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Zee vs Invesco case: The hurt caused to shareholder activism

In a decision that’s unlikely to bode well for shareholder activism in India, the Bombay High Court last week injuncted Invesco Developing Markets Fund from acting upon its requisition for an extraordinary general meeting of Zee Entertainment Enterprises Ltd.’s shareholders.

Zee had approached the high court with three asks:

  • Declare that Invesco’s requisition is illegal, ultra vires, invalid, bad in law and incapable of implementation.
  • That the Zee board’s refusal to act on it is in accordance with law, valid and justified.
  • And finally, grant an injunction against Invesco from acting in furtherance of its requisition notice.

Invesco and OFI Global China Fund LLC, together hold a 17.88% stake in Zee. As per Companies Act, any shareholder with more than 10% stake can seek an EGM. If the board declines, as per Section 100, the shareholder can convene the EGM itself.

In September, Invesco and OFI sent a requisition notice to Zee’s board to convene an EGM to oust Managing Director and Chief Executive Officer Punit Goenka. And appoint six new independent directors.

Zee’s board refused to convene an EGM basis Invesco’s notice saying it’s illegal and invalid. And even as the matter was pending before the National Company Law Tribunal, Zee approached the high court for relief and got it.

The order raises three crucial questions –

  • Are Invesco’s proposed resolutions, to be voted on in the EGM, illegal or simply require certain procedural requisites?
  • Two, what would a harmonious interpretation of Invesco’s resolution and the board’s stance look like?
  • And, the most important one, has the high court’s conclusion undermined an important shareholder right under company law?

“Illegality” in invesco’s resolution
The high court agreed with all of Zee’s arguments on the legal infirmities in Invesco’s requisition, namely that prior approval of Ministry of Broadcast is required for changes to the board, SEBI’s Listing Regulations mandate a Nomination and Remuneration-led process for appointing independent directors, violation of company law provision that mandates a managing director, CEO or a whole-time director, compliance with Takeover Code and competition law etc.

Umakanth Varottil, associate professor at National University of Singapore, said the order confuses conditionality with illegality. If the resolution requires certain procedures to be followed before they can be made effective, that does not make it illegal. By that logic, he explained, even the board cannot bring similar resolutions.

“If the shareholder cannot bring such resolutions, the board can’t as well. The same conditions that apply to the board, should also apply to the shareholders. There’s a distinction between illegality and conditionality and here, there is less discussion in the judgment on individual aspects of these requirements, the factual analysis of this.

Umakanth Varottil, Associate Professor, NUS

This is a very important question that I suspect will come up on appeal. Even assuming that illegality is a consideration, are these six or seven grounds that are raised here, do they elevate themselves to a level of illegality or are there only certain conditions to be satisfied failing which, there would be non-compliance with the law, Varrotil opined.

S&R Associates corporate law partner Rajat Sethi is of the same view.

In its order, the high court posits a question to Invesco’s counsel – can a shareholder bring any ‘madcap’ resolution and expect the board to convene an EGM for it? For instance, can the resolution say that Zee should take up the business of online gambling? Invesco’s response was that the reasons for the EGM are not justiciable.

First, Invesco hurt its own case by not arguing on the legality of its resolution and taking this extreme position, Sethi pointed out. But more importantly, he added, the reasons for rejecting a requisition under Section 100 need to be compelling, which is lacking here.

Take the court’s example of online gambling, Sethi said. Assuming that it is illegal, if the object of a resolution is to get the company to engage in criminal behaviour, the board can certainly refuse to convene an EGM. ‘But in Invesco’s resolution, there is no illegality that’s made out in the order’.

Harmonious interpretation picture
In his order, Justice Gautam Patel of the high court pointed out that while shareholders with over 10% have the right to convene an EGM under company law, listed companies have to adhere to certain specific provisions.

“Parallel to the Companies Act, controls are to be found elsewhere too. All demand compliance.
Bombay High Court

The court said it cannot see how Goenka can be removed at all, leaving a managerial void only to be possibly later filled. His removal causes an immediate vacancy and non-compliance. How this is to be done without prior permission of the MIB is also unclear. I see no method of circumventing the NRC or directly proposing named persons as ‘independent directors’, the order concluded.

Varrotil explained what a harmonious reading of the laws would look like.

For instance, the question of whether a nomination and remuneration committee has to approve the candidates proposed by Invesco as independent directors.

“It’s a valid ground that Zee has raised in this case, but it perhaps requires a little more analysis. Saying that the nomination committee needs to approve an independent director, shareholders can never propose an independent director—that is an extreme position.
Umakanth Varottil, Associate Professor, NUS

A harmonious interpretation would’ve been for the NRC to examine whether the candidates proposed by Invesco meet the expertise, skill and qualification criteria as per the policy set by them. Similarly, on Goenka’s removal – Invesco’s proposal is to remove him as a director of the company and not from his managerial position. The company law says that a company needs to have a managing director, CEO or a manager.

This, he added, could have been a more fine way of looking at this issue, because there are answers to that as well.

There is no analysis on how Invesco’s resolution violate the various laws, Sethi agreed.

“I don’t see any of that analysis except some very bold assertions that these are violative of the Takeover Code and the Competition Act.
Rajat Sethi, Partner, S&R Associates

The hurt caused to shareholder activism
Instances of shareholder and board standoffs are scarce in corporate India. The company law, under Section 100, contemplates this conflict and provides an important right to shareholders who meet the 10% threshold.

This right has been seriously undermined in the high court order, both the experts said.

This EGM requisition is an important voice given to shareholders under the Companies Act, Varrotil said. How else will shareholders assuage their concerns?

“This voice is usually exercisable when there’s a conflict between the board and a shareholder which is clearly the case here. The somewhat extreme nature of the order undermines this right. It will certainly have a negative impact on the concept of shareholder activism in India.
Umakanth Varottil, Associate Professor, NUS

Invesco has approached the court’s division bench against Justice Patel’s order. The hope is that the bench will lay down clear standards on circumstances where the board can turn down an EGM requisition, Sethi said.

“It has to be a very high standard; it cannot be some amalgamation of different themes which are picked up from different case laws. It has to be a precise standard.
Rajat Sethi, Partner, S&R Associates

The directors ultimately are fiduciaries in the company, Varrotil added. “So, they can’t simply take a stand saying that we don’t like this shareholder, we are only going to act in a way to ensure he will not succeed.” BloombergQuint

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