Will Tata’s Latest Gambit Stick Mistry In Legal Gridlock Or Strengthen His Case?

Does Cyrus Mistry stand to lose or gain from Tata Sons’ move to turn private limited?

Cyrus Mistry, former chairman of Tata Group. (Photographer: Dhiraj Singh/Bloomberg)
Cyrus Mistry, former chairman of Tata Group. (Photographer: Dhiraj Singh/Bloomberg)

It’s a curious twist. Now, on the one hand Tata Sons can force estranged shareholder Cyrus Mistry to sell his shares and on the other, if the company succeeds in converting to private limited, it can impose further restrictions on Mistry’s ability to sell shares.

But the same forces working against Mistry could also turn into his most effective weapon against Tata Sons.

Here’s how it came to this...

Why Now?

It’s not unusual for companies to prefer being private limited. Company law imposes fewer restrictions on the functioning of private companies, especially regarding related-party transactions, participation of interested directors, restriction on managerial remuneration and other such corporate matters.

But Tata Sons is no ordinary company. It’s the principal holding company for the Tata Group which has over 100 companies with a combined revnue of over $100 billion as of financial year 2016-17. As a private company, fewer legal and governance provisions would apply to it. Yet, the board says the move is in the company’s “best interests”.

The reinstatement of Tata Sons as a private company was considered by the Board to be in the best interest of the Company.
Tata Sons Spokesperson

An official at Tata Sons said to BloombergQuint, on the condition of anonymity, that Tata Sons’ articles of association have always had the features of a private company. It became a “deemed public company” in 1975 due to a change in law. And now the law allows it to reinstate itself as a private company.

While the full details of the proposal to change status are not available, the person quoted above also explained that Tata Sons intends to maintain certain governance requirements such as having an audit committee, independent directors and procedures applying to related-party transactions, as a public limited company would.

Corporate lawyer Sanjay Asher points out that the provision in law that forced Tata Sons to become a deemed public company was deleted in 2000 and yet the company didn’t avail the opportunity to go private, till now.

He also argues that the change in status may curb the company’s fund-raising options, which when combined with the information that it may maintain governance norms makes the shift difficult to understand.

If you are a public company today and you want to convert yourself into a private company, the first thing is the directors will have to demonstrate as to what are the advantages. The only advantage one can see is that there is some leniency. Because you are a private limited company you don’t have to comply with a lot of provisions of law. That can’t be the only reason you want to convert the company into a private company. I’ve (Tata Sons) been a public company all along and I have found no difficulties in my operations, whether as Tata sons or for the purpose of controlling the operating companies, then why the sudden change?
Sanjay Asher, Partner, Crawford Bayley & Co

Stuck Between A Rock...

So why after 42 years of existence as a public limited company does Tata Sons want change its status to private limited? Especially since it’s had the opportunity to make the change for 17 years and hasn’t chosen to do so.

That question of timing, according to corporate lawyer Rajat Sethi, has to do with Ratan Tata’s battle against Cyrus Mistry.

Mistry’s family has been a Tata Sons shareholder since 1965. It owns 18.4 percent of the company, with Tata Trusts at 66 percent and few other individuals and Tata companies holding the rest.

As a private limited company Tata Sons can restrict the right of its shareholders to transfer shares. And though such restrictions may already exist in the company’s articles, the status of private limited makes it difficult for Mistry to challenge them, says Sethi

A private company by definition restricts transferability of shares. The articles of association of Tata Sons would be relevant from that perspective, to determine what kind of restrictions do they contain. Any such restrictions in those articles would be more easily defensible if Tata Sons was a private company. 
Rajat Sethi, Partner, S&R Associates

Mistry has opposed Tata Sons’ move on exactly those grounds. Cyrus Investments, the company via which he holds shares in Tata Sons, said in a letter to the Tata Sons board that “the true effect of converting the status of Tata Sons into a private company is to introduce/re-introduce restrictions on transferability of shares which otherwise today are void and unenforceable under law and norms applicable to public companies; and which ought to never have been included in the Articles of Association of a public company in the first place”.

The letter, a copy of which was seen by BloombergQuint, alleges the status conversion move is “mala fide” and “oppressive to minority shareholders”. is apparent that the present proposal is nothing but a device and design to equip the majority shareholders of Tata Sons with one more weapon to oppress the minority shareholders and to subvert the highest standards of good corporate governance which is expected to be maintained in a company of the stature and repute as Tata Sons.  
Cyrus Investments’ Letter To Tata Sons’ Board of Directors (September 14, 2017)

But with his effort to move an oppression and mismanagement lawsuit against Tata Sons stymied by the National Company Law Tribunal, and the appeal on maintainability still pending order at the appellate tribunal (NCLAT), Mistry may not have much room to manoeuvre.

The Tata Trusts will likely overule him.

If this conversion does go through then for Mr. Mistry it forecloses any argument for him on the provisions in the articles in relation to restrictions on transferability. The Tata Group would have greater ability to enforce those restrictions if it were converted into a private company. I think that’s what it eventually boils down to.
Rajat Sethi, Partner, S&R Associates

Asher says Mistry can object to the conversion when approval is sought from the National Company Law Tribunal.

He has to go to the NCLT to say that this particular resolution which seeks to convert a public company into a private company, there’s no proper explanation given, there are no advantages and it is only to oppress a minority shareholder.
Sanjay Asher, Partner, Crawford Bayley & Co

Mistry can also question Tata Trusts’ decision to vote in favour of a change in status on two grounds, says Asher. One, that it may hamper Tata Sons ability to raise funds, especially as the Trusts can hardly fund the holding company themselves. And two, that the transferability restrictions may also hurt the Trusts in the future if they ever want to sell shares to raise funds.

Such an objection would have to be filed with the Charity Commissioner of Maharashtra.

...And A Hard Place. But, Wait...

Curiously, Tata Sons’ articles also include a provision that says the company can, by passing a special resolution, ask shareholders to sell their shares. That suggests the majority shareholders, aka Tata Trusts, can vote in favour of squeezing Mistry’s family out.

That amounts to equal and opposite forces of potentially restricting Mistry from selling his shareholding and also forcing him out if desired.

Either all this sticks Mistry in legal gridlock, or he can parlay it to support his argument regarding oppression and mismanagement. If at all he succeeds in launching that case.

On BQ Live Sanjay Asher and Rajat Sethi discuss the implications of Tata Sons’ move to convert to a private limited company.