Zee-Invesco: An Analysis of the Bombay High Court Judgment 

Shareholder litigation against listed companies in India is rare. Rarer still is an open attempt to remove the promoter and CEO of a listed company. It is not surprising then that a public dispute between the Zee Entertainment Enterprises Private Limited (“Zee”), a listed company, and Invesco Developing Markets Fund (“Invesco”), an institutional shareholder in Zee, has garnered significant attention. The dispute began with Invesco sending a requisition notice calling for a shareholders’ meeting to, among other things, remove the current MD and CEO of Zee, and appoint six new individuals as independent directors of Zee. Zee’s board of directors (“Board”) declined to call a shareholders’ meeting based on the requisition notice. Invesco filed a petition before the National Company Law Tribunal (“NCLT”) to compel Zee to call the meeting. Zee filed a suit before the Bombay High Court asking the court to declare that the requisition notice is illegal, declare that Zee’s decision to not act on the requisition notice is valid, and an injunction restraining Invesco from acting in furtherance of the requisition notice. Meanwhile, Zee announced proposals for a merger with Sony India (a ‘non-binding’ term sheet), in terms of which the current MD and CEO would continue in the merged entity. Invesco has publicly raised concerns with the terms of the merger, which it believes favours the promoters at the expense of public shareholders, and its disappointment with Zee’s Board for its refusal to call a shareholders’ meeting in terms of the requisition notice.

Recently, a single judge of the Bombay High Court granted an interim injunction restraining Invesco from taking further steps in furtherance of their requisition notice to Zee. While this order will likely be challenged, it is a rare corporate governance dispute in India that has taken the form of a private litigation (and not a regulatory investigation). This blog post provides a brief summary of the order, and a preliminary analysis of its central themes.

The Bombay High Court Order

There were two issues before the Court:
(i) Does the Court have jurisdiction to decide this issue?
(ii) If it does have jurisdiction, on what basis can the Court decide if the Board can legally refuse to call a shareholders’ meeting in terms of the requisition notice?

The Court determined it had jurisdiction to decide this issue on the basis that NCLT Rules do not mention Section 100 of the Companies Act, 2013 (which allows shareholders to requisition meetings), as one of the provisions over which it has jurisdiction; and if the proposed resolutions are “in the teeth of statutory and regulatory requirements”, it is ‘egregious’ to conclude that no court or tribunal can intercede.

On the second issue, Zee argued that both the form and substance of the requisition notice are subject to judicial review. The conditions for the form are set out in Section 100, and the requisition notice appears to comply with these conditions. However, Zee argued that the substance of the resolutions in the requisition notice contravened various legal and regulatory provisions including the following:

1. The requirement for the directors and senior management to be selected by the Nomination and Remuneration Committee (“NRC”), and for independent directors to be selected by the Board based on their opinion that such persons are in fact independent;
2. The requirement to have a full-time CEO or MD;
3. The requirement to maintain an ‘optimum’  balance of executive and non-executive directors (since the requisition proposes to remove the only executive director and fill all the positions with independent directors); and
4. The requirement to obtain the prior approval of the Ministry of Information and Broadcasting (“MIB”) before effecting a change in the Board.

Invesco argued that Section 100 does not allow the Board to consider the substance of the resolutions – shareholders can propose any resolution so long as they meet the procedural requirements. In any event, the resolutions proposed in the requisition notice have not been approved – and they may not be at a shareholders’ meeting; accordingly, the Board’s refusal, and the suit, are premature. Further, even if the resolutions are approved and found to be “unworkable”, they will then remain “still-born” and no action will be taken on the basis of these resolutions – therefore, there is no justification for the Board’s refusal or for the Court to intervene.

The Court dismissed Invesco’s arguments. It held that a substantive review of the requisition notice is permitted, and that courts can restrain meetings where the resolutions sought to be approved are “illegal” and not merely “irregular, undesirable or unpalatable”. Curiously, the Court specifically stated that this interpretation is not based on the use of the word ‘valid’ in Section 100 – a possible justification could have been that a ‘valid’ requisition required under Section 100 should meet both the procedural tests set out in Section 100, and substantive tests of legality of the resolutions. Instead, the Court explained that the focus is on “whether what is sought to be done is plainly an illegality” in view of the broader regulatory framework for public listed companies with a large shareholder base – these companies operating in highly regulated areas must receive “distinct considerations” where non-compliance may cause “a wholesale disruption of the company’s essential business”. Therefore, sometimes, companies “must be saved from its own shareholders, however well-intentioned”, and if the “resolution is bound to cause a corporate enterprise to run aground on the always treacherous shoals of statutory compliance, there is no…reason to allow such a resolution even to be considered”

Analysis

The judgment will no doubt receive close attention as a rare instance of private shareholder activism in India involving a listed company. At this stage, we offer a few preliminary thoughts.

Balancing provisions for shareholder protection 

The proposed resolutions for removal and appointment for directors are not illegal on their face. Indeed, these are core shareholder rights. However, the judgment considers the steps involved to effect such appointment or removal such as NRC recommendation or optimum balance between executive and non-executive directors, and finds that the implementation of the proposed resolutions runs afoul of these other provisions. This is ironic because the other provisions in the Companies Act and the SEBI Listing Regulations, are also designed for the benefit of shareholders, and to counteract the influence of the promoter on the board of directors. The better interpretation would have been locate these provisions within a broader framework of corporate governance, and interpret the proposed resolutions with these provisions harmoniously.

Interpreting regulatory instruments 

The judgment emphasizes that listed companies which are “tightly regulated” require special consideration. The regulatory provisions are characterized as a “binary: a company is either compliant or not. If it is not, the juggernaut of offences and penalties rolls.” Therefore, the MIB guidelines which require prior approval before any change in directors is made effective, would render the proposed resolutions illegal.

