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Mumbai: The Supreme Court on Friday handed Tata Sons Ltd a major victory in its four-year-long feud with the Mistry family, its single-largest shareholder, as it set aside an appeals court ruling that ordered the reinstatement of Cyrus Mistry as the chairman of the Tata group holding company.

A three-judge Supreme Court bench, headed by Chief Justice S.A. Bobde, also declined to intervene in the matter of pledging of Tata Sons’ shares by the Mistry family’s Shapoorji Pallonji (SP) Group, citing a clause in Tata Sons’ Articles of Association (AoA) that empowers the company to buy out its minority shareholders at fair value under extraordinary circumstances.

Shares of major group companies gained 2-6% on Friday, except TCS, which was little changed.
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Shares of major group companies gained 2-6% on Friday, except TCS, which was little changed.

The court’s refusal to determine a fair value for the Mistry family’s stake makes it tougher for the cash-strapped SP Group to raise funds by selling or pledging its 18.3% shareholding in Tata Sons, a move that the Tata group has fiercely opposed.

The Tata group’s victory brings an end to India’s biggest corporate battle that was sparked by the ouster of Cyrus Mistry, the eldest son of construction tycoon Pallonji Mistry, in October 2016. Cyrus Mistry took over the chairmanship of India’s biggest conglomerate from Ratan Tata in 2012 as part of a succession plan.

The National Company Law Appellate Tribunal (NCLAT) had in 2019 ordered Tata Sons to reinstate Cyrus Mistry as executive chairman of the company, concurring with Mistry’s plea that his removal was an act of oppression by the majority shareholders of Tata Sons, comprising philanthropic trusts.

Noting that NCLAT had failed to evaluate the merits of Mistry’s allegations pertaining to oppression of minority shareholders and corporate governance lapses by Tata Sons, the apex court said: “NCLAT, despite being a final court of facts, did not deal with the allegations one by one nor did the NCLAT render any opinion on the correctness. Instead, the NCLAT summarized in one paragraph its conclusion on some of the allegations, without any kind of reasoning."

Rejecting Mistry’s contention that SP Group, by virtue of being the largest minority shareholder of Tata Sons, had rights of proportionate representation in the company’s board, the apex court said Tata Sons was not “Two Groups" company with one of them being a majority and the other, a minority. “ SP Group became shareholders long after the incorporation of the company, and they did not acquire any privilege, prerogative or right," the bench said, adding “SP Group became shareholders, accepting the rights and obligations inter se among shareholders, as spelt out by the AoA. SP Group also accepted without demur, all the amendments made to the AoA."

On issues relating to pledging of Tata Sons’ shares, which has emerged as a contentious issue after it became known that SP Group was planning to offer its stake in the company as collateral to raise funds, the apex court directed both sides to resolve the matter through negotiations, while upholding its legal validity. “After attacking Article 75 before NCLT, the SP Group cannot ask this court to go into the question of fixation of fair value compensation for exercising an exit option. The valuation of the shares of SP Group depends upon the value of the stake of Tata Sons in listed equities, unlisted equities, immovable assets, etc., and also perhaps the funds raised by SP Group on the security/pledge of these shares. Therefore, at this stage and, in this court, we cannot adjudicate on the fair compensation. We will leave it to the parties to take the Article 75 route or any other legally available route in this regard," the bench said.

“Oppression has to be malicious, continuous and with an intent. None of the elements were present in the dealing with Mistry," said J.N. Gupta, founder of proxy advisory firm Stakeholder Empowerment Services. “Removal of Mistry was not as a shareholder director. He was occupying the post of chairman as Cyrus Mistry and not as a representative of Cyrus Investment or Sterling Investment. Since his appointment was not as a right of a minority to be represented on the board, his removal cannot be questioned under minority oppression."

Legal experts said the SP Group has limited legal recourse left. “They can file a review petition and even a curative petition, but it is unlikely that it will yield any real-world outcome for the SP Group. It has been settled now for all good purposes that the removal of Mistry was not mala fide," said Sajid Mohamed, managing partner of Argud Partners, a Mumbai-based law firm. “However, Mistry can always challenge the fair value accorded to its stake if Tata Sons chooses to buy it out," he added.

In a Twitter post, chairman emeritus of Tata Sons Ratan Tata said: “It is not an issue of winning or losing. After relentless attacks on my integrity and the ethical conduct of the group, the judgement upholding all the appeals of Tata Sons is a validation of the values and ethics that have always been the guiding principles of the group."

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