Zee Entertainment Enterprises Ltd approached the Bombay High Court to seek an injunction against the minority shareholders (ie, Invesco Developing Markers Funds and OFI Global China Fund (collectively "Invesco")) enacting the requisition notice issued by Invesco to remove Zee's managing director and appoint an additional six independent directors to the board.
On 11 September 2021, Invesco issued a requisition notice dated the same day that sought to:
- remove Punit Goenka as the managing director and chief executive officer (CEO), along with two other directors; and
- appoint six new independent directors to Zee's board.
Zee's articles of association provided for the appointment of a maximum of 12 directors. With nine directors already on the board, Invesco wanted to remove three directors because without doing this, it would not be possible to appoint the six additional directors. Out of the three directors that were proposed to be removed, two directors resigned after the requisition notice was issued. Before the end of the 21-day period in which an extraordinary general meeting (EGM) can be called, on 29 September 2021 Invesco filed a company petition before the National Company Law Tribunal (NCLT) under sections 98(1) and 100 of the Companies Act 2013 (the Act) to seek an order to call and hold an EGM on or before 28 October 2021. Zee's director conducted a board meeting on 1 October 2021 wherein the board concluded that the requisition notice was invalid, and it decided to approach the Bombay High Court to determine their conclusion's validity. Subsequently, Zee told Invesco about the board's decision by informing them that the proposed resolutions would contravene multiple regulations and guidelines, including:
- Securities and Exchange Board of India (SEBI) regulations;
- guidelines issued by the Ministry of Information and Broadcasting (MIB);
- provisions of Companies Act 2013; and
- provisions of the Competition Act.
The counsel for Zee made the following submissions:
- The shareholders of publicly listed companies cannot directly appoint independent directors. In order to appoint independent directors:
- the independent directors must be drawn from the databank, as per section 150 of the Act;
- the nomination and remuneration committee shall formulate criteria for determining the qualification, attributes and independence of the director, as per section 178(8) of the Act, and recommend their appointment to the board;
- the board shall consider the recommendations and how they satisfy the integrity and expertise requirements, which are requisite under section 149(6) of the Act; and
- they shall be appointed only once the shareholders pass the resolution appointing them in the general meeting.
Thus, Zee's counsel submitted that shareholders can only demand for the appointment of independent directors but cannot choose them.
- As per section 203 of the Act, companies such as Zee must have a:
- a managing director;
- a CEO;
- a manager; or
- in their absence, a whole-time director.
Through their requisition notice, the shareholders had demanded that Goenka be ousted. However, they had not proposed a replacement. Thus, by passing the resolution for the removal Goenka, Zee would be in violation of section 203 of the Act, and the company as well as the directors would be liable to face the consequences.
- Removing Goenka and appointing six additional independent directors would result in a board with only independent directors. This would violate multiple SEBI regulations and provisions of the Act which require a balanced composition of both executive and non-executive directors on the board.
- As Zee was governed under the MIB, the guidelines issued by it suggest that advance approval must be sought from the ministry before any changes are carried out in the company's top management. The requisition notice mentioned the appointment of independent directors subject to the MIB approval; however, this does not qualify as prior approval. The shareholders also failed to consider that the removal of directors would need the MIB's approval, before they issued the requisition notice.
- As per SEBI takeover regulations, if any acquirer takes control (which includes control through majority on the board) over a target company, it must make a public announcement of an open offer for acquiring company shares. In this case, this was not done.
- The requisition notice should be valid as per section 100(4) of the Act, which means that the objective of passing the resolutions should be legally feasible and effective, failing which the board is not obligated to call for an EGM.
The counsel for Invesco argued the following points:
- Shareholders have an unfettered right to propose any resolution that they wish to pass at an EGM by fulfilling the criteria of requisite numbers of shareholders and complying with the procedure set out in section 100 of the Act. A valid requisition merely means that the shareholders have acquired the necessary numbers of shareholders, set out the agendas to be considered and that the agendas have been signed and delivered to the company's registered office.
- Where the proposed resolutions are "unworkable", they are "still-born" and no effect will be given to them.
- As there was uncertainty on the outcome of the EGM on the proposed resolutions, the suit filed by Zee was premature.
- The counsel relied upon the judgment passed in Cricket Club of India v Madhav L Apte.(1) In this decision, it was held that under the Companies Act 1956 "the word or the adjective "valid" in section 169 has no reference to the object of the requisition but rather to the requirement in that section itself". Thus, the board was bound to call for the requisitioned meeting even though the proposed resolution would be invalid.
- The counsel also relied upon the judgment passed in LIC of India v Escorts Ltd,(2) wherein a similar resolution was proposed by LIC as the shareholder of Escorts, calling for the removal of some directors. The court held that LIC could not be restrained as shareholders from calling for an EGM to remove directors and that LIC was not bound to give reasons for proposing such resolutions.
- The counsel challenged the Court's jurisdiction under section 430 of the Act, as it states that no civil court shall entertain any suit or proceeding in respect of any matter which the NCLT or the National Company Law Appellate Tribunal (NCLAT) is empowered to decide upon.
On reading section 100 of the Act, the Court observed that the board was not bound to rubber stamp each and every requisition brought to them. However, this section does not remove the company's power to challenge the proposed resolutions before the meeting is held.
The Court relied on the judgment passed in Centron Industrial Alliance Ltd v Pravin Kantilal Vakil,(3) which the Court opined was relevant to the present case. In Centron, the court discussed various judgments, including Cricket Club of India and foreign judgments, to understand the law on requisition meetings. The Court observed that even though the form in which the proposed resolution was called for was irregular, the board of directors was compelled to call the EGM because "ultimately a decision taken in a meeting can be implemented in a legal manner". However, Lord Justice Lindley expressed his views in the case of Isle of Wight Railway Co v Tahourdin,(4) by stating that:
if the resolution proposed to be passed at the requisitioned meeting were wholly illegal, then the board of directors would be under no obligation to call a meeting requisitioned for the purpose of passing such an illegal resolution.
The Court then relied on Rose v McGivern,(5) wherein the court held that if passing the resolution would be a violation of the Act, the board of directors need not call such a requisitioned EGM.
After discussing various other judgments, the Court held that if the shareholders were willing to cause the company to violate the statutory compliances by proposing resolutions, there was no logical reason to even consider such resolutions.
The Court observed that the LIC judgment was distinct to the present case because that judgment was passed under the Companies Act 1956, which did not distinguish between listed companies and unlisted companies, as the Companies Act 2013 does.
Finally, the Court held that its jurisdiction was not barred under section 430 of the Act as jurisdiction of the NCLT and the NCLAT – as per the NCLT rules – does not include sections 100, 149, 150 or 168 of the Act.
On consideration of all of the submissions and observations made, the Court held that if the resolutions proposed by shareholders cannot even be countenanced in law and would put the company and the directors in jeopardy of non-compliance, the Court can intervene to stop such illegality. As such, the Court decided on the validity of the proposed resolutions to be passed at the requisition meeting and it granted injunction to Zee against Invesco by restraining Invesco from taking any actions to further their requisition notice of 11 September 2021, including calling for an EGM.
For further information on this topic please contact Nihal Shaikh or Dev Motta at Clasis Law by telephone (+91 11 4213 0000) or email ([email protected] or [email protected]). The Clasis Law website can be accessed at www.clasislaw.com.
(1) 1974 SCC OnLine Bom 40 : (1975) 45 Comp Cas 574.
(3) 1982 SCC OnLine Bom 318 : (1985) Comp Cas 12.