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Photo: iStock
Photo: iStock

A prenuptial pact for marriages made in boardrooms

Agreements based on principles may help avoid the unseemly acrimony of corporate splits

It is now becoming increasingly evident that while marriages for ordinary mortals might be made in heaven, corporate wedlock solemnized in boardrooms usually end up on the rocks. But the corporate sector can draw lessons from real life: Like pre-nups between life partners, business associates at the altar must also have some legal arrangements to guide future splits. Most companies do have shareholder agreements between partners, yet partings are rarely amicable because much is left to chance.

Witness the bombshell dropped by the Shapoorji Pallonji group in the Supreme Court recently, stating it wished to exit the Tata Group by selling its stake in Tata Sons. The SP Group’s sale of its Tata Sons stake is weighed down by multiple uncertainties, but the Mistry family’s publicly-stated desire to sever ties with the Tata group marks the nadir of a decades-old relationship. The two sides have locked horns in courts of law, and any rapprochement now seems impossible.

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The Mistry family stake in Tata Sons, the Tata Group’s holding company, goes back many decades when patriarch Shapoorji Pallonji Mistry bought a substantial 12.5% chunk in Tata Sons from the heirs of Framroz Edulji Dinshaw, a Mumbai land-owner and also investment adviser to the Scindias, erstwhile royal family of Gwalior. Over time, through further acquisitions and subscription to rights issues, the stake climbed to 18.4%. Although the Mistry family got a board seat—which went to Shapoorji Pallonji’s son Pallonji Mistry—and played a largely non-interventionist role, things changed when Ratan Tata selected Pallonji Mistry’s son Cyrus Mistry as Tata Sons chairman. Cyrus Mistry’s style allegedly clashed with Ratan Tata’s vision, leading to his ouster and its subsequent challenge in the courts. What emerges is the fact that despite the decades-old association, there was no agreement between the two largest shareholders on how to survive, or resolve, future acrimony.

Another similar partnership that did not survive—and was comparatively much more short-lived—was the joint acquisition of Dunlop by R.P. Goenka and Manu R. Chhabria. The reasons for the joint acquisition are not known, but speculation has it that, apart from joint financing, the purchase was mutually beneficial: Chhabria’s presence helped R.P. Goenka avoid questions of monopoly (he had already acquired Ceat Tyres) and Goenka’s proximity to Indira Gandhi and then West Bengal chief minister Jyoti Basu facilitated Chhabria’s management of the company. However, in the absence of an agreement or a legal framework for managing the partnership, differences between management styles quickly emerged and the partnership soon went south. Chhabria had to eventually buy out Goenka.

In recent times, Yes Bank—started by brothers-in-law Rana Kapoor and Ashok Kapur (both are married to two sisters)— ran into partnership and succession issues. Ashok Kapur’s untimely death in the 2008 Mumbai terror attacks precipitated demands from his family members for a board seat, which Rana Kapoor, who was managing director and CEO, rejected. This led to court cases, public airing of soiled laundry and much bitterness on both sides of the family. It didn’t help that regulators found Rana Kapoor’s management style risk-prone and investigative agencies found enough reasons to arrest him. The unfortunate outcome is that the bank now belongs to neither branch of the founding families.

But it is not always necessary that all partnerships end in rancour or public display of petulance.

Unbeknownst to many, the Scindias of Gwalior were equal shareholders with the Wadias in the Bombay Dyeing group. They had a 50% shareholding in the group holding company Nowrosjee Wadia and Sons Ltd, through which the Wadias now control Britannia, Bombay Dyeing and Manufacturing, Bombay Burmah Trading, National Peroxide and GoAir. But when Madhavrao Scindia, father of Jyotiraditya Scindia, became a minister in P.V. Narasimha Rao’s government of 1991-96—first as minister for civil aviation and tourism, and later as minister for human development—both sides decided to end the partnership in a dignified and civil manner. There was no public falling out.

India’s two largest industrial empires—Birlas and Tatas—also had an unwritten understanding. The Birlas, through their holding company Pilani Investments, nursed a large stake in Tata Steel (then called Tata Iron and Steel Company), which remained substantially larger than the Tata shareholding for many years. This was part of an agreement between J.R.D. Tata and G.D. Birla, fellow travellers from pre-independence days and co-architects of the famous 1944 Bombay Plan. It was around then that Pilani Investments picked up a stake in Tata Steel as a pure investment, though it was later also re-defined as a foil against hostile takeover by third parties. Yet, despite that large stake, the Birlas stayed non-interventionist till they sold their 6.3 million shares in 2012-13. There was had no written document, only a verbal understanding between two gentlemen, but one that later generations largely honoured.

It takes a lot to stay the course, given the Indian business landscape’s vicissitudes and the accompanying regulatory volatility. The trick might be to hammer out agreements bound by principles, which can be timeless, rather than specific rules that can become obsolete over time.

Rajrishi Singhal is a policy consultant, journalist and author. His Twitter handle is @rajrishisinghal.

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