Tata Sons vs. Cyrus Mistry: A Battle for the Front Office

Introduction

On October 4, 2016, Cyrus Mistry was removed from the post of executive chairman of Tata Sons. In 2017, Mistry was also removed as the director of Tata Sons which is the holding company of various companies in the Tata group including TCS, Tata Steel and Tata Motors. Natarajan Chandrashekaran, the then Chief Executive Officer and Managing Director of Tata Consultancy Services Limited was named as the Chairman of Tata Sons. This led to a five-year-long litigation war between the Tata Sons and Mistry Family. Differences between Cyrus Mistry and Ratan Tata were central to this conflict.

The Tata Empire

The Tata Group was founded in 1868 by Jamshedji Tata. Since then, the Tata Group has grown to become a multinational conglomerate of around 100 companies and enjoys international reputation and prestige.  Many of the Tata Group companies also come in the Fortune 500 India ranking. The Tata Group had an annual revenue of USD 106 billion in 2019.[1]

The Tata Group carries immense goodwill because of its charitable trusts. Various Tata trusts currently work across 33 states and Union territories. The Tata trusts hold approximately 66% of the equity of Tata Sons and the dividend received from these shares is used for philanthropic work.[2]Last April, Ratan Tata, the chairman of Tata Trusts, had announced a donation of Rupees 500 crore to fight the covid pandemic.

Who is Cyrus Mistry?

Cyrus Pallonji Mistry is the second-largest shareholder and former chairman of Tata Sons. He was appointed as the Chairman of Tata Sons in 2012 and continued to hold the post till 2016. He owns 18.4% stake in Tata Sons and his net worth is approximately $28 billion. Mistry is also the managing director of Shapoorji Pallonji and Company, which is his family construction company. At one point, Mistry was considered to be the successor of Ratan Tata. However, things between the two started falling apart when Mistry was sacked from the post of Executive Chairman of Tata Sons.

NCLT Order

The National Company Law Tribunal (NCLT) was established by the Central Government under section 408 of the Companies Act, 2013.[3] Currently, there are 16 benches of NCLT which have been established across various cities of the country. The NCLT deals with matters relating to the winding-up of the company, management and oppression, deregistration of companies, conversion of a public company to a private company, etc.

Cyrus Investment Private Limited and Sterling Investment Corporation Private Limited, two Mistry family-backed firms, appealed before the Mumbai bench of NCLT against the removal of Cyrus Mistry as chairman of Tata Sons. The complaint was filed under section 241[4], 242[5] and 244[6] of the Companies Act, 2013. However, the NCLT found no merit in their arguments and upheld the right of the company to remove Mistry as the executive chairman. The firms had also made several allegations against Tata Sons such as mismanagement in business operations and exploitation of minority shareholders. However, the tribunal held that the firms were not eligible to file the case as they did not meet the eligibility criterion of 10% ownership in the company, as specified under the Companies Act, 2013. Excluding the preferential shares, the Mistry family holds less than a 3% stake in Tata Sons. The firms’ plea of waiving the eligibility criterion was also rejected by the tribunal.

Appeal before the NCLAT

The National Company Appellate Law Tribunal (NCLAT) was established by the Central Government under section 410 of the Companies Act, 2013. It hears appeals against the orders of the NCLT. An appeal against the order of NCLT can be made before the NCLAT within 45 days of passing of such order.

The two firms appealed against the order of the NCLT before the NCLAT. The NCLAT accepted the plea of waiver of eligibility criterion and directed the Mumbai bench of NCLT to take up the matter for hearing. However, the NCLT did not find any merit in the allegation made by the firms and dismissed the case.

The two firms again approached the NCLAT against the order of the NCLT. Cyrus Mistry also filed a petition in his personal capacity. The NCLAT heard the matter and restored Cyrus Mistry as the Chairman of Tata Sons. However, the Tribunal delayed the implementation of the order for 4 weeks in order to give adequate time to Tata sons to appeal against the order. The Tata Group appealed against the order of NCLAT before the Supreme Court and the Supreme Court subsequently stayed the order of the NCLAT.  

Legal Questions before the Supreme Court

When Tata Sons moved the Supreme Court against the order of NCLAT, several questions were raised before the Supreme Court. The Supreme Court had to consider the following issues:

• Whether the NCLAT had crossed its jurisdiction while reinstating Cyrus Mistry as the Chairman of Tata Sons?
• Whether the conversion of Tata Sons from a public company to a private company was legal or not?
• Whether Cyrus Mistry or Natarajan Chandrashekaran should continue as the Chairman of Tata sons?
• The legality of the removal of Cyrus Mistry as director of Tata Sons.
• What constitutes operational mismanagement and oppression of minority shareholders?
• What was the valuation of Cyrus Mistry’s stake in Tata Sons?

