India: Corporate Democracy – A Balancing Act Between Interests

This article analyses the Bombay High Court's decision setting aside an injunction restraining Invesco Developing Market Fund from requisitioning a meeting of Zee Entertainment Enterprises Ltd., and the impact of the decision on corporate democracy.

In Invesco Developing Markets Funds vs. Zee Entertainment Enterprises Ltd., a Division Bench of the Bombay High Court permitted Invesco to take steps further to its requisition notice including holding an extraordinary general meeting (EGM) under Section 100(4) of the Companies Act, 2013 (Act) so overturning the Single Judge's order in Zee Entertainment Enterprises Ltd. v. Invesco Developing Market Fund.

BRIEF FACTS

On 11 September 2021, Invesco requisitioned an EGM of Zee shareholders to remove the MD and CEO of Zee and to appoint 6, new, independent directors¹. On 29 September 2021, Invesco filed a petition before the National Company Law Tribunal (NCLT), Mumbai, to enforce the requisition notice by calling an EGM.

On 1 October 2021, Zee rejected the requisition notice on the grounds that the proposed resolutions were invalid as they violated the Act, Zee's Articles of Association, and other provisions of law. Zee moved the Bombay High Court seeking a permanent injunction restraining Invesco from acting on the requisition notice.

The Single Judge granted the injunction as: (i) if the resolutions were approved, Zee risked losing its broadcasting licence and facing adverse consequences from regulatory bodies; and (ii) the proposed resolutions would be ineffective at law. His decision was premised on reading 'valid' at Section 100 of the Act² as referring to validity at law and not validity in the context of the numerical criteria set out at Section 100³.

Consequently, Invesco's appeal to the Division Bench was on the meaning of 'valid' at Section 100 of the Act. Invesco relied on the Supreme Court's judgment in Life Insurance Corporation of India vs. Escorts Ltd.⁴ (Escorts) and the Bombay High Court's judgment in Cricket Club of India vs. Madhav L. Apte⁵ (Cricket Club).

THE DECISION IN ESCORTS

In Escorts, an overseas investor purchased shares of Escorts Ltd. in 1983 without the prior approval of the Reserve Bank of India (RBI)⁶. Although the investor obtained post-facto approval from the RBI, Escorts Ltd. filed a writ petition with the Supreme Court claiming that the RBI approval could not be provided ex post facto and the shares could not, therefore, be transferred to the overseas investor. While Escorts Ltd.'s challenge was pending, 1 of the majority shareholders in Escorts Ltd. requisitioned an EGM to replace Escorts Ltd.'s non-executive directors. The question before the Supreme Court was whether the requisition notice was bona fide.

The Supreme Court held that every shareholder has the right to requisition an EGM in accordance with the provisions of law and that shareholders exercised control over the directors of a company using this right. The Supreme Court also held that the requisition need not disclose reasons for proposing the relevant resolutions in the requisition notice and that such reasons are not subject to judicial review.

Distinguishing from, and applying, Escorts

The Single Judge distinguished Zee's application from Escorts as Escorts did not deal with the legality or effectiveness of the proposed resolutions⁷. The Division Bench noted that the Single Judge had unseated settled law and a shareholder's right to requisition an EGM.

There can be no escaping the observations of Escorts on the principles of corporate democracy. However, Escorts must be considered on facts. As the Single Judge held, Escorts dealt with whether the intent of a requisitioner when issuing a notice may be questioned. In the present case, the challenge was to the legality of the proposed resolution and not Invesco's intentions.

The Division Bench did not address this factual conspectus that informed the ratio in Escorts as Escorts did not envisage situations where the day-to-day management of the company was directly affected by the proposed resolutions or the proposed resolutions were ex facie illegal.

