TATA VS MISTRY: THE FINAL COUNTDOWN
The Supreme Court hearings that start this month will determine the legacy of Ratan Tata and establish the rights of minority shareholders
When the Supreme Court begins hearing petitions filed by the Tata Sons and the Mistry family from this month, it will decide not only the legacy of Tata group patriarch, Ratan Tata, 82, and the rights of minority shareholders but also the bruised egos of two top business families.
Also at stake is the veto power enjoyed by Tata charitable trusts in the affairs of Tata Sons and, of course, ~6 trillion of assets held by the Tata group, the country’s largest corporate group.
The four-year-old battle between the friends-turned-foes started when Cyrus Mistry, 52, the younger son of billionaire Pallonji Mistry, was unceremoniously removed as chairman of Tata Sons in October 2016 — a few months before his five-year term was to end. The Mistry family, which owns 18.5 per cent in Tata Sons, was furious at the way Tata removed Mistry — triggering a bitter and expensive legal battle between the two.
Cyrus Mistry’s main grouse was he was blamed for the Tata group companies’ shoddy performance during his tenure since 2012 but it was his predecessor, Ratan Tata, who created the crisis during his 20-year term at the helm of Tata Sons. In his communications to the Tata Sons directors and Tata Trusts trustees soon after he was removed, Mistry cited the poor financial performance of Tata Steel Europe, Tata Motors' Nano project, Tata Teleservices, Indian Hotels, Jaguar Land Rover, Tata Power’s Mundra which, he said, drained Tata Sons coffers (he called them “legacy hotspots”).
Mistry also said he was made the fall guy for several corporate governance issues including Tata Capital’s loans to Tata’s close friend, C Sivasankaran (which were never repaid), and bribery by Airasia India for its flying licence. Interestingly, Mistry’s successor, N Chandrasekaran, 57, is grappling with the same issues that Mistry raised in 2016.
In a related step, Tata Sons also decided to turn into a private company in September 2017, making it difficult for the Mistry family to sell its shares. “If a company goes private, it becomes difficult for the shareholders to sell shares or give it as a collateral as it can lead to a change in ownership,” says R S Loona, managing partner of Alliance Law, adding, “Clarity by the Supreme Court on this issue will help both sides.”
After the National Company Law Tribunal (NCLT), Mumbai, ruled in Tata Sons’ favour on April 17, 2017, saying Mistry’s removal was kosher, the Mistry family moved the National Company Law Appellate Tribunal (NCLAT) in New Delhi. The appellate tribunal, on December 18 last year, said Mistry’’s removal was “illegal,” restored him as Tata Sons chairman and held Chandrasekaran’s appointment illegal.
In January this year, Tata Sons moved the Supreme Court, which stayed the NCLAT order and sought responses from all parties. The Mistry family also appealed to the apex court seeking additional reliefs on representation on Tata Sons board on the basis of its 18.5 per cent stake in Tata Sons and deletion of Article 121 from Tata Sons’ articles of association which gives Tata Trust-nominated directors an “affirmative vote”.
The Mistry family’s argument for proportional board representation was based on its claim that its stake in Tata Sons was a quasi-partnership. Several instances were cited to prove this — personal letters written by Ratan Tata to Pallonji Mistry and transactions conducted with Tata family members prove that the relationship was beyond a simple financial investment and had a personal character to it.
To bolster this argument, the Mistry family said that since 1951, the family’s representation on the board evolved from group companies to Tata Sons. With time, more Mistry family members represented their shareholding in more than 20 group companies.
The Mistrys argue that Tata Sons’ shareholding pattern clearly shows that the holding company is a two-group-owned entity as the Tata Trusts, Tata companies and Tata family members hold 81.5 per cent and the rest is held by the SP Group, the only significant non-tata equity shareholder, making the arrangement a quasi-partnership.
Tata’s legal team says the issue of quasi-partnership is an afterthought on the part of the Mistrys that was never effectively pleaded before the NCLT or the NCLAT.
Tata Sons was incorporated in 1917, founded by the late Jamsetji Tata and his family. Pallonji S Mistry and Sterling Investments bought Tata Sons shares in 1965 — more than 50 years after its incorporation and after a large portion of the company’s shares were endowed to charitable trusts.
Even this initial shareholding was not a result of any grand alliance or partnership but acquired through a secondary purchase of 124 equity shares by Pallonji S Mistry. No special rights were attached to the Mistry family’s acquisition, and none were either demanded or promised to them.
This purchase of shares in 1965 was a transaction at a commercial value between a willing buyer and willing seller, the argument ran, and there was no contract, arrangement or understanding of any kind in which the Mistry family would have a seat at the board or any other management role.
The Tata position is that the operating group companies are distinct legal entities, many of which are listed with a large base of public and institutional shareholders. The Tata Trusts are public charitable trusts, not a private trust controlled by any family members.
On the argument that the Mistry family has been denied “special rights,” the Tata argument is that the only rights that are available to shareholders are those that accrue in law or under the terms of the Company’s Articles of Association as shareholders of Tata Sons. None of these rights was denied to Mistry or Mistry family/entities, they said.
As for the affirmative voting right, it does not mean that the Trust-nominated directors can pass any resolution at will. Any Tata Sons board decision will require the support and majority vote of all the directors. Article 121, at the very highest, gives the majority of the Trust-nominated directors a right to veto a decision; they cannot impose their decision on the rest of the Board. “It is also a matter of record that to date this ‘veto’ has not been exercised even once to negate a decision of the Board,” the Tata group petition said.
On Mistry’s charges that Tata took poor business decisions, Ratan Tata left it to the stakeholders to decide. “At this stage of my life and career, I would not like to either explain or defend my performance as chairman of Tata Sons and of the other Tata companies whose board I chaired during my tenure. It is for the companies and their stakeholders to judge,” he said in an emotional appeal to the Supreme Court.
“However, one thing I would like to clarify and reiterate that throughout the past several decades that I have served the Tata group in various capacities, I have been solely guided by the interest of this group and its enduring legacy, which cannot be judged in numbers alone and goes beyond return on investment and costs of capital.”
Whether the Supreme Court agrees with this self-assessment is an open question.