By Monika Vyas and Ayushi Narayan. Monika is an associate at Khaitan & Co. Ayushi is an associate LexInfini.

Shareholders Activism inter alia includes a situation wherein the shareholders of a company use their equity stake in the company to try and make governance decisions by influencing or controlling the actions of the directors of the corporation. Such structural changes or an attempt to improve the corporate governance are made by the shareholder activists to improve their returns on the investments made in the company. Recently, there has been a trend of rising shareholder activism in the Indian equity market. This article will discuss the recent trend of shareholder activism in India in the wake of the recent case of Zee Entertainment Enterprise Limited and Invesco Developing Markets Fund. The Bombay High court order is analysed in relation to the recent treatment of shareholder activism in India.

Rise in shareholder activism

Few examples of shareholders activism in the recent years are that of Cyrus Mistry being removed as the director of Tata Sons by an EGM held on February 2017. In March 2020, during market crash, Vendanta Ltd. was a company which wasunsuccessful in delisting itself from the stock exchange as it received resistance from its shareholders. Further its institution shareholder Life Insurance Company, tendered its share at a high price which forced the promoters to withdraw the offer. Puneet Bhatia, head of TPG Capital Asia was removed from the board of Shriram Transport Finance Corporation Ltd (“STFC”), as the minority shareholders voted against a resolution to re-appoint him as a member of the board due to his lack of sufficient attendance in board meetings. Interestingly, just after a week of Bhatia’s removal from the board of STFC, he was renamed to the board vide a press release from STFC.

Facts of the case 

One of latest examples of shareholders activism in India has been that of Invesco Developing Markets Fund (“Invesco”) against Zee Entertainment Enterprises Limited (‘Zee”). As a way of background, it may be relevant to note that Invesco which along with OFI Global China Fund LLC, hold a 17.88% stake in Zee, was interested in Zee to strike a deal with Reliance Industries Ltd. However, the discussions between Zee’s CEO and Reliance Industries didn’t turn out to be fruitful. On the other hand, Zee has now finalised merger with Sony Group Corporation’s India Unit, after conducting three months of due diligence. The dispute arose when Invesco requisitioned the board members of Zee to call for an extraordinary general meeting (“EGM”), for the purpose of making structural changes in the company by revamping the board and removing the managing director and Chief Executing Officer and suggesting six new independent board members.

Zee rejected the proposal made by Invesco with respect to the change in board of members of the company and cited legal infirmities in Invesco’s request. As Zee denied Invesco’s request to revamp the board, Invesco sent a requisition notice to Zee for removal of the managing director and CEO Punit Goenka and to further appoint six new independent board members identified by Invesco. As per the provisions of the Companies Act, a shareholder holding more than 10% stake in a company can seek an EGM. In the event the board declines, the shareholders as per Section 100 of the Companies Act, can convene the EGM itself. Upon Zee’s denial to act upon the said notice, Invesco considered ZEE’s behaviour to be oppressive and filed an appeal before National Company Law Tribunal (“NCLT”) to direct ZEE to act upon Invesco’s notice for EGM. While the said matter was pending before the tribunal, Zee filed an appeal before the Bombay High Court for an injunction against Invesco’s notice for EGM. In the said appeal, Zee stated the notice to be illegal and that it could not implement the same. Further, Zee’s refusal to implement the said notice was within the purview of law and justified.

analysis of the issues

Issue of Requisition of EGM

The issues in this case are quite complex and leads to different outcomes based on the interpretation. The first issue is, whether Zee is obligated to call EGM upon a valid requisition. The court issued the injunction whereby the requisition for the EGM was not granted based on the rationale that objections of Zee were justified and resolutions were illegal. It observed that if the Board itself cannot act call for EGM on such resolutions, then there’s no way that the shareholders would be kept at higher pedestal.

Opinion- Section 100(2)(a) of the Companies Act, 2013 empowers the Board to call for EGM on requisition of minority shareholders. It reads as thus: the Board shall, at the requisition made by, in the case of a company having a share capital, such number of members who hold, on the date of the receipt of the requisition, not less than one-tenth of such of the paid-up share capital of the company as on that date carries the right of voting, call an extraordinary general meeting of the company within the period specified in sub-section (4). We should interpret the word ‘shall’ in Section 100 of the Companies Act, 2013 to find the legislative intent behind this section. The choice of word ‘shall’ indicates that is must to call the EGM. However, the literal interpretation can sometimes overlook the intent of the legislation. By giving the alternative route in Section 100(4) itself of conduction of the EGM lest the Board shall fail to act, the word ‘shall’ should not be used as ‘must’. It reads as thus: If the Board does not, within twenty-one days from the date of receipt of a valid requisition in regard to any matter, proceed to call a meeting for the consideration of that matter on a day not later than forty-five days from the date of receipt of such requisition, the meeting may be called and held by the requisitionists themselves within a period of three months from the date of the requisition. 

