Updated: April 1, 2021 8:03:22 am
The Supreme Court verdict in the Tata-Mistry case last week brought an end to the uncertainty that has been plaguing the Tata group for the past few years. In the process, while setting aside the National Company Law Appellate Tribunal (NCLAT) order, the Court, which ruled in favour of Tata Sons, has also clarified on the larger issue of the rights of minority shareholders and board representation. The Court has held that minority shareholders are not automatically entitled to a seat on the board of a private company, there is no statutory obligation. In doing so, the verdict has brought about much-needed clarity on the rights of minority shareholders in private companies.
The ruling has sought to distinguish between “small shareholders” and “minority shareholders”. Under the Companies Act, “small shareholders” are defined as those with shares of a nominal value of not more than Rs 20,000 or any other prescribed sum. Section 151 of the Companies Act 2013 recommends that listed companies have one director elected by small shareholders, not minority shareholders. The Mistry group, on the other hand, which holds an 18.4 per cent stake in Tata Sons, is not a “small shareholder” but a “minority shareholder” according to the verdict. Thus, as the Court notes, “the right to claim proportionate representation is not available even to a minority shareholder statutorily, both under the 1956 Act and under the 2013 Act. It is available only to a small shareholder, which S.P. Group is certainly not.”
The Tata Sons’ Articles of Association had allowed for the two Tata trusts to nominate one-third of the directors on the Tata Sons board. These nominee directors were vested with affirmative voting rights which are effectively veto rights on specified matters. The Court also examined the issue of these affirmative voting rights on which the Mistry group had cast doubts. However, upon examination, it upheld the validity of the affirmative voting rights. While this verdict brings the curtain down on this particular case, the larger ramifications of the ruling — whether minority shareholders in private unlisted companies will now have to venture into agreements with majority shareholders or promoters or will now have to explicitly get their rights incorporated in the articles of association of the company — will play out in the days to come.
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