Opinion | Tata Sons’ failed conversion and its strange article of association4 min read . Updated: 20 Dec 2019, 07:25 PM IST
How the Supreme Court views Article 75 of its AoA could potentially affect how articles of association are drafted in the future for all companies, public or private
Much is being written about the National Companies Law Appellate Tribunal (NCLAT) order dated 18 December, reinstating Cyrus Mistry as executive chairman of Tata Sons. There are several questions being raised about this order. This opinion piece does not really seek to counter such views or analyze the NCLAT order in detail. However, it looks at two interesting and in our view possibly intertwined issues that have emerged in this case from the NCLAT order that will have a bearing on corporate governance issues going forward. The first is the sudden attempted conversion of Tata Sons to a private limited company, and the second is Article 75 of the Articles of Association (AoA) of Tata Sons, which the NCLAT has directed Tata Sons to refrain from invoking against Shapoorji Pallonji Group as a minority shareholder. Indeed, the discussion so far has not focused adequately on the possible impact of these two on businesses, whichever way the Supreme Court decides.
Let us first look at the manner in which Tata Sons attempted to change its status from a public to a private company. Of course, it has required some ‘creative interpretation’, something that is not new to the Tata Group (remember how the interpretation of a comma in India’s foreign direct investment policy helped the same group set up an aviation business).
Two things are critical here: the timing of such a conversion attempt, and of course the manner in which it was attempted. As for the timing, the conversion was tried hurriedly at a stage an appeal had been filed by Mistry before the NCLAT, a fact highlighted by the NCLAT order. As for the manner, the hurry meant that instead of following Section 14 of the Companies Act of 2013, which sets out the procedure of conversion of a public company to a private company (and vice versa), requiring approval of the government, Tata Sons sought to rely not on provisions of the Companies Act, or Rules made thereunder, but on a general circular dated 13 September 2013, arguing that it allows a company that satisfies the definition of ‘private company’ to change its status with direct permission of the Registrar of Companies.
What Tata Sons (and indeed even the NCLAT order) does not highlight is the fact that the said general circular was issued at the time of a transition from the old Companies Act of 1956 to the current Companies Act of 2013, and that to facilitate proper administration, it allowed the Registrar of Companies to “register those Memorandum and Article of Association received till 11.9.2013" as per the definition of a ‘private company’ under the old Act of 1956. This ‘creative interpretation’ has—at least for now—been overruled by the NCLAT order, restoring the public company status of Tata Sons. It remains to be seen how the Supreme Court views this when the NCLAT order is challenged before it. It appears that the order has rightly held such an attempted conversion to be illegal and reversed it.
A public company has a higher standard of corporate governance to answer to, as compared to a private company. Perhaps that is why the Tata Group was in a hurry to change the status of its holding company, though I am not sure how such an attempted change long after the removal of Mistry would really have helped the group on the issue pending before courts regarding the legality of his removal, which would have to be decided on the basis of the fact matrix at that point of time.
Therefore, it appears that there might have been another reason for such a hurried attempt at conversion, which brings us to Article 75 of Tata Sons’ AoA. This Article is a powerful provision that has not been invoked so far, but actually allows the company to ask any shareholder to sell his shares. Invoking such a provision could render any potentially adverse finding of the courts redundant by simply asking the Shapoorji Pallonji Group to sell out. It is here that the issue of Tata Sons’ status as a private or public company may become important. This is because one view is that such a provision cannot be valid for a public company, which cannot impose restrictions on the transferability of its shares to the extent that a private company can do under the law.
Interestingly, as of now, the NCLAT order has only asked Tata Sons not to invoke such a provision, stating that it can be “exercised only in exceptional circumstances and in the interest of the company." It would therefore be interesting to see how the Supreme Court views Article 75 of its AoA. What it determines would potentially affect how articles of association are drafted in the future for all companies, public or private.
Som Mandal is managing partner, Fox Mandal & Co