'It Isn't About Noel Tata, It Isn't Even About Chandra'

'You can't have a runaway board that takes decisions against the active disagreement of the 66 per cent shareholder.'

The decision of the Tata Sons board to award another five-year term to Chairman N Chandrasekaran has been challenged by Tata Trusts Chairman Noel Tata, who is the Trusts' nominee on the Tata Sons board.

Tata Trusts has engaged jurist Abhishek Singhvi, a five-time member of Parliament and former additional solicitor general of India, as its lead counsel.

In an e-mail interview with Vikram Gopal/Business Standard, Singhvi, who is a former chair of the Parliamentary Standing Committees on law, home affairs and commerce, as well as a member of the Congress Working Committee and the party's senior national spokesperson, said crucial provisions of the Tata Sons articles of association (AoA) were not followed by the board at its meeting.

He added that there is no link between the question of listing Tata Sons and Chandrasekaran's reappointment.

'If there are two people and one disagrees, then it's a veto'

A majority backed N Chandrasekaran's re-appointment at the board meeting, but Noel Tata has challenged it. Does the board not have the power to decide this matter?

This is a case of shareholder primacy.

The Tata group has a unique architecture, where the Tata Trusts hold 66 per cent of the shares of Tata Sons, which in turn controls and runs a series of operating companies.

You can't have a runaway board that takes decisions against the active disagreement of the 66 per cent shareholder.

A shareholder with such a holding can normally pack the board. But the Tata Trusts said they wanted only a minimum of one-third representation on the board.

However, in return for that, specific provisions were made in the AoA of Tata Sons, particularly articles 104B, 118, and 121.

Article 118 states that the board must ensure decisions have the concurrence of the directors nominated by the Tata Trusts.

Earlier, all trust nominees had to concur on a decision, but this changed with a 2014 amendment to require the concurrence of a majority of the Trusts' nominees.

When there are two nominees, the majority cannot be one; it must be two. So, clearly in this case there was no majority.

In the absence of a majority, the lack of an affirmative vote acts as a veto. If there are two people and one disagrees, then it's a veto.

'It is about the primacy of a trust that holds 66 per cent of shares'

A casting vote was exercised in this matter.

That question arises only when there is a deadlock amongst all the board members taken as a whole.

According to Article 121 of the AoA, a veto (or lack of an affirmative vote) within the intra-trust nominee directors means that the issue cannot even be discussed in the board, since the 66 per cent shareholder's nominees have vetoed it.

There is, hence, no question of a casting vote arising when the board is denuded of jurisdiction to even consider the matter.

In this case, the acting chairman made a casting vote.

Article 121 contains no concept of a stalemate of intra-trust nominees and does not envisage a non-trust nominee chairman or acting chairman to exercise a casting vote.

But doesn't the Tata Sons board steer matters?

Obviously not if it violates its own articles, if it ignores the absence of an affirmative vote.

It is not about Noel Tata; he's not an individual shareholder. It is not even about Chandrasekaran. It is about the primacy of a trust that holds 66 per cent of shares.

Now, if you were to accept the principle of a runaway board acting independently of its 66 per cent owner, there would be disastrous consequences for corporate governance.

In several earlier cases, including the celebrated Escorts case as far back as 1986, the Supreme Court said that corporate majority has to prevail.

The definition of corporate majority is he who owns the shares.

The same Article 121 was challenged as oppressive [in the Cyrus Mistry case], and specifically and comprehensively upheld by the SC a few years ago.

Can trustees claim ownership over the company?

The trustees are doing nothing except seeking adherence to articles of Tata Sons -- especially articles 104B, 118 and 121 -- which constitute the governing constitution of the company, Tata Sons.

'There is no connection between listing and the reappointment of the chairman'

Another resolution was on the listing of Tata Sons in line with the Reserve Bank of India's rules. Won't listing improve transparency?

This is a red herring introduced in the middle of the chairman's appointment. There is no connection between the two, at least in the immediate or even the medium term.

The issue pertains to the re-appointment of the chairman and the meaning of an affirmative vote on the board in terms of article 121.

An old application for non-listing was made to RBI by this very Tata Sons.

It took two years for the RBI to dismiss this application.

The basis of this application, as adumbrated by this very board, was that Tata Sons had repaid over Rs 20,000 crore of public borrowings and was not dependent on public funds and, hence, needed no listing.

This rejection by RBI will either be set aside in duly constituted legal challenges or upheld.

In the latter case, the transition to listing will itself take at least two to three years. None of this is of any relevance to the chairman's appointment.

The Shapoorji Pallonji group, which owns more than 18 per cent in Tata Sons, has also backed a listing...

I agree that the SP Group has the right to aspire for liquidity, as indeed every shareholder does. But there is no connection between that issue and the reappointment of the chairman.

The SP Group may get the benefit of listing or it may not. Or it may enter into agreements regarding liquidating all or part of its shareholding.

Isn't it the fiduciary duty of a board member to safeguard the interests of the company on whose board they serve?

These questions have been answered for both parties in identical circumstances.

In Tata Trusts' case, in the same situation, the court said they have a fiduciary duty towards both companies, one which nominates them and the other being the board of the company upon which they are nominated.

One cannot say that I have a duty only to the board of the company to which I have been nominated.

Your duty to the 66 per cent shareholder who nominated you cannot be forgotten.

This has been answered by the Supreme Court for the same company and the same trust.

"Chandrasekaran expressed his desire not to seek a third term"

After Chandrasekaran said he would not seek a third term, Tata Trusts advised Tata Sons to initiate the process of setting up a selection committee...

The process of constituting a selection committee for a new chairman began the moment Chandrasekaran expressed his desire not to seek a third term.

The Trusts sought and followed the detailed, comprehensive and well-reasoned legal opinion of former Chief Justice of India D Y Chandrachud that a fresh five-year term amounts to a new appointment.

An elaborate procedure has been laid out in the articles.

Under Article 118, the selection committee for the chairman must comprise five persons: Three nominated jointly by the two trusts [Sir Dorabji Tata Trust, or SDTT, and Sir Ratan Tata Trust, or SRTT]; one board member of Tata Sons; and an independent member selected by the Tata Sons board.

If one trust has been stopped from convening a meeting, as has mysteriously, inexplicably and suddenly been done in the case of SRTT by the Charity Commissioner [of Maharashtra], then the Trusts cannot decide jointly. So there is a multi-pronged conspiratorial move.

At one end, one trust is paralysed. At the other, Article 121 is egregiously and blatantly violated.

At a third level, the whole of Article 118 is ignored and a chairman is appointed without any selection committee being constituted.

'Matters have reached far beyond what they should have'

An option reportedly being explored to avoid listing Tata Sons is to split it. Is such a move being considered?

There is neither need nor relevance to answer hypothetical and speculative questions.

Is a legal battle the only option now?

My anguish and sadness is that I wish there was some way out without litigation.

Matters have reached far beyond what they should have.

Rupturing the historical hyphen and legacy of the Tata Trusts with Tata Sons and divorcing them amidst bitter acrimony should all be unthinkable.

Feature Presentation: Rajesh Alva/Rediff