The Supreme Court Order

It was the Supreme Court that finally put an end to the half-a -decade long litigation war. The Supreme Court bench, led by Chief Justice of India S.A. Bobde, set aside the decision of the NCLAT and ruled in complete favor of Tata Sons. Ratan Tata described the Supreme Court judgment as a “validation of the values and ethics” of Tata Group. The Tata Group was represented by senior advocates Harish Salve and Abhishek Manu Singhvi while the Mistry family was represented by senior advocates CA Sundaram and Shyam Divan.

The Supreme Court observed that the pleadings before the NCLAT were only to restrain Tata Sons from removing Mistry from the post of Director and the relief of reinstatement was not even sought in the first place. The Supreme Court held that the NCLAT did not give adequate consideration to the findings of the NCLT and simply gave a conclusion on the basis of some allegations made by the Mistry family.

In the 282-page long judgment, the Supreme Court said that while Cyrus Mistry was initially removed only from the post of executive chairman of Tata Sons, he invited further trouble for himself through his subsequent actions. After being removed from the post of the Chairman, Mistry had used his authority as a director of Tata Sons to pass on some crucial information about the company’s trusts to the Income Tax Department. Even though Mistry claimed that the documents sent by him were in response to the summons issued by the Income Tax department under Section 133(6) of the Income Tax Act[7], the Supreme Court observed that satisfactory response had already been submitted by Tata Sons to the IT Department and hence the sole purpose of Mistry’s actions was to create trouble for Tata Sons. Just after a day of being removed from the post of executive chairman, Mistry had leaked a mail to the media alleging oppression of minority shareholders by Tata Sons. The mail had maligned the image of the company. The Supreme Court said that Mistry’s actions led to a trust deficit between Mistry and Tata Sons because of which Mistry was removed from the post of non-executive director. The Court compared Mistry to a person who “tries to set his own house on fire” and said that his removal was completely justified [8].

The Supreme Court further observed that the mere removal of Cyrus Mistry from the post of executive chairman and director of Tata Sons does not amount to oppression of minority shareholders. The Supreme Court said that it was ironic that Cyrus Mistry, who was considered a successor to Ratan Tata even though the Mistry Family held only 18.4% stake in the company was raising the allegations of oppression of minority shareholders by Tata Sons.

The Supreme Court upheld Tata Sons’ decision to convert to a private company. This will not only have implications for Tata Sons but also other companies who are planning to go private. Furthermore, the Supreme Court also rejected Cyrus Mistry’s plea for proportionate representation reflecting his family’s shareholding in the Company.

However, the Supreme Court chose not to go into the details of the amount of compensation payable to Mistry for his 18.4% stake in Tata Sons. The Supreme Court left it upon the two parties to decide the valuation of Mistry’s stake in Tata Sons. The Supreme Court also refused to comment on whether or not Tata Group can use Article 75 of the Article of Association. Article 75 provides that the company, through the passing of a special resolution, can force an ordinary shareholder to transfer or sell his shares.  

Conclusion

The Supreme Court order has finally drawn the curtains on what can arguably be called one of the most famous corporate feuds in Indian history. The verdict is likely to facilitate the separation of the Tata and Mistry families. The Mistry family has already expressed its desire to exit the Tata Group. However, the Mistry family considers the value of its stake to be around 1.75 lakh crore while the Tata Sons consider it to be around 70,000 to 80,000 crores [9]. This difference in opinion is likely to increase further after the Supreme Court judgment. If both the parties do not arrive at a uniform consensus, then it might lead to further litigation. For Cyrus Mistry, such litigation might result in further defeats while for Tata Sons, it might create uncertainty in the minds of the shareholders. Thus, both sides should resolve the remaining disputes through mutual cooperation.

• [1]https://www.Tata.com/investors#:~:text=In%202019%2D20%2C%20the%20revenue,its%20own%20board%20of%20directors.
• [2] https://www.Tata.com/community
• [3] https://nclt.gov.in/
• [4] https://www.mca.gov.in/SearchableActs/Section241.htm
• [5] http://ebook.mca.gov.in/Actpagedisplay.aspx?PAGENAME=17652
• [6] http://www.mca.gov.in/SearchableActs/Section244.htm
• [7] https://indiankanoon.org/doc/1106823/
• [8] https://energy.economictimes.indiatimes.com/news/power/tata-mistry-person-who-sets-own-house-on-fire-doesnt-deserve-to-be-in-decision-making-body-says-sc/81717972#:~:text=New%20Delhi%3A%20The%20Supreme%20Court,of%20any%20decision%20making%20body%E2%80%9D.
• [9] https://www.thehindubusinessline.com/companies/tatas-unlikely-to-cede-ground-to-mistry-on-stake-valuation-sale/article34192630.ece#:~:text=The%20Mistry%20side%20has%20pegged,resolving%20the%20stake%2Dsale%20dispute.

This article is authored by Gautam Badlani student at Chanakya National Law University.