In December 2023, the shareholders of Dish TV rejected the appointment of four independent directors to the board of the company, effectively rejigging the board composition of one of India's leading direct-to-home service providers. This move was preceded by a request made in July 2023 to hold an extraordinary general meeting for the appointment of independent directors as well as removal of directors alleged to be working in the sole interest of the company's promotors by minority shareholders with a 10.15% stake in the company's share capital. The request, however, was rejected by the board, citing non-compliances with the procedure laid down in the Companies Act 2013 for shareholders to requisition such extraordinary general meetings.
Shareholder rights have been a topic of discussion in the corporate world for quite some time now, and the recent example of Dish TV's shareholders exercising their right to influence the board composition is a testament to the importance of these rights. It is worth noting that the minority shareholders who called upon the board to alter its composition in July 2023 (and consequently also drew attention to corporate governance issues at the company) held around 10% of the company's share capital – this may seem like a small percentage, but it was significant enough to allow them to influence the company's decision-making process.
In fact, this is not the first instance when shareholders holding around 10% or lesser of a company's share capital have managed to alter corporate strategy in India. Their ability to impact dealmaking was demonstrated in 2018, when shareholders of Tata Sponge Iron Limited – who held only 3.77% of the company's share capital – were able to defeat resolutions pertaining to approval of related party transactions proposed to be carried out by the company. In the same year, through an extraordinary general meeting sought by a group of minority shareholders holding around 12% of Fortis Healthcare Limited's share capital, a director was removed from the board of the company by shareholders citing concerns in relation to investment offers received by the hospital chain.
It is also important to note that the 10% shareholding threshold for certain minority rights is capable of being waived in in exceptional circumstances, such as when strict adherence to the threshold can lead to an unfair and/or inequitable outcome for minority shareholders. Most recently, this waiver was granted by the National Company Law Appellate Tribunal in a petition filed by the Mistry group against the Tatas, where the Mistry group held merely 2.17% of the total issued share capital of Tata Sons Limited but was nonetheless held to possess a major monetary interest in the Indian conglomerate, thereby empowering it to file an oppression and mismanagement petition against the Tatas.1
Such instances of shareholder activism, admittedly, are few and far between – the majority of the attention, both academic and journalistic, is directed towards the exercise of power held by larger shareholders to influence the operations of Indian companies, which can perhaps be attributed to the greater monetary incentive possessed by them for exercising oversight over the company's operations. If we were to look at the different thresholds for exercise of control by a company's minority shareholders (i.e., 10%, 25%, 33%, and so on), it is safe to say that although the 10% threshold is the first ownership threshold where crucial corporate governance safeguards under Indian law begin to apply, it is often the most ignored when it comes to assessing the risk of shareholder activism prior to dealmaking activity.
With a view of filling this gap and at the same time providing guidance to companies seeking to undertake key corporate transactions in the near future, this article highlights five distinct rights held by a 10% minority shareholder which can possibly impact the consummation of M&A transactions, raising of debt or the decision to go for an IPO by a company. Companies looking to undertake such transactions must be cognizant of these rights and take steps to ensure that the interests of minority shareholders are adequately represented in the dealmaking process.
Right to approach the jurisdictional National Company Law Tribunal (NCLT) for oppression and mismanagement claims2: M&A transactions may lead to a material change in the management or control of the company by way of an alteration in the board of directors and/or the ownership of the shares of the company. In such a situation, a 10% shareholder has the right to make an application before the NCLT, claiming that, as a result of the change, it is likely that the affairs of the company will be conducted in a manner prejudicial to its interests or its members or any class of members. However, in our view, it will be difficult to establish that an isolated transaction involving a change in the shareholding pattern or control of the company results in affairs of the company having been conducted in a prejudicial or oppressive manner, and that such transaction, by itself, justifies the intervention of the NCLT. There are also judicial precedents in case of oppression and mismanagement which state that the NCLT does not have the power to adjudicate upon commercial decisions and financial affairs of a company.3 Having said that, the right of the minority shareholder to approach the NCLT to halt the transaction cannot be denied under law. The nuisance value of such an action is likely to outweigh legal merits of the case they may be put forth before the NCLT in support of such a legal action.
