Activism in Boardroom: Trends, Impediments & Windows of Opportunity in Indian Shareholder Activism
[Samrudh is a student at Jindal Global Law School.]
With increased volatility in the stock market, public shareholders have begun to exert a substantial influence on companies in which they hold their shares. The emerging wave of participative governance accompanied by proxy advisory firms, technological advancement, and regulatory reforms spearheaded by the Securities and Exchange Board of India (SEBI) have contributed to the colloquially termed phenomenon of Shareholder Activism. An example of such activism in the contemporary context is the recent show of no-confidence by the shareholders of Vedanta Limited in the special resolution against adopting annual financial accounts and reappointment of independent director UK Sinha. Similarly, the shareholders of Eicher Motors Limited, (i.e., the parent company of Royal Enfield) have also voted against the reappointment of the Managing Director (MD), Siddhartha Lal. However, Vedanta’s accounts were adopted, and Siddhartha Lal was reappointed with revised remuneration due to promoter and public non-institutional support. This transition of shareholder attitude from passivity to an active and combative role has recently been observed in the Invesco-Zee case. By analyzing the case, this article seeks to answer whether combative activism is feasible in the Indian context.
Tracing the Changing Trends of Shareholder Activism in India
Shareholder activism can be defined as a proactive effort to change the firms’ behaviour or influence management functions. Furthermore, it is a living phenomenon that evolves with changing socio-economic conditions. In the Indian context, we observe shareholder activism being molded into different forms. Firstly, we observe passive activism that involves investors who vote with their feet. If such investors are unsatisfied with the company’s management, they sell their shares and exit the firm. This unpretentious practice of the ‘wall street walk’ indirectly inculcates a disciplinary effect and garners accountability within the company. Passive activism was prevalent post-independence, with equity markets being substantially shallow. However, in the contemporary context, the efficacy of such activism would be negligible unless a prominent investor who wields a substantial shareholding and influences managerial decisions exits the company. Secondly, introducing liberalization policies and opening up the Indian economy attracted Foreign Institutional Investors (FIIs). This ventilated participative activism, wherein global corporate governance standards influenced shareholders to assume a more significant managerial role. The basic principle of such activism lies in the assumption that greater participation from non-institutional shareholders could impact the outcome of corporate decisions. Thirdly, post the global financial crisis of 2008 and its impact on the stock market, shareholders became increasingly cautious and took greater responsibility for monitoring their investments. This paved the path to contemporary ‘interactive’ activism, which has been instrumental in developing engagement between shareholders and the company vis-à-vis managerial affairs. We observe the fourth kind of shareholder activism (i.e., combative activism) emerging with the slow westernization of the economy. In combative activism, shareholders voice their dissatisfaction by resorting to litigation through derivative or direct action to ensure that their interests are not adversely affected. Despite such activism being nascent, it caught the public-eye through the Invesco-Zee fiasco, wherein proxy fights and litigation were employed to ameliorate inept management.
Battle of Thin Lines: Shareholder Activism versus Proxy Control
At the crux of the Invesco-Zee saga is the interpretation of Section 100 of the Companies Act 2013 (Companies Act). At the outset, Section 100(2)(a) is indispensable for shareholder activism as it empowers shareholders holding at least 10% of paid-up share capital with the right to call Extraordinary General Meetings (EGM) and propose special resolutions. Additionally, Section 100(3) requires a requisition notice containing the proposed resolutions to be sent to the Board of Directors (BOD). Section 100(4) permits shareholders to hold the EGM themselves if the BOD does not take any steps to call the EGM within 21 days of the notice. In this regard, Invesco, which held an aggregate 17.88% shareholding, sent a requisition notice to Zee to hold an EGM. The resolutions to be considered in the EGM were removing MD Punit Goenka and appointing 6 independent directors. Subsequently, Zee refused to call the EGM as the requisition was allegedly illegal. Zee also contended that the requisition contravened several laws such as SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015 (SEBI LODR), Ministry of Information and Broadcasting-Policy Guidelines for Up linking of Television Channels from India 2011 (MIB Guidelines), and SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011 (SEBI Takeover Regulations). These contentions culminated in Invesco approaching the National Company Law Tribunal (NCLT), which ordered Zee to favourably consider the request for EGM. Subsequently, Zee approached the Bombay High Court, which at the first instance contravenes Section 430 of the Companies Act, conferring exclusive jurisdiction on the special courts to hear company law matters. This resulted in creating a jurisdictional tussle between the civil courts and NCLT. Notably, the single-judge bench ruled in favour of Zee, albeit with a flawed rationale by encroaching the jurisdiction of the NCLT and ruling on the validity of the proposed resolutions– which ran contrary to established precedents. Consequently, Invesco appealed to a division bench of the Bombay High Court, which settled positions of law vis-à-vis shareholder activism.
