TMI Blog2021 (11) TMI 486X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of the company s profits or business. That is not a court s concern. But the resolution must be legal. The interpretative question is therefore not over the word valid at all but about the matters proposed to be considered at a requisitioned EGM. And the Court is never foreclosed from considering this. Cricket Club of India came at a time well before the slew of regulatory provisions we see today. In particular, there was no distinction or special provisioning for a public listed company. These companies today, with wide shareholder basis, operating in tightly regulated fields must receive distinct considerations. Compliance is not only with the Companies Act. Parallels to the Companies Act controls are to be found elsewhere too. There is also no call to examine the motivations of either side. That is certainly for the general body to take into account. For this reason, it is found that Mr Sibal s endeavour to take me through a compilation of past communications between the two sides to be somewhat distracting, even possibly dangerous - what Invesco seeks today might be perfectly attainable if the substance - and therefore the form - of the proposed resolutions is corr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ainder is held by the public, including Invesco. Defendant No.3 ( Goenka ) is Zee s Managing Director and Chief Executive Officer. B. FRAME OF THE SUIT 2. In this suit, Zee asks, first, for a declaration that a Requisition Notice dated 11th September 2021 issued by Defendants Nos.1 and 2 (collectively, Invesco ) is illegal, ultra vires, invalid, bad in law and incapable of implementation. Second, Zee seeks a declaration that its refusal to act on the Requisition Notice is in accordance with law, valid and justified. Third, it seeks an injunction against Invesco from acting in furtherance of the Requisition Notice in question. The Interim Application follows the third prayer. I am considering the Interim Application. Given that the matter has been argued at considerable length, this order is the final order on the Interim Application. C. THE QUESTIONS FOR DETERMINATION 3. Zee contends that Invesco s Requisition Notice contravenes various provisions of the Companies Act, 2013; the Securities Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 ( the SEBI Listing Regulations ); the Securities Exchange Board of India (Subs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and will not be put into effect. But that does not mean that the EGM should be interdicted. Principles of corporate governance and indoor management militate against the grant of any such injunction. Therefore, Invesco argues, the entire suit is premature and speculative: it assumes that the resolutions proposed at the requisitioned meeting will be passed by the necessary majority. This is by no means certain today. The word valid in Section 100 merely requires compliance with the qualifying criteria in that section itself - the minimum percentage shareholding, whether the Requisition Notice is signed, and whether it has been delivered to the company s registered office. The word used in the section in relation to the Board s obligations is shall , and there is no call to read it permissively as may . 6. On this last point, it seems to me that there is a fundamental disconnect in Invesco s construct. The section itself contemplates a refusal or failure by the Board to convene a requisitioned meeting; and the section then provides for what is to happen if the Board does not act. The Board has 21 days from date of receipt of the Requisition Notice to call a meeting within 45 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not in every case that a court is entirely powerless. 10. Mr Subramaniam s case that Zee is caught between the Scylla of Section 100 to call an EGM to consider certain resolutions and the Charybdis of those resolutions, if passed, causing Zee to be potentially non-compliant and severely damaged in its business is, in my considered view, a compelling argument. I find it difficult to countenance a situation where, once it is shown, as I believe it is, that the proposed resolutions are in the teeth of statutory and regulatory requirements, a court of law is entirely effete. It seems to me even more egregious to be forced to conclude that no court or tribunal can ever or in any circumstances intercede. 11. There is one fundamental flaw in Invesco s construct. It assumes that resolutions at an EGM requisitioned by shareholders are somehow special or more sacrosanct than resolutions proposed by the Board itself. There is no warrant for this. If the Board itself proposes an EGM to consider these very resolutions, or ones equally vulnerable, it is entirely possible for anyone with sufficient legal standing, even a shareholder in a derivative action, to ask of a Court precisely th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. On 20th September 2021, Invesco sent in revised forms, annexures and additional documents. 19. Paragraphs 23 to 28 of the Plaint contain a narrative of a preliminary non-binding term sheet Zee executed with Sony Pictures Networks India Pvt Ltd ( Sony India ) on 22nd September 2021. This has no relevance to the discussion at hand and I have chosen to ignore it entirely. Both sides may have quite a lot to say about it; I do not see the need to hear any of it. The Requisition Notice preceded the term sheet and the Sony India negotiations by a good ten days. The Requisition Notice was not triggered by anything Zee did vis- -vis Sony. 20. Under the statute, Zee s board would have had 21 days from 11th September 2021 (until 3rd October 2021) to call the requisitioned EGM. On 29th September 2021, Invesco filed Company Petition No. 322 of 2021 before the NCLT under Sections 98(1) and 100 of the Companies Act against Zee, Goenka, all existing independent directors and Zee s registrar and share transfer agent. Invesco sought an order from the NCLT to call and hold an EGM of Zee on or before 28th October 2021. That matter before the NCLT is pending following an order of the NCLAT. