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Chairman’s abrupt exit: Coup or a corporate democratic action?

By: Sharanya Ranga

The recent high-profile exit of the Chairman of the Tata Group, Mr. Cyrus Mistry has shaken up the corporate world in India. With both the Tata group and Mr. Mistry trading charges at each other, the spotlight is on the dynamics and interplay of the powers of the board, its chairman and the shareholders of a company as set out in its charter. While the exact sequence of events is yet to emerge clearly, we take a look at the legalities involved from a corporate law perspective.

Articles of Association: A company is bound to act as per its bible – its articles of association (Articles) that sets out the regulations for management of the company’s affairs and appointment and removal of its directors. Further, due process as per the Articles as well as the required compliances under the Companies Act and other securities laws has to be followed. The Articles typically includes a provision for appointment and removal of a Chairman, who holds office so long as he has the trust of the board.

Power of the board: The board of directors has unfettered power to remove the chairman if he has lost their confidence. This can be by way of passing a resolution backed by a majority vote, unless the Articles provides otherwise.

Company secretarial requirements: Valid notice of the board meetings has to be sent to all directors with the items of business listed in the agenda. There has been some talk on how the removal of the chairman was not included in the agenda items circulated to the board and that the board took up this agenda falling back on the residuary category of “other items”  in the notice taking Mr. Mistry by surprise. Such an act may not be illegal per se as courts have held that it is not necessary that an agenda for a board meeting be specified in advance so long as the Articles do not mandate it.  

Contracts: We are not aware of the contractual arrangement between Mr. Mistry and the company that deal with notice and other termination related issues. In any event, the provisions of such agreements have to be captured in the Articles to be enforceable in a court of law. 

Oppression and mismanagement: Mr. Mistry’s family is a significant minority shareholder (18.38%) in Tata Sons Ltd. (the holding company of the Tata group) giving rise to the possibility of the minority shareholder initiating legal action challenging the removal of the chairman as an act of “oppression and mismanagement” of the company by its majority shareholders.  In our view, a singular act of removal of chairman who has lost the board’s confidence may not meet the requirements of this provision as the burden of proof is on the minority shareholder to prove that the affairs of the company were being conducted in an oppressive manner that was ‘unfairly prejudicial’ to the interests of the minority shareholders.

Corporate governance and natural justice: Last but not the least, it is the fiduciary duty of the board of directors to conduct the affairs of the Company on principles of corporate governance and natural justice such that the board, like Caesar’s wife, is above reproach.

Overall, the board’s action may not fall foul of the law but the summary dismissal of the chairman through an ‘other items’ door without a fair hearing may tilt the perception battle in favour of the dismissed chairman.

Ms. Mahafrin Sidhwa also contributed to this article.

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