'Valid' as used in Section 100 of the Act

Having distinguished, Zee's application from Escorts, the Single Judge relied on Centron Industrial Alliance Ltd. vs. Pravin Kantilal Vakil (Centron) (which preceded Escorts) where a meeting of shareholders was requisitioned to approve withdrawal from a scheme of merger for commercial reasons. The resolution proposed was illegal as it compelled the company to resile from its obligation under law to present the scheme of merger. Centron distinguished between undesirable resolutions and illegal resolutions, and held that while courts should be circumspect in restraining EGMs for undesirable resolutions, EGMs need not be convened to consider illegal resolutions.

Significantly, under Section 303 of the English Companies Act 2006⁸ a resolution included with a requisition must be capable of being 'properly moved' in the EGM⁹. This follows the principles laid down in Isle of Wight Railway Co. vs. Tahourdin (Tahourdin) on which the Single Judge relied.

The Division Bench, however, relied on Cricket Club, which interpreted 'valid' as meaning only compliance with the prescribed procedural and numerical requirements. In Cricket Club, the requisitioners requisitioned a meeting of shareholders to prescribe conditions for the re-election members of the executive committee. The Court opined that, although the proposed resolutions were invalid, the company was bound to convene the EGM.

The Division Bench ruled that Cricket Club was binding on the Single Judge; proceeded to rely on the extended interpretation of Escorts – that courts could not interfere in shareholder requisitions; and ignored the principles laid down by Centron and Tahourdin.

EVOLUTION OF THE LAW ON REQUISITIONING EGMs

The Indian Companies Act, 1866 set out a shareholder's right to requisition EGMs in the Schedule setting out model articles of association¹⁰. The Schedule did not refer to a 'valid requisition'.

Section 78 of the Companies Act, 1913 was the 1st express stipulation addressing shareholders requisitioning an EGM¹¹. Again, there was no mention of a 'valid requisition' although the object of the resolutions had to be disclosed in the requisition.

The concept of a 'valid requisition' was introduced in Section 169 of the Companies Act, 1956, replaced by, and replicated at, Section 100 of the Act¹², which provided that in the event the Board did not call an EGM within the stipulated time period after receipt of a 'valid requisition', the requisitioners could themselves hold such an EGM.

Neither the Report of the Joint Committee to the Companies Bill, 1953 nor the Report of the Company Law Committee, 1952 explains the rationale for recasting the provisions for requisitioning EGMs. The Notes on Clauses to the Act are also silent on the significance of the word 'valid'. A proper analysis on what was meant by a 'valid' requisition was, therefore, required. However, neither the Single Judge nor the Division Bench considered the evolution of the law.

THE INTERDICT BETWEEN COMPANY LAW AND THE SECURITIES AND EXCHANGE BOARD OF INDIA (LISTING OBLIGATIONS AND DISCLOSURE REQUIREMENTS) REGULATIONS, 2015

Zee contended that the proposed resolutions were ex facie illegal as they were ultra vires Regulation 17 of Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 (SEBI LODR) which addresses the composition of the board and to which Zee is subject.

The proposed resolutions sought the appointment of a board of directors which comprised only of independent directors while ignoring the statutorily mandated process involving Zee's Nomination and Remuneration Committee (NRC). The Single Judge held that it would be absurd for Zee to not have a MD and CEO – which would have been the outcome had the proposed resolutions been effected.

The Division Bench held that the Single Judge had not properly considered the law, particularly Section 203(4) of the Act¹³, Section 178 of the Act read with Regulation 19 of the SEBI LODR¹⁴, and Section 160 of the Act¹⁵. A question which merits consideration is whether a company can, as the Division Bench suggests, function de hors executive directors, a chief executive officer, and a manager.

SECTORAL REGULATORS

The Single Judge held that passing a resolution 'subject to MIB approval' could not be equated with obtaining 'prior approval'. The resolutions were inherently illegal and liable to cause great havoc on, and erosion of value to, Zee and its shareholders.

The Division Bench failed to appreciate the fact that Zee is, amongst others, mandated to operate in compliance with various guidelines including the Policy Guidelines for Uplinking of Television Channels from India (MIB Guidelines) dated 5 December 2011 promulgated by the Ministry of Information & Broadcasting (MIB). The MIB Guidelines provide that a change to the board, or of the CEO, requires the prior approval of MIB. Zee's broadcasting licence could have been suspended if it had contravened this requirement with attendant adverse consequences to Zee and its shareholders.