Several questions arise with this approach. First, the MIB guidelines do not prohibit shareholders appointing or removing directors; it only requires prior permission before their appointment is made effective. It is unclear why Zee cannot apply for approval prior to the shareholders’ meeting, or for the directors, if appointed at such a meeting, to take office once they receive approval from MIB. Second, policy guidelines and regulations should not ordinarily trump statutorily entrenched rights, particularly when there is no direct conflict. Companies in most regulated sectors require a consent from authorities before a change in the board of directors is made effective. In fact, given the number of approvals most Indian companies require regularly, it is not unusual for approvals to include a consent or a prior intimation requirement for change of directors, alteration of the articles of association and other such matters. These requirements in their text or purpose, do not indicate that an act is ‘illegal’  – they merely require consent before such an act is made effective. Third, regulatory matters in India far from operating in binaries depend a great deal on the practice established for a particular consent requirement, particularly because the text of the regulatory instrument is rarely clear. The law operates very much in the interstices. In this instance, the MIB guidelines do not indicate when the application for approval is required to be made. The typical director appointment process under the Companies Act and SEBI Listing Regulations requires the NRC to recommend specific names; these individuals are then usually appointed by the board of directors as additional directors; and then appointed as directors at the next shareholders’ meeting. A plain reading of the MIB guidelines gives no indication that the approval of the MIB is to be obtained at a specific stage during this process. In fact, the Zee’s 2020 Annual Report curiously states that “requisite intimations with respect to the changes in Directors during the year had been made to and approved by the Ministry of Information and Broadcasting” (emphasis supplied) – this does not give a clear indication either. In this context, using a policy guideline, which had no explicit or implied intent to read down a core right available to shareholders under the Companies Act, may require reconsideration. The judgment also notes that the resolutions propose a board comprising only of independent directors, which violates provisions of the Companies Act and the SEBI Listing Regulations which mandate executive directors. But there have been such instances in the past. For example, the National Stock Exchange was in a similar situation when its MD resigned unexpectedly; the remaining directors (who were all non-executive), continued supervising the business until a new MD and CEO was appointed – all this while SEBI was closely monitoring the situation. While these situations are unusual, they are not unprecedented and it is unclear how they are so easily classified as ‘illegal’, to the detriment of shareholders who are trying to hold that very set of directors accountable. Regulatory instruments should be interpreted practically and with reference to their purpose, and not as ‘binary’, static provisions.

Threshold for substantive review 

While English decisions do support a limited substantive review of shareholder requisition notices, they do so with great caution. Even the cases cited in judgment contain important observations to this effect. In Isle of Wight Railway Co v Tahourdin ¹, Cotton, L.J. observed that “[it is a very strong thing indeed to prevent shareholders from holding a meeting of the company, when such a meeting is the only way in which they can interfere, if the majority of them think that the course taken by directors… is not for the benefit of the company.”] Similarly, in Fruit and Vegetable Growers Association v. Kekewich ², it was held that it would be wrong for the court to be “astute to discover and give objections raised against efforts made by shareholders to call a meeting of the company. Such shareholders’ wishes should not be thwarted if it is possible to give effect to them.”

The cases cited in judgment as authority for the proposition set a high standard to determine illegality. For example, in Queensland Press Limited v. Academy Investments, the resolutions required the board of directors to refer for ratification, a proposal to dispose the company’s major asset. Since the decision as to whether a major asset should be disposed is that of the board of directors, who are not merely agents of the shareholders, the object of the requisition was found to be one which cannot be given legal effect. The proposed resolution in that case violated a fundamental principle of company law.

In Rose v. McGivern ³, the requisition was drafted in such a way that it could not have been practically implemented. In any event, the facts were such that the object for which the requisition was issued were substantially achieved due to developments after the requisition notice was issued.

In this case, the requisition has been termed illegal not because of defects in its drafting, or because it contravenes a fundamental principle of company law. The possibility of changing directors through a requisition has been ruled out because of other laws that in the ordinary course prescribe certain processes and conditions to be satisfied. By this standard, most requisitions could be termed as illegal – or at least a dispute raised about it. Even if a substantive review is required for requisitions under Section 100, the standard for review requires reevaluation.

Conclusion

The dispute between Zee and Invesco will likely continue – as appeals from this judgment, or in other forms. But the judgment has consequences beyond this case. It illustrates the challenges in developing a coherent interpretation of the law in view of multiple statutes, guidelines, regulations and other instruments, all seemingly applicable to the same issue. Traditional ‘binary’ interpretations may not suffice. A better understanding of the regulatory framework is required to interpret these instruments meaningfully. The judgment also has implications for corporate governance in India – if the single largest shareholder, with deep pockets, faces such an uphill task to merely convene a meeting against a company which received a rebuke from SEBI earlier this year, it raises uncomfortable questions about how ordinary shareholders can hold the board of directors accountable. The last year has seen a record number of IPOs and dizzying market valuations for listed companies; but without a credible framework for governance, it is unlikely these will endure.

Endnotes:

1 [1884] 25 Ch D 320 (CA).
2 [1912] 2 Ch. 52), cited in Rose v. McGivern ([1998] 2 BCLC 593 (Ch D)), which is relied on in the judgment.
3 [1998] 2 BCLC 593 (Ch D).

About the Author:

S. Vivek, NLS ‘LLB 2010, is a Research Fellow at NLSIU where he also heads the Regulatory Governance Project. He was previously a partner at a leading law firm in Mumbai. His practice involved advising leading corporates and investment banks on structuring complex equity fundraising transactions, and representing clients before High Courts and regulatory tribunals. His other interests include corporate law, securities law and corporate governance. Read more about Vivek here.