to enter into a combination (which could be solely an acquisition of ‘control’ over another enterprise) to give notice to the Competition Commission of India within 30 days, providing diverse information necessary for obtaining CCIs’ approval. An enterprise that is in a position to appoint more than 50% of the members of the board of directors in the other enterprise is said to be in control of that other enterprise. How could Invesco or Yes Bank propose to appoint a majority of the board of directors of Zee or Dish TV respectively without first giving notice to and obtaining approval of the CCI?

To start with, unless there has been a meeting of minds, merely on account of the bulk of shareholders favoring Invesco’s or Yes Bank’s nominees whilst exercising their own free judgment at an EGM may not fall foul of CCI.

Even otherwise, delayed filing may be accepted by CCI at its discretion. If due notice is not given CCI can always act suo moto or presumably on the basis of a complaint to declare the combination to be void. Parties may be injuncted till CCI takes a final view. CCI may also penalise the party that is responsible for the failure to notify.

Incumbent management or directors cannot just presume that there will be violation laws or arrogate unto themselves the powers vested in diverse regulatory bodies to deny basic democratic rights to shareholders.

In fact, where the relevant regulators have been clothed with powers to adjudicate, undo, or penalise potential harm or infringement resulting from resolutions requistioned or passed at an EGM, even the jurisdiction of ordinary civil courts to decide on the legitimacy of such matters may stand ousted. BloombergQuint

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