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Section 149(6) as one who is not a Managing Director or a whole-time director or a nominee director. He or she must, in the opinion of the Board, be a person of integrity and must possess the relevant experience and expertise. There are requirements from sub-subsections (a) to (f), many with their subsidiary clauses, in regard to independent directors. Sub-sections (7) to (13) also all apply to independent directors. Then Section 150 prescribes the manner in which independent directors are selected. They are to be drawn from a data bank. Under Section 150(2), the appointment of independent directors is to be approved by the company in general meeting as provided in Section 152(2). The explanatory statement annexed to the notice of the general meeting called to consider the said appointment must show the justification for the appointment as an independent director. Under Section 178, the Board of Directors of every public listed company must constitute a Nominations and Remuneration Committee or NRC of three or more non-executive directors, of which at least half are independent directors. The NRC is to identify persons who are qualified to be directors, to recommend their appoi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Board. 29. Conceptually and philosophically, he maintains, there is a difference between an independent director appointed according to the Companies Act and following its provisions, and six named individuals being put there at the instance of one group of shareholders. That nomination of identified individuals speaks - and not well - of their independence . It is impossible not to see these as nominees of the requisitionists, and there is little achieved by protestations of the excellence of the Chosen. In the scheme of the Companies Act, shareholders do not get to choose individual independent directors. They may only demand that there be independent directors. 30. Section 203, in contrast, applies to every company of a prescribed class. Such a company must have a Managing Director or a Chief Executive Officer or manager or, in their absence, a whole-time director. Goenka is the Managing Director and the Chief Executive Officer. The requisition demands his ouster - but without proposing a replacement. This puts Zee into a statutory black hole, for it would then be totally in violation of Section 203(1); and it, and its directors, would have to face the liabilities, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... subject to MIB approval . The removal of Goenka is not. But even that requires prior MIB permission, as does any change in the constitution of the Board. Mr Subramaniam submits that there is no situation in which prior permission equates to subject to approval . The latter is, by definition, ex post facto; the former is clearly not. Therefore, he contends, the entire resolution structure is not merely flawed; it drives through a demonstrable illegality and infirmity, one that will jeopardize the functioning of the company and threatens the interests of all shareholders. 34. Finally, there are the SEBI Takeover Regulations. Regulation 2(1)(e) defines control . It includes the right to appoint a majority of directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding rights. Regulation 2(1)(a) defines an acquirer to mean inter alia a person who acquires control over a target company . Regulation 4 says that irrespective of any acquisition or holding of shares or voting rights, no acquirer may acquire control unless the acquirer makes a publi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e any hypothesis in philosophy - has to be tested for falsification or failure. Based on the work in philosophy of Sir Karl Popper, this is called null hypothesis testing: using deductive reasoning to ensure that the truth of conclusions is irrefutable. Any hypothesis has to be tested, repeatedly, for failure; including testing at the margins or extremities. It is no use saying that a hypothesis fits a median situation. The question is whether the hypothesis survives a test or collision against a polarity? If it does, then it is sound; if not, it must fail throughout and considered unsound. This has a direct application to the case at hand. If the resolutions proposed are not such as can even be countenanced in law, then how does the question of putting them to vote at an EGM even arise? I am leaving aside for now the very serious considerations of the costs and logistics of calling an EGM with such a wide shareholding base. 40. The third answer also does not commend itself. Indeed, it seems to me to provide its own answer from the result of the second submission. If the inevitable consequence is going to be something effete - incapable of effective action - why compel the meeti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and held by the requisitionists themselves within a period of three months from the date of the requisition. (5) A meeting under sub-section (4) by the requisitionists shall be called and held in the same manner in which the meeting is called and held by the Board. (6) Any reasonable expenses incurred by the requisitionists in calling a meeting under sub-section (4) shall be reimbursed to the requisitionists by the company and the sums so paid shall be deducted from any fee or other remuneration under section 197 payable to such of the directors who were in default in calling the meeting. (Emphasis added) 43. The structure of this is straightforward. The Board may call