Analyzing the division-bench judgment, let us first demystify the thin line of difference between shareholder activism and hostile takeovers. The SEBI Takeover Regulations govern hostile takeovers and defines control under Regulation 2(1)(e) as the right to appoint a majority of the directors or control managerial decisions by virtue of shareholding. Therefore, the question arises, did Invesco attempt a hostile takeover by gaining ‘control’? The answer can be inferred from the proposed resolutions and the precedent set in Arcelor Mittal v. Satish Kumar. In this case, the Supreme Court held that when an acquirer has the power to appoint a majority of the directors, he can be said to be in ‘control.’ Furthermore, only when an acquirer is the prime driving force of the targeted company can he be in ‘control.’ In this regard, the resolutions proposed the appointment of six independent directors in contrast to the threshold of twelve specified in the articles of association. This results in appointing half of the directors, (i.e., 50%) and not a majority (i.e., >50%). Moreover, the appointment is of independent and not nominee directors, which does not put Invesco in a power position. Therefore, it can be asserted that Invesco engaged in combative activism as it did not hold the requisite ‘control’ for a hostile takeover.
A Window of Opportunity: Significance of the Invesco-Zee Judgment
The judgment settled two crucial notions of law. It clarified that shareholders have the right to appoint directors by a harmonized interpretation of Regulation 17 of SEBI LODR and provisions of the Companies Act. The court elucidated that whilst Regulation 17 requires appointments to go through a nomination and remuneration committee, it merely envisages situations of appointments made by the BOD and not activist investors. Consequently, Section 160(1) of the Companies Act is attracted, which upholds the shareholders’ power to propose candidates for being appointed as directors. Moreover, Regulation 17 mandates the presence of an executive director, which is lacking if Punit Goenka is ousted. In this regard, the court cited Section 203(4) of the Companies Act, which allows the executive director position to be filled within 6 months of vacancy. Additionally, Zee contended the requisition to be non-compliant with Clause 5.10 of MIB Guidelines that mandates prior permission before effectuating a change in the BOD. In this regard, the court opined that in the interest of corporate democracy, permission subsequent to the EGM may be taken for the appointment of directors. Furthermore, the court reaffirmed the right of a shareholder to call an EGM as it comes within the purview of the shareholders’ indefeasible right to hold the BOD accountable. On this point, heavy reliance was placed on LIC v. Escorts Limited, wherein the apex court held that shareholders’ right to demand the BOD to call an EGM cannot be curbed if the requisition meets the requirements of Section 100 of the Companies Act. Furthermore, the court opined that no court could restrain a notice requesting EGM. In this manner, the Invesco-Zee case has been pivotal in striking a balance between the board’s powers and shareholders’ rights, thereby facilitating a new wave of shareholder activism led by FIIs.
The Invesco-Zee case illustrates a manifestation of the change in governance amongst the shareholders of a company. Such combative activism was bound to face traditional resistance, mainly due to impediments such as the phenomenon of family capitalism rampant within promoter-driven companies and poison-pill mechanisms unique to the Indian context. Furthermore, whilst the courts clarified the shareholder’s right to hold EGMs and appoint directors, it missed an opportunity to demarcate the powers of the civil court and the NCLT. The court did not adequately engage with the consequences of interfering with corporate democracy. Consequently, we observe that Invesco could not hold an EGM for over 6-months, thereby stripping the legislative intent of Section 100. During this period, Zee announced its merger with Sony, which improved Zee’s grasp on the Indian over-the-top sector and empowered the promoter family with greater control. Accordingly, despite a favourable judgment by the division bench, Invesco decided to call off the EGM and support the merger. Therefore, as evidenced by the Invesco-Zee tussle and ongoing Yes Bank-Dish TV facade, such combative shareholder activism is currently infeasible in the Indian context.