The Shapoorji Pallonji Group is within its legal rights to seek proportionate representation on the board of Tata Sons, Senior Advocate Shyam Divan said in the Supreme Court.

Hearing in the Tata-Mistry case entered its sixth day today with Divan arguing on behalf of the SP Group.

Divan explained to a bench headed by Chief Justice SA Bobde that the long-standing relationship between the two groups was a “good-faith relationship developed over the decades”. Shapoorji Pallonji Group had played the role of a partner in good faith and is right in seeking a representation on the board, he argued.

‘Breach Of Articles Of Associations In Mistry’s Removal’

Divan, while addressing the ouster of Cyrus Mistry as executive chairman of Tata Sons in 2016, said the Articles of Association of Tata Sons (Article 118) lay down the process of appointment of chairman, which must be followed while removing them.

There’s an express black letter provision saying if you wish to remove the chairman you must follow the same process, said Divan.

He also told the bench that some of the directors on the board when Mistry was removed were appointed just a few months earlier and had attended only one prior board meeting.

On Ties Between Tatas, SP Group

Divan said the relationship between the two groups was decades-old.

However, he said, a series of acts encompassing a breach and misuse of the articles of association and a violation of the essential understanding between the two groups gave rise to oppression, prejudice and mismanagement.

Divan also defended the proposition that Tata Sons was essentially a two-group company and the SP Group had an important role in it.

“The status of Tata Sons as a controlling entity at the very top is very very important,” he said. “The actions impact minority shareholders, group entities, employees, shareholders of other group companies as well.”

He said the request for proportionate representation is consistent with provisions of the Companies Act, 2013.

Duties Of Directors Are Enshrined In Law: Divan

In his arguments, Divan also spoke about the duties of directors of a board in a company.

The case, according to him, is about corporate governance and that the law itself has evolved from corporate majority to recognising a higher set of values and higher standards that strengthens transparency.

Any director on the board of a company, Divan argued, is obligated by law to act as a fiduciary and exercise independent judgment.

A fiduciary cannot outsource, cannot delegate. Their duty and allegiance are to the company alone, Divan told the bench and added that:

  • Fiduciary obligations of directors demand that she leaves behind how she was appointed.
  • Duties of the directors are specified.
  • If you’re a director, the statute itself speaks on what you can and cannot do.
  • Once you’re a director you cannot be dictated by anybody. It’s your independent judgment and the statute mandates it.
  • If you find that you are being torn between your duty as a director and something else, you cannot continue.
  • Wherever the law or articles require you to apply your mind, you can’t allow someone else to do it.

The Chief Justice, at this point, asked Divan whether a director cannot even consult others while fulfilling his obligations.

To this, Divan replied, there’s no bar on consultation but they cannot be dictated to or abdicate or yield their independent judgment.

The case has already seen two rounds of litigation at the National Company Law Tribunal and the National Company Law Appellate Tribual, with both sides winning one each. The case then landed in the Supreme Court in January this year.

On Oct. 29, the Mistry side submitted an affidavit in the apex court offering to settle the dispute by presenting a plan of separation and suggested a share-swap arrangement in listed entities of Tata Group in lieu of the shares held by them in the unlisted Tata Sons.

The plan of separation proposed by the SP Group included:

  • A selective reduction of capital at Tata Sons thereby extinguishing shares held by them.
  • In exchange, SP Group be granted shares in listed companies of the group.
  • Also, cash consideration or shares for brand value, unlisted assets, etc.

In case Tata Group didn’t want to part with stocks in a particular listed entity, say for reasons of maintaining a certain shareholding level, according to the separation proposal, SP Group was willing to accept shares of Tata Consultancy Services Ltd. or cash.

Tata Sons, last week, rejected an offer by billionaire Pallonji Mistry’s conglomerate to swap Mistry family’s stake in the group’s holding company for shares in listed Tata entities.

Accepting the offer would mean spilling the dispute to other group companies, senior advocate Harish Salve, who’s the counsel representing Tata Sons, had told the court.

Divan will continue his arguments tomorrow which is also likely to be the concluding day of arguments. Senior Advocate Aryama Sundaram has already concluded his arguments for the Mistry side. For the Tatas, Salve may reply to the arguments by Divan and Sundaram tomorrow.



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