However, the Division Bench has read down the provisions of the MIB Guidelines by noting that any resignation or removal from the board of directors of the company without prior approval of MIB would not contravene the MIB Guidelines, and only fresh appointments required MIB's approval. Going one step further, the Division Bench also held that the prior approval could be obtained ex post facto after the resolution was passed by Zee's shareholders. This greatly dilutes the checks and balances imposed by MIB and the concept of regulatory oversight and is, arguably, a matter which the Executive must address as it potentially unbalances the terms of licences¹⁶ and the management and operations of licencees.

JURISDICTION OF CIVIL COURTS

Section 430 of the Act provides that civil courts do not have jurisdiction over matters that the NCLT is empowered to determine. However, the Single Judge held that under the NCLT Rules the NCLT did not appear to have jurisdiction over disputes under Section 100 of the Act, and the Court could entertain the suit.

The Division Bench disagreed with the Single Judge and held that he did not have the requisite jurisdiction to issue the injunction given the plain language of Section 430 of the Act.

The Division Bench correctly held that the NCLT Rules cannot override the express provisions of the Act, and the Single Judge had erred in using the NCLT Rules as justification to exercise jurisdiction. It is equally clear that the NCLT has jurisdiction over applications under Section 98 of the Act which are preferred in circumstances when it is 'impracticable' to convene a meeting. In fact, Invesco had preferred an application under Section 98(1) of the Act¹⁷ mere days before the suit was instituted before the Bombay High Court.

However, neither the Single Judge nor the Division Bench has satisfactorily addressed the meaning of 'impracticable' in Section 98 of the Act. The facts of the case do not demonstrate any impracticability that would make it difficult for Invesco to exercise its rights under Section 100(4) of the Act (except the suit – however, that suit was filed after Invesco's application under Section 98 of the Act). Therefore, a reasonable case could be made out for the Single Judge to exercise jurisdiction.

CONCLUDING COMMENTS

The Division Bench has based its decision on the twin positions that, 1st, allowing courts to injunct requisitions to review the legality of the resolution proposed would render corporate democracy nugatory and leave shareholders at the mercy of the "...non-cooperative and obstructive conduct..." of the board¹⁸; and, 2nd, that a civil court cannot oust the jurisdiction of the NCLT. As a position of principle, we view the 2nd as more robust¹⁹.

Corporate democracy is a cornerstone of company law. However, this must be balanced against requisitions for "...ineffective resolutions..."²⁰ and compliance with matters of law beyond the Act. Centron and Tahourdin suggest that appropriate checks and balances can be formulated and, given the ruling of the Division Bench in Invesco, it remains for the Legislature to clarify the position²¹.

The Zee-Invesco saga has ended as Invesco withdrew its requisition notice following the Division Bench's judgment and divested from Zee shortly thereafter – all of which demonstrates that much judicial time and energy has been expended on matters which could have been addressed without recourse to the judiciary if the initial requisition had been appropriately crafted.

Footnotes

1. Presumably in the context of a proposed M&A transaction between Zee and Sony Pictures Networks India Pvt. Ltd. However, the Single Judge refused to go into the merits of the rival contentions as the requisition notice preceded the preliminary non-binding term sheet of the proposed M&A transaction

2. Section 100 of the Act deals with the calling of EGMs

3. Relying on the Bombay High Court's ruling in Centron Industrial Alliance Ltd. vs. Pravin Kantilal Vakil and the thread of precedent commencing with Isle of Wight Railway Co. vs. Tahourdin

4. (1986) 1 SCC 264

5. [1975] 45 Comp Cas 574 (Bom)

6. At the relevant time the Foreign Exchange Regulation Act, 1973 permitted foreign investment in shares of Indian companies subject to approval of the RBI.