an EGM at any time. In addition, so may shareholders. For a company with a share capital, only shareholders who, between them, hold at least 10% of the equity can requisition a meeting. The Section does not constrain the purpose of the requisition. It only requires this numerical strength to be met, and that the Requisition Notice must contain the matters to be considered, must be signed and must be sent to the registered office of the company. It cannot be correct to say that the Board is to rub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons as regards calling of extraordinary general meetings on requisition were to be found contained in section 78 of the said Act. Under those provisions the directors of a company which has a share capital were enjoined on the requisition of the holders of not less than one-tenth of the issued share capital of the company, upon which all calls had been paid, to call an extraordinary general meeting of the company. The scheme was substantially similar to the scheme of section 169 of the Companies Act, 1956. Sub-section (2) of section 78 provided for the contents of the requisition and the mode of its deposit; and sub-sections (3) to (5) provided for calling of a meeting by the requisitionists on failure by the directors to cause a meeting to be called for after deposit of a requisition. In sub-section (3) of section 78, however, the words used were date of the requisition being so deposited . Under section 169(6) of the Companies Act, 1956, one finds a change in the terminology, the provision being that the requisitionists may themselves call a meeting (subject to other provisions, with which we are not concerned) if the board does not call a meeting within twenty-one days from th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... called would be an exercise in futility. On the other hand, the question to be considered would be whether the board of directors of a company can be allowed to ignore a requisition which complies with all the requirements laid down in section 169 of the Companies Act, 1956, on the ground that the object of the requisition was illegal or otherwise invalid and, therefore, the requisition was not a valid requisition which ground may ultimately be found to be unsustainable. In my view, the word or the adjective valid in section 169 has no reference to the object of the requisition but rather to the requirements in that section itself. If these requirements indicated in the earlier part of the section are satisfied, then the requisition deposited with the company must be regarded as a valid requisition on which the directors of a company must act. If the directors fail to act within the period specified by sub-section (6), then, in my opinion, the requisitionists would be entitled to proceed under the later provisions of that sub-section and the other sub-sections of section 169. (Emphasis added) 49. The Court held that the Board was bound to call the requisitioned meeting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the requisite number of members, they are bound to call a requisitioned meeting of the company. In this connection, the opponents rely upon a decision in the case of Isle of Wight Railway Co. v. Tahourdin, [1884] 25 Ch D 320 (CA). The court, in that case, held that it would not interfere with the internal working of the company and that when the shareholders had requisitioned a meeting, the board of directors is bound to call such a meeting and it cannot refuse to call such a meeting on the ground that some of the resolutions, if passed at such a meeting, would be irregular. Lord Justice Lindley observed in that case as follows (at p. 333): We must bear in mind the decisions in Foss v. Harbottle, [1843] 2 Hare 461 and the line of cases following it, in which this court has constantly and consistently refused to interfere on behalf of shareholders, until they have done the best they can to set right the matters of which they complain, by calling general meetings. Bearing in mind that line of decisions, what would be the position of the shareholders if there were to be another line of decisions, prohibiting meetings of the shareholders to consider their own affai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shareholders in order to pass resolutions which are not supported by the board of directors or the management of the company. The board of directors would, therefore, be expected to thwart the calling of such requisitioned meeting. It is thus undesirable that the board of directors should be allowed to refuse to call a requisitioned meeting, because the board considers the resolutions which were proposed to be passed at such a meeting, undesirable or not in the interest of the company. Courts have, therefore, consistently held that if the requisition is called for the purpose of passing a resolution which can be implemented in a legal manner, although the form in which the resolution has been proposed is irregular on the face of it, nevertheless, such a meeting must be called because ultimately a decision taken at the meeting can be implemented in a legal manner. Lord Justice Lindley has, in the case of Isle of Wight Railway Co. v. Tahourdin, [1884] 25 Ch D 320 (CA), in his guarded language, expressed a view that if the resolution proposed to be passed at the requisitioned meeting were wholly illegal, then the board of directors would be under no obligation to call a meeting r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment to disclose, in an explanatory note, all material facts relating to the resolution coming up before the general meeting to enable the shareholders to form a judgment on the business before them. It does not require the shareholders calling a meeting to disclose the reasons for the resolutions which they propose to move at the meeting. The Life Insurance Corporation of India, as a shareholder of Escorts Ltd., has the same right as every shareholder to call an extraordinary general meeting of the company for the purpose of moving a resolution to remove some Directors and appoint others in their place. The Life Insurance Corporation of India cannot be restrained from doing so nor is it bound to disclose its reasons for moving the resolutions. 