Right to disapprove a related party transaction (RPT)4: Corporate transactions including capital infusion or raising debt might qualify as RPTs under the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations 2015 (Listing Regulations), which broadly define RPTs to include inter alia any transfer of resources, services or obligations between: (i) a listed entity or any of its subsidiaries on one hand and a related party of the listed entity or any of its subsidiaries on the other hand; or (ii) a listed entity or any of its subsidiaries on one hand and any other person or entity on the other hand, the purpose and effect of which is to benefit a related party of the listed entity or any of its subsidiaries. In such cases, the Listing Regulations provide that for 'material' RPTs (i.e., RPTs exceeding the lower of (i) INR 1,000 crores; or (ii) 10% of the annual consolidated turnover of the listed entity as per the last audited financial statements), related parties are not allowed to vote to approve the RPT, irrespective of whether or not they are a party to the transaction. Accordingly, by restricting shareholders with an interest in the RPT from approving it, this provision can possibly put a minority shareholder (including a 10% shareholder) in a strong position to influence the consummation of any corporate transaction qualifying as a material RPT under the Listing Regulations. In fact, it is with the help of this provision that the 3.77% shareholders of Tata Sponge Iron Limited were able to defeat resolutions pertaining to approval of related party transactions proposed to be carried out by the company, as discussed above.
Right to dissent against a scheme of scheme of arrangement / reconstruction / amalgamation5: In case the company is entering into a scheme of arrangement / reconstruction / amalgamation under the Companies Act 2013, a 10% shareholder has the right to apply to the NCLT to object to the scheme and seek an order to the effect that the scheme shall not be binding on the minority shareholder (despite the fact that it has been accepted by shareholders holding 90% of the value of the shares being transferred), and the NCLT, at its discretion, may give an exit offer to the minority shareholder at fair value.
Right to dissent against a change in objects for which money was raised from the public6: Transactions involving capital infusion or raising debt for a company by leveraging its assets, may involve raising money from the public through a prospectus. Accordingly, in case the company, after raising money from public through a prospectus, has any unutilized amount out of the money so raised and the company changes the objects for which the money was raised, a 10% shareholder has the right to be given an opportunity to exit by the promoters and shareholders having control of the company, in accordance with regulations specified by the Securities and Exchange Board of India. However, such a right will not be applicable in case the money is raised by the company through issuance of equity by way of private placement / preferential allotment or by way of debt through a financial institution.
Right to dissent against variation or alteration in the rights attached to their shares7: Certain transactions, including M&A transactions and undertaking an IPO, may lead to a variation or alteration in the rights attached to the class of shares owned by the 10% shareholder. In such a situation, the minority shareholder may apply to the NCLT to have the variation or alteration cancelled.
Other rights provided to minority shareholders under the Companies Act 2013 – although not fully relevant from the perspective of impacting key corporate transactions – include the right to: (i) apply to the NCLT for conducting an investigation into the affairs of the company if the company's business is being conducted with the intent to defraud its creditors / shareholders, the company's management is guilty of fraud or shareholders have not been given all reasonably expected information with respect to the company's affairs8; (ii) block a resolution condoning notice of less than 21 days or such other time period as may be contemplated under the articles of association of the company, for a resolution which is to be approved at a general meeting of the company9; and (iii) collectively bring a representative action against the company when individual shareholder rights (including the right to vote, to have votes recorded, to enforce dividend declared as a legal debt etc.) have been breached.10
In conclusion, while varying degrees of shareholding can have varying effects on a company's corporate strategy, the rights provided to a minority shareholder cannot be ignored when it comes to dealmaking activity. As the Dish TV saga continues to make waves in the corporate world, it is clear that recognizing and respecting these rights cannot be an afterthought, even when it comes to shareholders holding as less as 10% of a company's share capital.
Footnotes
1. Cyrus Investments Private Limited v Tata Sons Limited, 2017 SCC OnLine NCLAT 261.
2. Sections 241, 242 and 244 of the Companies Act 2013 ("Companies Act").
3. TCS v Cyrus Investment Private Limited, 2021 9 SCC 449; Needle Industries (I) Limited v Needle Industries Newey (I) Holding Limited, 1981 3 SCC 333.
4. Regulation 23(4) of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations 2015.
5. Section 230 of the Companies Act.
6. Section 13(8) and Section 27 of the Companies Act.
7. Section 48(2) of the Companies Act.
8. Section 213(a)(i) of the Companies Act.
9. Section 101 of the Companies Act.
10. Section 245 of the Companies Act.
The content of this document do not necessarily reflect the views/position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at legalalerts@khaitanco.com
