Invesco v. Zee: Can Independent Director Nominations by Shareholders be Entertained at EGMs?
[Pravah is a student at Gujarat National Law University.]
On 22 March 2022, a division bench of the Bombay High Court approved the appeal by Invesco Developing Markets Fund (Invesco) against a verdict dated 26 October 2021, in Invesco Developing Markets Fund (Invesco / Appellant) v. Zee Entertainment Enterprises Limited (Zee / Respondent). The injunction restraining Invesco from calling for and convening an extraordinary general meeting (EGM) of Zee was granted by Justice GS Patel at the Bombay High Court on 26 October 2021 (Impugned Order). The Impugned Order concluded that Invesco's proposed resolutions aimed to create an "illegality", which would put Zee in breach of various statutory obligations. One of the requests made in the requisition notice was to propose the appointment of independent directors. The key contention was whether Invesco as Zee’s shareholder had the right to suggest nominations for the appointment of independent directors. This article will attempt to explore the above-stated contention in the context of statutory requirements and related judicial precedents.
The Role of the Nomination and Remuneration Committee
The Companies Act 2013 (CA 2013), under Section 178, sets out the requirements for a nomination and remuneration committee (NRC). The board of directors of every publicly listed company (Board) must constitute an NRC. Further, under Section 178(3), the NRC is entrusted with formulating criteria for, (a) determining the qualifications, attributes, and independence of a director; and (b) recommending a policy to the Board for, among others, determining remuneration payable to directors, key managerial personnel, and other employees. The Board is required to consider these recommendations [and how they satisfy the integrity and expertise requirements, which are required under Section 149(6) of the CA 2013].
Calling an Extraordinary General Meeting
In Life Insurance Corporation of India v. Escorts Limited (Escorts), the Supreme Court of India held that for the purpose of Section 100 of the CA 2013, every shareholder of a company has the right, subject to compliance with the procedural requirements prescribed under the CA 2013, to call an EGM.
Section 100 requires the fulfilment of 2 procedural conditions for an EGM requisition to be valid, which are: (a) the requisition must only be made by the shareholders holding 1/10th of the company’s share capital as on the date of the requisition, and (b) the requisition must be signed by the requisitionists and set out the matters for the consideration under the proposed meeting, and thereafter sent to the registered office of the company.
Contentions of Invesco / Appellants
The Appellants contended that the statutory right of a shareholder to call for an EGM cannot be disputed before a court. The ruling in Escorts by the Supreme Court is directly relevant to the circumstances of the current case. The Appellants further contended that a company’s board of directors cannot refuse to convene a meeting in response to a shareholder request if such request complies with the requirements set out in Section 100 of the CA 2013.
Contentions of Zee / Respondents
The Respondent contended that an EGM requisition is unattainable under law as the shareholders have not been vested with the right to recommend nominations for independent directors. The heart of the contention is not the ‘validity’ (legality) of an EGM requisition, but rather the legality of matters proposed to be considered at said EGM. It is settled law that if the matters proposed under the requisition have the effect of inviting the shareholders to do something which at law, they have no power to, the directors stand entitled to refuse to convene the meeting. Accordingly, there is no concept or statute for the direct nomination or appointment of independent directors by shareholders. It is not open for shareholders to suggest a management change or restructuring in a manner inconsistent with the applicable statutory framework.
In view of the above, the Respondent concluded that the EGM requisition to appoint 2 independent directors was unattainable under the law since shareholders do not have the right to recommend such nominations for independent directors in the first instance.
It is a settled principle that if an EGM aims at passing, in effect, ineffective or invalid resolutions, then, as a matter of commercial practicality, the directors need not call such an EGM. Accordingly, the directors will be entitled to refuse convening a meeting if the outcome of such EGM would be unmaintainable.
Accepting Nominations via a Harmonious Interpretation of Section 100 and Section 178 of the CA 2013
In Dodge v. Ford Motor Co., it was held that "a business corporation is organized and carried on primarily for the profit of the stockholders. The powers of the directors are to be employed for that end.". In Centron Industrial Alliance Limited v. Pravin Kantilal Vakil, it was held that even if the form in which the proposed resolution is called is irregular, the board of directors is compelled to call the EGM if "ultimately a decision taken in a meeting can be implemented in a legal manner". In the present case, it must be understood that the shareholders are not trying to overtake the authority of the NRC to formulate policy and make appropriate recommendations. Academics have suggested that since the shareholders are only giving nominations to the NRC through this EGM, the NRC can subsequently recommend these names as per the CA 2013. In view of the above analysis, it may be argued that shareholders’ requests, if harmoniously interpreted under the provisions of Sections 100 and 178 of the CA 2013, can be legally effectuated.
Corporate Governance and Shareholder Primacy
The objective of Section 100 of the CA 2013 is to allow shareholders to seek emergency meetings. Therefore, providing suggestions for nominations is not a violation of the CA 2013, particularly the provisions of Section 100 of the CA 2013. Therefore, where shareholders only seek an opportunity to be heard, terming such attempts to voice concerns as “illegal” may be extreme. It may also be noted that independent director nominations are being welcomed as advisory requests in various jurisdictions. The United States Securities and Exchange Commission (Division of Corporation Finance) recently issued a staff legal bulletin stating that the shareholder proposals should state “as clearly as possible” the course of action that the proponent believes the company should follow as an “advisory request” for company action.
Therefore, the objective of Section 100 of the CA 2013 is to allow shareholders to ask for a meeting and provide suggestions. Such action is neither barred generally under the CA 2013, nor specifically under Section 100 of the CA 2013.
A reference may be made here to the J.J. Irani report, which stated that the law must balance the need for effective corporate decision-making based on fair consensus. Nonetheless, a majority of Indian listed entities continue to be promoter-driven and controlled entities. Therefore, the protection of minority shareholder interests assumes even more importance. Indian courts, therefore, must consider allowing such EGMs with a view to uphold minority interests and promote fairness in corporate governance.