7. For completeness, the Single Judge refused to consider arguments advanced before him on the requisitioners' intent

8. 303. .... (4) A request—

(a) must state the general nature of the business to be dealt with at the meeting, and

(b) may include the text of a resolution that may properly be moved and is intended to be moved at the meeting.

(5)A resolution may properly be moved at a meeting unless—

(a) it would, if passed, be ineffective (whether by reason of inconsistency with any enactment or the company's constitution or otherwise),

(b) it is defamatory of any person, or

(c) it is frivolous or vexatious.

9. At English Law a resolution cannot be properly moved if it is ineffective whether by reason of inconsistency with any law or the company's constitutional documents, or otherwise

10. (32.) The Directors may, whenever they think fit, and they shall upon a requisition made in writing by not less than one-fifth in number of the members of the Company, convene an Extraordinary General Meeting.

(33.) Any requisition made by the members shall the object of the meeting proposed to be called, and shall be left at the registered Office of the Company

(34.) Upon receipt of such requisition the Directors shall forthwith proceed to convene an Extraordinary General Meeting. If they do not proceed to convene the same within twenty-one days from the date of the requisition, the requisitionists or any other member amounting to the required number, may themselves convene an Extraordinary General Meeting.

11. 78 (1) Notwithstanding anything in the articles, the directors of a company which has a share capital shall, on the requisition of the holders of not less that one-tenth of the issued share capital of the company upon which all calls or other sums then due have been paid, forthwith proceed to call an extraordinary general meeting of the company.

(2) The requisition must state the objects of the meeting and must be signed by the requisitionists and deposited at the registered office of the company, and may consist of several documents in like form, each signed by one or more requisitionists.

(3) If the directors do not proceed within twenty-one days from the date of the requisition being so deposited to cause a meeting to be called, the requisitionists, or a majority of them in value, may themselves call the meeting, but in either case any meeting so called shall be held within three months from the date of the deposit of the requisition.

(4) If at any such meeting a resolution requiring confirmation at another meeting is passed, the directors shall forthwith call a further extraordinary general meeting for the purpose of considering the resolution and, if thought fit, of confirming it as a special resolution, and, if the directors do not call the meeting within seven days from the date of the passing of the first resolution, the requisitionists, or a majority of them in value, may themselves call the meeting.

(5) Any meeting called under this section by the requisitionists shall be called in the same manner, as nearly as possible, as that in which meetings are to be called by directors.

12. 100. Calling of extraordinary general meeting. — (1) The Board may, whenever it deems fit, call an extraordinary general meeting of the company.

(2) The Board shall, at the requisition made by, —

(a) 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;

(b) in the case of a company not having a share capital, such number of members who have, on the date of receipt of the requisition, not less than one-tenth of the total voting power of all the members having on the said date a right to vote,

call an extraordinary general meeting of the company within the period specified in sub-section (4).

(3) The requisition made under sub-section (2) shall set out the matters for the consideration of which the meeting is to be called and shall be signed by the requisitionists and sent to the registered office of the company.

(4) 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.

(5) A meeting under sub-section (4) by the requisitionists shall be called and held in the same manner in which the meeting is called and held by the Board.

(6) Any reasonable expenses incurred by the requisitionists in calling a meeting under sub-section (4) shall be reimbursed to the requisitionists by the company and the sums so paid shall be deducted from any fee or other remuneration under section 197 payable to such of the directors who were in default in calling the meeting

13. Which allows a company to fill a vacancy in the office of whole-time key managerial personnel within 6 months

14. Which the Division Bench held do not mandate the presence of executive directors on the board

15. Which provides the right of persons to stand for directorship

16. Across sectors – not limited to television broadcasting

17. Section 98(1) of the Act deals with the power of the NCLT to call EGMs where it is otherwise impracticable to do so

18. Specifically, in the instance case, the Board of Zee

19. Of course, the consequences of the NCLT having, literally, the bench strength to full discharge its jurisdiction remains; albeit beyond the scope of the decisions of the Single Judge and the Division Bench and this article

20. Quoting from Section 303 of the English Companies Act, 2006

21. Unless the courts reconsider the issue when opportunity arises

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