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Home / Opinion / Views /  No scope for a legal challenge to the Tata-Mistry ruling

India’s Supreme Court (SC) gave a fairly detailed judgement, unequivocally ruling against the case of oppression and mismanagement sought to be made against the Tata Group by the Mistry Group, which has since filed a review petition, as reported. Although the success odds of review petitions is extremely low, ‘why not try one’s luck’ is the general practice, with not much to lose except legal fees. The real loser is the judicial system, with its huge case pile.

While the grounds of the review petition are not in the public domain, a few commentators have opined that the court may revisit its findings on the duty of directors. The judgement, they argue, has diluted the fiduciary duty of nominee directors of public charitable trusts. This is a patently incorrect interpretation of the judgement, which must be read in whole rather than in a disjointed manner. Picking a word here and a phrase there may lead to an incorrect conclusion. Contesting parties tend to draw their own interpretations of facts and law. But the SC’s duty is to make unbiased judgements.

An allegation central to the Mistry Group’s case was that Tata Trusts’ nominee directors were not discharging their fiduciary duty appropriately to act in the best interests of the company (i.e., Tata Sons), but acted only to further the interests of the Tata Trusts that had nominated them.

It is perplexing how what is in the interest of 82% shareholders (Tata Trusts and others) will not be in the interest of the company, unless the Trustee directors also harmed the interests of the Trusts. Since no case of minority oppression was established, it can be concluded that the actions were in the interest of the company. ‘Fiduciary duty’ cannot have an all-inclusive definition. The apex court examined these allegations and found no merit in them. On the duties of directors, the court found that the way company law has evolved, directors’ duties straddle various interests—a director must act in the best interests of the company, as also its employees, shareholders, the community at large and the environment. The court found that what is ordained by Section 166(2) of the Companies Act of 2013 is a combination of “private interest" and “public interest". The duty of company directors is to balance these oft-competing interests.

The SC noted that the majority shareholding of Tata Sons is with philanthropic trusts and not with private individuals; its beneficiaries are the public at large. In fact, the SC did not treat the directors nominated by the Trusts on a different footing. Nor did it dilute their duties. It was guided by the concept of ‘mens rea’ (intention). The point made by the ruling was that no ‘private interest’ was served by the actions of Trust-nominee directors. Therefore, the personal interests of Tata Sons’ directors or their nominator did not come in way of directors discharging their fiduciary duty.

The importance of the judgement is that the nominee directors of a public charitable trust, unlike nominees of a family or corporate promoter, will have no incentive (mens rea) to misuse or abuse their position to sub-serve their nominator’s interest. One can be sure that the SC has applied its mind to the ultimate public beneficial interest served by Tata Trusts. It would be incorrect to conclude that the ruling has given the application of company law a variability based on the identity of shareholders, or that it departs from well-established principles of company law. Courts do not pass judgements in a vacuum; the context plays an important role, and in interpretation, substance takes precedence over form.

No doubt all directors owe a fiduciary duty to the company. But the judgement has neither changed nor diluted this position. All directors—nominee, independent or executive—have a duty to protect the interest of all stakeholders, including minority shareholders; one could justifiably question them if there was any trampling of minority rights. However, the SC didn’t find any. The interest of the majority is not always at conflict with that of the minority and the two are not mutually exclusive. Acting in the interest of one does not mean acting against the other. So, if a nominee director acts in the interest of the nominator-shareholder, which in Tata Sons’ case has a 66%-plus stake, it does not mean that minority interests are being compromised. There is a subtle difference in being an independent director and being independent in the application of mind. A nominee director is not independent and is free to discuss issues with the nominator, yet must apply his or her mind independently. One has to judge specific decisions and discard the notion that only dissent signifies independence. The SC applied this logic, and if this was well understood, there would be no confusion about the role of Tata Trusts’ nominees.

The premise of the Mistry Group’s case of oppression and mismanagement, and the allegation that corporate governance in Tata Sons and the Group was at peril was ab-initio wrong, as it mixed the right (not to be ousted) of Cyrus Mistry as an individual with the rights of the Mistry Group, the company’s largest minority shareholder. Charges of “oppressive" acts were levelled only after Cyrus Mistry’s removal, although the Mistry Group and he were party to all alleged pre-existing oppressive acts as a shareholder and individual. If the court was to find oppression, Mistry could not have been absolved of his role in it, as he was at Tata Sons’ helm for almost five years, opening the possibility of the Mistry Group making Cyrus Mistry a respondent in the case as well.

India’s Supreme Court, in its incisive analysis, without mincing words observed: “Though the [Mistry Group] padded up their actual grievance with various historical facts to make a deceptive appearance, the causa proxima for the complaint was the removal of [Cyrus Mistry] from the office of Executive Chairman."

Logically, Mistry cannot claim relief on the grounds of oppression and mismanagement, as he had actively been involved in that management.

J.N. Gupta is managing director, Stakeholders Empowerment Services

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