This short piece that deals with an intriguing issue, considered by the single judge of the Bombay High Court through the Zee Entertainment Enterprises Ltd (ZEE) versus Invesco Developing Markets Fund case, does much injustice to the interim order, which is embellished with a great deal of judicial wisdom and learning.
The order dated 26th October may have left little for the final proceedings, should that milestone arrive.
The article considers only one of the many limbs of the controversy, which, in the opinion of the author, is independent of the other issues raised in the suit and thereby at the threshold of presenting a defence that does not deal with the judgement in totality on all the points under contention is no vice to the singular issue debated here!
The facts of the controversy are generally closely followed by readers as the subject has spotlighted a glamourous media company whose many soaps are eagerly watched in many a household.
Invesco, a shareholder of ZEE, issued a request to ZEE to convene an extraordinary general meeting (EGM) to, inter alia, replace a set of independent directors (IDs) serving on ZEE’s board. The other requests made in the requisition are not debated in the article and, as clarified in the introduction, those do not impinge on this discussion and are seen as discrete and distinct by the author.
The delay and the dilly-dally on the part of the company to convene the EGM when sought by the eligible shareholder triggered different judicial actions by both parties. One such foray landed in the Bombay high court (HC) and the subject of this article.
The company took a stand that the disgruntled shareholder’s solution sought to replace the IDs was ab-intio illegal. Hence, there was no case to convene a meeting to pass an illegal resolution.
To jump to the answer straight, the Court saw this contention to be correct.
What is there in the demand made by the shareholder to replace the ID with their nominee that the company projected as illegal and the judge agreed with?
The company contended that IDs are to be appointed only in a particular way that the requisition would be non-compliant.
IDs have to be identified from a pool of talent listed in the database of the government and should be independently tested for suitability by the nomination and remuneration committee and the board of the company should see the merit of choice and recommend the candidate to the shareholders, who finally have a say to appoint the person or not!
Whereas the disgruntled shareholder, Invesco, sought to violate every step in appointing the most suitable IDs by autocratically coming up with a list of its own!
The judicial mind saw in this a significant conspiracy to violate the sanctity of the provisions of the Companies Act and other regulations like the SEBI (Securities and Exchange Board of India) rules on corporate governance, thereby carrying an irremediable taint of illegality.
Therefore, the interim rule issued disavowed the shareholder’ right to seek new IDs.
This, to say the least, is quite path-breaking.
Should any court be inspired to think that a disgruntled shareholder would get the support of the existing directors whose replacement is sought to aid its efforts to appoint new IDs, by convening the NRC and objectively consider and recommend to the board the new names so that the board (which stands discredited in the view of the disgruntled shareholder), would like Dharmaputra letting his consort to be dragged into the court in the most inappropriate fashion and argue with his brothers that one should act according to dharma in all situations, function very objectively to dynamite its own end?!!
The naivete of the arguments posed and its acceptance by the Court seeking the support of judicial precedents that clearly lack relationship or relevance to the factoid of the dispute is a high watermark of this order.
The existence of the safeguard in the law whereby shareholders with a threshold holding can question the right of the company and its board to function in its fanciful way is most often accessed only by the threat of change in the composition of the directors.
In India’s listed public limited company, the law has fixed the proportion in which IDs and other directors are to be elected. So, by a numerical limitation, no disgruntled shareholder would bring in a non-independent director as that would straightaway create the illegality that the Court vowed to stop in this matter.
The board can be reconstituted or rebalanced by bringing IDs and replacing the existing ones. This is precisely what the shareholder proposed to do. The very thought that the shareholder in choosing a set of directors to nominate as IDs has violated the code of honour of IDs, is perhaps most farcical as no ID who does not have the support of some shareholder, either the promoter or non-promoters, can emerge out of thin air to answer to the attributes sought by the judge.
Writing any further will only add words and not wisdom!
Should this decision be upheld in higher courts, the safeguard available to non-promoter shareholders to challenge the incumbents will become otiose and a dead letter!
EnZoyable times for those holding the reins!
(The author is a CA and CS and retired as a partner at EY, Chennai heading tax and regulatory advice.)