Tata-Mistry spat: What it means for minority and small shareholders

Experts explain the distinction between the rights of small and minority shareholders in public-listed and private companies.

The Supreme Court order in the Tata-Mistry case has put the spotlight on the rights of minority and small shareholders in public and private companies.

The court pointed out that there is no statutory provision under Company Law that entitles the minority shareholder — namely the Mistry group — to claim proportionate representation on the board of a private company.

However, minority shareholders could enjoy this right to board representation only if it is specially created through the firm’s Articles of Association.

Interestingly, there is provision in the law that gives small shareholders the right to ask for representation on the board of a publicly listed company.

Experts explain the distinction between the rights of small and minority shareholders in public-listed and private companies.

How does the company law differentiate between minority and small shareholders?

Small shareholders are defined in the Companies Act, 2013 as those holding shares of a nominal value of not more than Rs 20,000, or any other prescribed sum.

Under the Companies Act, minority shareholders are defined in the context of protection of their minority interests in a company.

Therefore, a shareholder owning 10 per cent of a company has the right to file an action against the majority shareholder, in both private and public companies, for oppression and mismanagement.

By this definition, the Mistry group — with around 18 per cent stake in Tata Sons — falls in the category of minority shareholders.

“Minority is a general category of shareholder, while small shareholder is a special category within minority.

"So, every small shareholder is likely to be a minority, but all minority shareholders need not be small shareholders,” says Anand Prasad, senior partner, AP & Partners.

How are rights of a minority shareholder different from those of a small shareholder in public and private companies?

Legal experts point out that a minority shareholder has the right to initiate action before the National Company Law Tribunal (NCLT) against majority shareholders to protect their interests in the company, particularly when the larger or majority shareholders misuse their veto rights, or act to the detriment of the minority shareholders’ economic interest in the company.

These rights are available to minority shareholders in both public and private companies, they add.

On the other hand, a small shareholder has the legal right to ask for a nominee on the board of a listed public entity, but that is not an absolute right.

“The company could decide to agree to the request, or refuse it,” says Prasad.

Lawyers point out that the concept of independent directors was introduced in company law largely to take care of interest of minority and small shareholders in public companies.

So, when can minority shareholders enjoy additional rights in a private company?

Experts say this is possible only when special rights given to minority shareholders in a private company are reflected in its Articles of Association.

The provisions of the Articles of Association need to be in compliance with the provisions of company law.

Lawyers point out that historically the judicial interpretation on these issues took a strict approach whereby an agreement by shareholders was required to be in consonance with the Companies Act.

However, there were some departures.

In the case of Vodafone vs Union of India, the Supreme Court recognised the rights of shareholders to agree to altered rights, provided they do not conflict with the Articles of Association, says Mohit Kapoor, senior partner at Universal Legal.

“In investment transactions, minority investors frequently ask for and obtain veto or other preferential rights that are a part of the shareholders’ agreement and are also built into the articles. These rights can be enforced,” adds Kapoor.

What are the key lessons for minority and small shareholders in private companies from the Tata-Mistry spat in terms of their rights on the board?

The Supreme Court judgment clarifies that in the absence of a specific law in this regard, to seek adequate (or proportional) representation on the board, minority shareholders will have to ensure that they have a contract with the company’s majority shareholders/promoters, which is adequately captured in the Articles of Association, says Vatsal Gaur, partner at law firm Pier Counsel.

Shriram Subramanian, managing director, Ingovern Research Services, a proxy advisory firm, agrees that the Articles of Association should be seen as more relevant to the relationship between majority and minority shareholders.

He, however, adds that the SC judgment hasn't significantly pronounced on aspects of law as the order was very contextual to the Tata-Mistry case.

“The SC itself did not indicate or envisage any changes in corporate law,” says Subramanian.

The key message for Prasad is: “Regardless of interpersonal relationships, please sign a shareholder agreement if you pick up a significant stake in any company.

"The Articles of Association should reflect the special rights given to minority shareholders.”

Photograph: PTI Photo