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

Sebin James
4 Nov 2021 7:40 AM GMT
Companies Act 2013 - Proposed Shareholder Resolution Must Be Legal For EGM To Be Called : Bombay High Court
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"...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.

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...

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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 Director
  • As 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 prior approval instead of ex post facto approval.
  • The requisition notice, as per the petitioner, is also in violation of 2(1) (e) about 'control' r/w Regulation 4 of SEBI Takeover Regulations for lack of an open offer by Invesco for the public to acquire the shares of of the 'target company' that it intends to take control over, i.e., ZEE Enterprises.

Senior Advocate Janak Dwarkadas appearing for Invesco argued that such a spin on the interpretation of provision was unacceptable; the shareholders have an inalienable right to propose any resolution of their liking and a 'valid' requisition should only meet the criteria specified in Section 100 itself and nothing beyond it. Even if the resolutions are non-workable, it will be 'still born'. The counsel further submitted that these resolutions can't be considered as certain since the outcome in the EGM is not known and the suit is hence premature. Section 100 of the Companies Act precludes the High Court's intervention once the necessary criteria is met, argued the counsel.

Judgment Pronounced By Bombay High Court

The court in its reasoning emphasised that the question is not of interpretation of the word 'valid' in Section 100 at all, but whether what is sought to be done through a proposed resolution, part of the requisition notice, is plainly an illegality. The court even used the null hypothesis theory by Sir Karl Popper to test the Invesco proposition that Section 100 conveys an unfettered right on shareholders to move any resolution. According to the court, the very hypothesis or proposition must be tested against the extreme polarities as possibilities and whether it is sound or not.

"This has a direct application to the case at hand. If the resolutions proposed are not such as can even be countenanced in law, then how does the question of putting them to vote at an EGM even arise?"

The judgment of SK Desai in Cricket Club of India Ltd & Ors v Madhav L Apte & Ors. 1974 SCC OnLine Bom 40 whereby the court was inclined to read Section 169 Of Companies Act 1956 (Almost Identical to Section 100 of Companies Act, 2013) in isolation, irrespective of its illegality or even invalidity outside the requirements specified in Section 169, was repeatedly brought to the high court's attention by Advocate Dwarakadas.

The court made note of those submissions regarding precedent; even the Cricket Club Of India didn't address the power of the court to grant injunction against furthering the objectives of a requisition notice, it only dealt with the interpretation of Section 169, the interplay of term 'valid requisition' and determining whether the requisition in question was valid or not.

Justice G.S. Patel elaborated upon the judgment in Centron Industrial Alliance Ltd v Pravin Kantilal Vakil & Anr 1982 SCC OnLine Bom 318 that too had an otherwise numerically valid requisition arising in the scheme of an amalgamation between two companies. The resolution in dispute in the Centron Case sought the withdrawal of a company petition against another party in Bombay High Court. The deviation from a legal obligation and its impact was examined by the court in Centron. The Centron judgment disagreed with the judgment in the Cricket Club Of India and noted that the resolution therein only affected the internal management of the company and none otherwise, which was not the situation in the instant case:

"Courts have, therefore, consistently held that if the requisition is called for the purpose of passing a resolution which can be implemented in a legal manner, although the form in which the resolution has been proposed is irregular on the face of it, nevertheless, such a meeting must be called because ultimately a decision taken at the meeting can be implemented in a legal manner."

Justice G.S Patel hence agreed with the distinction drawn in Centron regarding the resolutions proposed at a requisitioned EGM unlike the blanket sanction in Cricket Club: between resolutions that are irregular or undesirable to the Board and those that are illegal.

Bombay High Court then reiterated the observation of Lord Justice Lindley in the landmark case of Isle of Wight Railway Co. v. Tahourdin, [1884] 25 Ch D 320 (CA) that finds a place in Centron as well.

"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 looked into other jurisdictions and recognised how Isle of Wight decision has been relied upon consistently from 1884, also in Queensland Press Ltd v Academy Investments No 3 Pty Ltd & Anr [1987] QC 3 to ascertain the validity of a requisition and grant of injunction if the requisition couldn't be legally effectuated.

Bombay High Court also made the following observation against the argument constructed by Dwarakadas regarding the form and substance of resolution by relying on Queensland:

"The argument that the wording of a proposed resolution in a Requisition Notice is a matter of form, not substance, the latter being 'adjustable' at the meeting was repelled, and rightly so. This would be an EGM, and not an AGM — and the resolutions would have to be considered as placed and proposed, not in some variant that was never propounded."

Reliance was also placed on Rose v McGivern & Ors [1998] 2 BCLC 593 (Ch D). where it was held that if an EGM called contains only resolutions that will be ineffective if passed, and something that couldn't be implemented, Directors would be entitled to refuse to convene such a meeting.

There has been Section 303(5) in England's Companies Act that underlines the Court's freedom to intervene and examine the legality of a resolution so as to protect the company's interests as mentioned in Kaye & Anr v Oxford House (Wimbledon) Management & Ors [2019] EWHC 2181 (Ch), though such a provision has been absent in the Indian law to prevent 'madcap resolutions.'

"We do not have such a provision. But it does not have to be made explicit, and Section 303(5) only makes explicit that which judicial pronouncements from Isle of Wight in 1883 onwards said was always part of companies law."

The court went on to lay down the grounds of its order as below:

"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."

The court also noted that this was a case where the form must follow the substance. If the substance of the proposed resolution is illegal, the form is illegal.

Regarding the arguments raised against the court's jurisdiction, the court observed that Section 430 of the Companies Act bars a civil court from adjudicating upon a matter that NCLT or NCLAT has jurisdiction on. However, NCLT Rules does not mention that they have jurisdiction over matters under Section 100, 149, 150 or 168.

Invesco's argument that no injunction can be granted since NCLT has already been seized of the matter under Section 98 and an injuction granted would effectively be against NCLT was also proved wrong by the court:

"I am not asked to issue any such injunction against a court. The injunction is against Invesco. Indeed, in any anti-suit injunction proceeding, the frame is precisely against the party prosecuting a rival action in another forum, not the forum itself (unless the other forum is hierarchically subordinate)."

The court agreed with the arguments raised by Zee Enterprises and granted interim relief restraining Invesco from taking any action in furtherance of requisition notice, including the convening of an EGM under Section 100(4).

Case Title: Zee Entertainment Enterprises Ltd. v. Invesco Developing Markets Fund And 2 Others

Case No: IA (L) No. 22525 Of 2021 In Suit (L) No. 22522 Of 2021

Click Here To Read/ Download Judgment



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