Companies Act 2013 - Proposed Shareholder Resolution Must Be Legal For EGM To Be Called : Bombay High Court

The Bombay High Court has recently ruled that a shareholder resolution requisitioned under Section 100 of the Companies Act, 2013 must be legal so as to demand the Board of Directors hold an Extraordinary General Meeting (hereinafter EGM). The Single Judge Bench of Justice G.S. Patel was hearing a suit filed by Zee Enterprises Limited, a public limited and listed company seeking an injunction against Invesco (investors and shareholders that holds 17.88% equity in ZEE) from acting in furtherance of a requisition notice on the grounds that it's illegal, ultra vires, invalid, bad in law and incapable of implementation. Justice GS Patel, who considered the matter, observed in the order that the Court can examine if the matters proposed to be considered in the requisition are legal."...sometimes, it happens that a company must be saved from its own shareholders, however well-intentioned. If a shareholder resolution is bound to cause a corporate enterprise to run aground on the always treacherous shoals of statutory compliance, there is no conceivable or logical reason to allow such a resolution even to be considered. Shareholder primacy or dominion does not extend to permitting shareholder-driven illegality. A perfectly legal resolution, if carried, may well result in the diminution of the company's profits or business. That is not a court's concern. But the resolution must be legal. The interpretative question is therefore not over the word 'valid' at all but about the matters proposed to be considered at a requisitioned EGM. And the Court is never foreclosed from considering this". Factual Background The requisition notice by Invesco had nine resolutions out of which the primary resolution was the removal of CEO and Managing Director of ZEE Enterprises, Punit Goenka, and six other resolutions for the appointment of six independent directors. Two other resolutions for removal of two other directors had lapsed since they had already resigned due to personal reasons. The appointment of independent directors were mentioned as 'subject to Ministry of Information & Broadcasting approval'. Zee's Articles of Association mandates a 12-member Director Board and if the resolution for removal of Goenka wasn't successful, the company would have 13 Directors. Under Section 100 of Companies Act, a requisition notice sent by shareholders must meet the following requirements: they have collectively not less than 10 per cent of the total share capital, clearly sets out the matters for consideration, the requisition notice is signed by the requisitionists and delivered to the registered office of the company. As per Section 100(4) of the Act, if the Board of Directors does not proceed to call an EGM within 21 days from the receipt of notice to conduct the same within 45 days, the requisitionists are at liberty to conduct the said meeting within a period of three months, provided that the requisition notice is 'valid'. The major bone of contention in the arguments levelled by both parties revolved around the concept of 'validity' of a requisition notice sent to the Board and whether the Board of Directors can exercise its discretion to refuse to act upon such a requisition notice. Submissions Made By Zee Enterprises And Invesco Senior Advocate Gopal Subramaniam for Zee Enterprises submitted that the term 'valid' in Section 100(4) denotes a requisition 'whose objects are legally feasible and effective.' The proposed resolutions, if proceeded with, will contravene the following statutory provisions: Section 203 of Companies Act that requires every company to have a managing director/ CEO/ Whole Time DirectorAs per the Companies Act, independent directors must be drawn from a data bank, approved by a nominations and communications committee constituted under Section 178, the Board of Directors must be convinced of their expertise and integrity and each independent director proposed must be approved by the General Body. Regulation 17(8) of SEBI Regulations lays down an 'optimum' combination of executive and non-executive directors and Regulation 19(3) requires an NRC and specifies its composition. From these provisions regarding appointment, what directly follows as per the petitioner counsel is that shareholders do not get to choose individual independent directors bypassing these steps; they can only demand that independent directors be appointed. The resolution for appointing independent directors and removing one of the directors including CEO require 'prior approval' under Clause 5.10 of the MIB Guidelines. The requisition notice says that appointment of the six new independent directors will be 'subject to MIB approval' while remaining silent about MIB approval for removal of CEO. Even the term 'subject to MIB Approval' is contrary to MIB Guidelines that demand...

Companies Act 2013 - Proposed Shareholder Resolution Must Be Legal For EGM To Be Called : Bombay High Court

Sebin James

"...sometimes, it happens that a company must be saved from its own shareholders, however well-intentioned. Shareholder primacy or dominion does not extend to permitting shareholder-driven illegality" - HC said.

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