55. But the question with which I am concerned never arose in LIC v Escorts . It was under the 1956 Act, which did not separate listed companies as the 2013 Act does. In any case, as Mr Chinoy points out, the LIC v Escorts debate was about mala fides, not about the legality or legal effectiveness of resolutions proposed at an EGM. 56. There are three illuminating decisions from overseas. Each speaks to a general principle common ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to omit that object from the notice of meeting. It seems to me to follow that if the sole object of a requisition is to do something which cannot be lawfully effectuated at a meeting, the directors are entitled to refuse to convene the meeting. 60. The argument that the wording of a proposed resolution in a Requisition Notice is a matter of form, not substance, the latter being adjustable at the meeting was repelled, and rightly so. This would be an EGM, and not an AGM - and the resolutions would have to be considered as placed and proposed, not in some variant that was never propounded. The Queensland Court rejected the argument before it (which ran to this effect: that the code only required the matters or objects of the meeting to be set out, the actual form not being specified). It held: if the only objects stated are such that the general meeting is invited to do something which at law it has no power to do, the directors are entitled to refuse to convene the meeting. 61. Next is the decision of Neuberger J As he then was. Later Lord Neuberger of Abbotsbury, and President of the Supreme Court of the United Kingdom from 2012 to 2017. of 5th and 8th June 1998 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n no manner and by no machinery could it be legally carried into effect, the directors would be justified in refusing to act upon it. That proposition has been cited with approval and followed in three Australian cases, namely by Needham J in Turner v Berner [1978] 1 NSW LR 66, by Mclelland J in NRMA v Parker (1986) 11 ACLR 1 at 5 and by Ryan J in Queensland Press Ltd v Academy Instruments (No 3) Pty Ltd (1987) 11 ACLR 419 at 422. (Emphasis added) 64. Going on to analyse Isle of Wight, Neuberger J concluded, on this proposition: In the Isle of Wight Rly Co case that is particularly clear from the observations at the start of the second passage which I quoted from Lindley LJ. It also appears from the contradistinction between objects and resolutions in the second passage I quoted from Cotton LJ, and it also seems to me to appear from the second of the three passages I cited from Fry LJ. The distinction between objects and resolutions in notices requisitioning meetings has been identified and discussed more recently by Mclelland J in NRMA v Parker, to which I have referred, especially at 11 ACLR 1 at 6. 65. In Rose v McGivern, there was clearly a question o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pective. For the necessary - and ineluctable - implication of Mr Dwarkadas s argument is that the Court is altogether precluded from itself looking at the legality of the proposed resolutions. The question of whether or not a certain resolution is legal must be left to the general body. None can question it, or, at any rate, not until after the resolution in question is carried, when an action to restrain implementation may well be brought and may equally well succeed. As Mr Seksaria pointed out with a very timely interjection, even a sole shareholder can assail a resolution, even before it is passed, on these very grounds. 68. But Invesco s submission that the Court cannot even examine the legality seems to me to be entirely an exercise in futility. It advances a general theory that even what I can only describe as a madcap resolution must always and in all circumstances be put before the general body. I do not suggest that the present resolutions fit that description, only that this is the inevitable destination of Mr Dwarkadas s argument. Indeed, it finds some echo in paragraph 94 of Oxford House: 94. The learned editors of Kosmin Roberts: Company Meetings and Resolut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y regulated fields must receive distinct considerations. Compliance is not only with the Companies Act. Parallels to the Companies Act controls are to be found elsewhere too. All demand compliance. It is invalid or illegal; what of it? is not and cannot be a sound answer, because the illegality might, as it does in this case, result in a wholesale disruption of the company s essential business purely for the reason of non-compliance. These regulatory statutes are often binary: a company is either compliant or it is not. If it is not, the juggernaut of offences and penalties rolls. No shareholder can, I think, be permitted to force his own company under that juggernaut s crushing wheels. 72. I must clarify some aspects. This is not merely a question of form or substance, or one versus the other. This is a case where the form must follow the substance. If the substance is illegal, the form is illegal. The substance of the proposed resolution will dictate its form. 73. I also do not suggest that shareholders rights are curtailed or abrogated, or that they cannot seek what they now do. But the manner in which they go about doing it must be legally compliant. 74. There is al ..... X X X X Extracts X X X X X X X X Extracts X X X X
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