Thus, we can say that the Board is well within its right to use discretion otherwise it can always be held hostage to the whims of the shareholders who intend to misuse the provisions. Having said this, it is also unclear why this in-built remedy of shareholders proceeding to hold the meeting was not granted to Invesco by the Court. 

Issue of Legality of Propositions in the Resolutions

This brings us to the next issue of whether the proposed resolutions were legal for requisition of EGM. For this, interpretation of the word ‘valid’ in section 100(4) of the Act was made the issue. The shareholders are allowed to hold the EGM themselves in case the Board fails to act within the stipulated time provided the requisition is valid. The court concluded that there was no question of interpretation of word ‘valid’ but only of the illegality of the resolutions proposed. It was established that the represented matters by the shareholders were illegal and hence could not be implemented. It held this based on the following reasoning:

• Non-compliance of Ministry of Information and Broadcasting (“MIB”) guidelines, SEBI (Substantial Acquisition of Shares and Takeovers) (“SAST”) Regulations, 2011 and Competition Act, 2002

The guidelines of MIB require that before effecting any change in CEO/Board of Directors, its prior approval must be taken. Approval of Competition Commission of India (“CCI”) is also required in the eventuality that Invesco is in control if it succeeds in appointing majority of directors. It also attracts the provisions of SEBI SAST Regulations, 2011 which provides for such regulatory approvals. In this case because the approval was not taken from either of them, the resolution was termed illegal by the court on grounds of non-compliance with the guidelines and the statute.

Opinion-It is unclear whether the word ‘change’ applies to only fresh appointments or its scope covers resignations/removals too as in this case. The guidelines cannot be meant to stop someone from quitting. 

Secondly, one must also question if the mere non-compliance with the guidelines and statutes would amount to illegality. As it is, the passage of resolution is contingent upon the approval of MIB and CCI. One cannot term it illegal when it is in its nascent stage and yet to fulfil the conditions for its acceptability. If, at all, it is inconsistent, the same would be declined by the regulatory body and need not be decided by the court. Thus, terming the resolution illegal when it is still premature cannot be held in good faith. Also, it would be Invesco who would be responsible for the consequences of not having the approval of competition commission. Hence, on this ground one cannot term the resolution illegal. 

• Violation of SEBI LODR Regulations and Section 203 of Companies Act, 2013

Invesco proposed six independent directors to be appointed named by it in the resolution. This is violative of Regulation 17 of SEBI LODR which states that the company should have optimum numbers of executive and non-executive directors processed by the nomination and remuneration committee. Further, the court was of the view that the proposition to remove the managing director and CEO infringed upon section 203 of the Act which envisages that every company must have CEO, managing director or manager.

Opinion-While SEBI LODR talks about appointment through nomination and remuneration committee, it also envisages situation where appointments are initiated by the board of directors. Thus, the court through its order has created the situation of polarisation between the Companies Act, 2013 and SEBI LODR Regulations. Further, the violation under Section 203 of the Act is curative in nature meaning whereby it can be cured within six months of the removal of CEO.

Concluding remarks

There is no doubt that the order of the court is detrimental to the shareholder activism in India. From the above analysis, we can see that Invesco is not entirely in the wrong. However, Invesco has stepped on its feet by not being transparent about the issues why it wants to remove the CEO. The intention of Invesco is not clear as to whether the proposed resolutions are on account of bad governance issues of Zee or to exercise control by appointing independent directors, the names which it has not justified for appointment. Earlier, this year, it had also approached Goenka, CEO with the proposalto merge Zee with media entities of Reliance Industries Ltd. which failed. It is not clear why it did not approach the Board directly. However, the court could have been lenient in its interpretation of the provisions since the order wards off the shareholder activism which could have been for the benefit of the company. However, as Invesco has contested the Single Bench decision and the case has now been taken up by the Division Bench of Bombay High Court, one can be hopeful that the decision ushers in towards welcoming this concept. It would be especially interesting to see how the case unfolds in light of the recent merger with Sony which has facilitated the continuation of post of CEO being held by Punit Goenka.