TaxTMI 
TaxTMI 
TaxTMI 
2021 (11) TMI 486
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.... Senior Advocate & Mr. Suhail Nathani, Ms. Mumtaz Bhalla, Mr. Manendra Singh, Mr. C. Keswani & Mr Neeraj Malik, Advocates, i/b Economic Laws Practice JUDGMENT: A. PARTIES 1. The Plaintiff ("Zee") is a well-known media enterprise. It is a public limited and listed company. Defendants Nos.1 and 2 (collectively, "Invesco") are investors in Zee and among its shareholders. Invesco holds about 17.88% of Zee's equity. Zee's promoter and promoter group hold or control about 3.99% of its equity shareholding. The remainder 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....
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....for the Board or the company to decide whether or not a particular proposed resolution - or all the proposed resolutions - are, according to the Board or the company, illegal or valid. The general body of shareholders will decide in general meeting whether or not to pass a particular proposed resolution, or any of the proposed resolutions. The shareholders' rights to call an EGM cannot be curtailed by the company or its Board. If a resolution is 'ineffective', it will simply be 'still-born' 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 s....
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....tance, the statutes and authorities cited. The matter is not, I believe, quite as simple or innocuous as Mr Dwarkadas would have it. There is some authority from law in England that points to the authority of a court to intervene in precisely this scenario. Decisions of courts in England forced a change in the law there. Here, we are at a stage just before the statutory amendments in the UK. There is also some authority in India, and from this court itself, to indicate that it 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. T....
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.... Goenka was carried, the resolutions for all six of the names proposed by Invesco could not be carried: the Board strength would have gone to 13 directors. 18. On 15th September 2021, Invesco asked Zee if it had sought MIB approval for the appointment of the six independent directors proposed in the Requisition Notice. Later that day, Invesco sent further documents relating to the profiles and experience of some of the directors it proposed be appointed. 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-à-vis Sony. 20. Under the statute, Zee's board would have had 21 days from 11th September 2021 (until 3rd....
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....provisions regarding directorships. 25. Chapter XI of the Companies Act deals with the appointment and qualifications of directors. Section 149 requires every company to have a Board of Directors. It provides a minimum and a maximum. Section 149(4) is specific to listed public companies. At least one-third of the total number of directors of such companies are to be independent directors. An independent director is defined in 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 t....
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....form to the statute; the latter never can. The entire set of proposals to place six persons hand-picked and chosen by the requisitionists to the board is not one that the law contemplates, even if every single one of those six is supremely qualified. He makes no allegations against any of the six; he simply says that whoever they are, however qualified or capable, the law does not permit their being directly seated on the 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 mus....
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....ines to seek prior permission from MIB before effecting any change to the CEO or Board of Directors. The change cannot be effected in advance of permission. A default invites penalties, including the suspension of the license and a 30-day ban on broadcasting (90 days for a second violation). In the Requisition Notice, only the resolutions for the appointment of the six new independent directors are said to be '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 exercis....
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....ose any sort of resolution, regardless of its legality, and force this to be considered by the general body at an EGM. I specifically asked Mr Dwarkadas if this meant that a group of qualified shareholders could propose that the company take up the business of online gambling. His response was that this is too extreme or outlandish. Indeed it is; and that is precisely the point. A proposition - like 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? ....
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....sts and sent to the registered office of the company. (4) If the Board does not, within twenty-one days from the date of receipt of a valid requisition in regard to any matter, proceed to call a meeting for the consideration of that matter on a day not later than forty-five days from the date of receipt of such requisition, the meeting may be called 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....
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....n. According to them, therefore, the executive committee is not bound to call an extraordinary general meeting, which has been described by the plaintiffs as an "exercise in futility". 48. One of the questions was whether the requisition was 'valid'. The Court held: 25. Under the Indian Companies Act, 1913, the provisions 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 requ....
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....when one peruses sub-section (5) of section 169, where also the use of the word "valid" is perceived. The learned counsel for the plaintiffs emphasised the mischief that in his opinion would be caused by an otherwise invalid requisition being made which would put the company to considerable financial loss for what he 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 t....
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....ies Act, the board of directors of a company shall, on the requisition of such number of members of the company as is specified in sub-s. (4) forthwith proceed duly to call an extraordinary general meeting of the company. Thus, if the board of directors receive a valid requisition signed 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 s....
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....tors of the company. The courts have not normally permitted the board of directors of the company to sit in judgment over the requisition received by them to call a meeting of the shareholders. Normally, such a meeting would be required to be requisitioned by the 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 Railw....
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....meeting including, in particular, the nature of the concern or the interest, if any, therein of every director, the managing agent if any, the secretaries and treasurers, if any, and the manager, if any. This is a duty cast on the management 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....
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....s court then held that the weight of authority establishes the proposition that if an object of the requisition cannot be lawfully effectuated at the meeting, then the directors are at least entitled 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. Ne....
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....y LJ in Isle of Wight Rly Co v Tahourdin (1883) 25 Ch D 320 at 334 where he said: 'If the object of a requisition to call a meeting were such, that in 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 Mclel....
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.... be deciding the issue itself. (Emphasis added) 67. This analysis, in my view, puts the matter in the correct perspective. 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 e....
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....or 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. 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 d....