Post implementation of the Companies Act, 2013 and SEBI Listing Obligations and Disclosures Requirements Regulations, not only the authorities, but the Corporate have also become more vigilant in compliances of the relevant provisions of the law.
We all are aware about the legal implication of the various secretarial/ legal documents/information related to Corporate and other laws in company’s lifecycle. Sometimes this legal documentation proves to be the backbone of the corporate skeleton especially when some dispute or disagreement arises.
Number of articles have already been penned down and are in circulation on the forceful replacement of Mr. Cyrus Mistry, in media.
We would like to draw your attention on the importance of the law, viz-a-viz, legal documentation/ terminology in the light of present TATA case.
Articles of Association (AOA):
Legal Provision:
- AOA is the charter document of the company, which contains rules and regulations of the management of the Company.
- As per Section 5 of the Companies Act, AOA shall contain the matter as prescribed under the Act but that does not prevent the company to include such additional matters in articles as may be considered necessary for management.
- Model set of Articles for a company limited by shares has been defined in Table F of Schedule I of Companies Act, 2013.
TATA case:
Companies Act, 2013 does not define “Chairman”. As an industry practice, official with the highest power on the Board can be appointed as the Chairman of the Company, as per the Articles of Association of the Company. Since this has not been defined in the law, companies through their own Articles of Association (AoA) set down the procedure for appointment and removal of chairman. Hence, the appointment, as well as, removal process will be governed either by Articles of Association or appointment contract. However, Secretarial Standard-1 define the Chairman as:
“Chairman” means the Chairman of the Board or its Committee, as the case may be, or the Chairman appointed or elected for a Meeting.”
In present case, AOA provides appointment and removal provisions, which provides that till Tata Trust hold 40% of Tata Sons, the appointment will be made by board on recommendation of selection committee and removal can be done by the consent of five directors out of nine and all three Directors of Tata Trust shall support such removal. This means effectively, only two more external Director votes are needed to remove the Chairman.
Agenda and notes to agenda of Board Meeting
Legal Provision:
- As per Companies Act, 2013 read with SS-1, the Agenda, setting out the business to be transacted at the Meeting, and Notes on Agenda shall be given to the Directors at least seven days before the date of the Meeting, unless the Articles prescribe a longer period.
- The mandate is to give notice of the Board Meeting, however no such requirement is prescribed for giving notice for removal of Chairman under the Companies Act, 2013. This is just an agenda item for which agenda may or may not be circulated.
- As per SS-1, it is mandatory on the company to circulate detailed notes on each agenda item, but there is no restriction on taking any business transaction in “Any other agenda item” for which any circulation is not required.
TATA case:
As per the provisions of the Companies Act, the only requirement is to give notice to the Board with regard to holding of the board meeting and not for removal of Directors or any other specific items. Since the agenda item to remove the Chairman from the board is part of ‘any other agenda item’ hence there is no violation of law.
Article 90 of the company gives Tata Sons, as majority shareholder, the right to nominate the Chairman.
Further the removal of Mr. Mistry as Chairman in not the part of the main agenda item, the same is being considered under “Any other agenda item” for which no agenda item has been circulated.
However, not serving enough notice to Mr. Cyrus Mistry is violation of principle of natural justice i.e. Opportunity of being heard. Further it is also a part of good corporate governance practice, to give sufficient notice to the person before removing them from any position.
Nomination and Remuneration Committee (NRC):
Legal Provision:
- Section 178 of the Companies Act, 2013 governs the provisions of Nomination and Remuneration Committee.
- In case of the company having such committee, nomination, remuneration, performance appraisal, and all related activities pertaining to Directors and KMP will be laid down before such NRC committee for approval.
TATA Case:
Nomination and Remuneration Committee of Tata Sons lauded Mr. Mistry’s performance on June 28. The same has duly been discussed and approved in the NRC Committee and report of committee was also adopted by the complete board the following day. Tata Sons is yet to state what necessitated the replacement of Mr. Mistry on October, 24 without any notice or opportunity of being heard.
Removal of Director from the Board
Legal Provision:
- As per Section 169(1) a company may, by ordinary resolution, remove a director, before the expiry of the period of his office after giving him a reasonable opportunity of being heard.
- As per Section 169(2), a special notice shall be required of any resolution, to remove a Director under this section, or to appoint somebody in place of a director so removed, at the meeting at which he is removed.
- On receipt of notice of a resolution to remove a director under this section, the company shall forthwith send a copy thereof to the director concerned, and the director, whether or not he is a member of the company, shall be entitled to be heard on the resolution at the meeting.
Calling of Extra Ordinary General Meeting
- As per Section 100(2) of the Companies Act, 2013, the board shall call the extra-ordinary general meeting by the requisition (members holding atleast 10% of the paid up share capital of the company which carries voting rights too)
TATA Case:
Although, Mr. Mistry’s removal from the Chairmanship will governed by the provision of Articles of Association of the company, his removal from the Board as Director has to be done as per provisions of the Companies Act, 2013
By virtue of holding 28% of the paid up share capital of Indian Hotel Company, Tata Sons has requisitioned for holding an Extra-Ordinary General Meeting (EGM), to pass a resolution to remove Mr. Mistry as a Director of the Company.
Proceedings of Board, Committee and General Meeting:
Legal Provision:
- As per Section 118 of the Companies Act, 2013, every company shall cause minutes of proceedings of the meeting in the manner as prescribed. This shall contain a fair and correct summary of the proceedings thereat.
- However, if Chairman feels that the matters are defamatory of any person, irrerelevant, immaterial, or detrimental to interest of the company then these shall not be required to be reported.
- Once the minutes get approved and initialed by Chairman of the meeting, these become legal record and these can be presented in the court of law also.
TATA Case:
As per Tata Sons statement, “Mr. Mistry’s non-performance and urge for getting control over Indian Hotels business led to his replacement.”
Tata Sons statement reflects desperation. The Statement admits receiving email and calls from many across the globe since the Board decided to change the Chairman. All the “reasons” in the letter would have and should have been tabled and recorded in the minutes of many Tata Sons Board Meetings held over four years of Mr. Mistry’s Chairmanship. Unfortunately, as per Mr. Mistry’s statement no such record exists because these are simple allegations which might not be true.
We will get back to you with roles and responsibility of Independent Directors, specifically during such corporate turmoil, as well as, remedies available with Mr. Cyrus Mystry within the ambit of law, in our next volume of “Unfolding Board Room Battles”.
Since the above mailer is prepared based on the information available in public domain, the company BlueLotus Strategy Consulting Private Limited, cannot be held responsible for any errors or false information as circulated in Social media.
This mailer is just an analysis of facts of the case, as available in public domain and also in the light of legal provisions, these do not form part of any professional advice.
