Zee vs Invesco: Bombay High Court reserves its order

Zee Entertainment Enterprises Ltd. resisted the court-offered solution against its dispute with Invesco Developing Markets Fund and OFI Global China Fund LLC. The single judge bench of Justice Gautam Patel of the Bombay High Court reserved its order.

On Thursday, the high court had proposed that the extraordinary general meeting be called and Zee’s right to contest the validity of the resolutions post the EGM be reserved. Invesco and OFI Global, together holding a 17.88% stake in the media major, are locked in a dispute with the company’s current board and Managing Director and Chief Executive Officer Punit Goenka. The two funds are seeking to

Some clouds of concern have appeared on the horizon, Zee’s counsel Gopal Subramanium told the court during Friday’s hearing.

The independent directors on Zee’s board, including the chairman R Gopalan, serve on other listed companies as well. The reason for vindication, which the board of directors desire, is largely because this is a foreign investor, Subramanium said.

“Foreign investors have shares in many public listed companies in India. This is the first case of its kind. Listed companies don’t want the board of directors to become helpless if investors who come in have actually larger designs. That’s why they’d like the sense of vindication.” – Zee’s Counsel

If the board of directors are compelled to carry out resolutions which, once passed, are going to be completely violative of Companies Act, 2013 and other laws, it will be as an English judge put it “ineffective”, Subramanium argued.

“The English Companies Act did not have this provision but it came by way of judgment law in England. That in certain circumstances, the board of directors can reject a request for holding a shareholders’ meeting if the object was either illegal or if the resolution was carried through, could not be implemented in law. That is the position even in India according to me.
Zee’s Counsel Gopal Subramanium

So, courts have taken a view that they have jurisdiction in such situations where the National Company Law Tribunal is not empowered to determine such questions, he added.

This argument set the tone for Zee Entertainment to reiterate its position that the board, after seeking legal advise, has concluded that Invesco and OFI’s resolution cannot be taken to the shareholders by the company.

‘Valid’ applies to objects of the requisition: Zee Entertainment

At the heart of this case is section 100 of the Companies Act, 2013 which, among other things says:

• Shareholders with more than 10% stake can requisition an EGM.
• The requisition shall set out the matters for the consideration for which the meeting is to be called.
• If the board doesn’t call an EGM basis a valid requisition, the requisitonists can do so themselves.

Subramanium argued that the “validity” needs to be examined not just for the numerical threshold but also ‘matters for consideration’. “If the object of the meeting is totally illegal, the board of directors can’t say- well, let’s debate it in a (shareholder) meeting.”

On Subramanium’s arguments, the high court bench of Justice GS Patel made an observation using an “extreme” example.

“I see your point. Can there be a requisition meeting if the proposed resolution is that the company should engage in a hawala transaction? But here, the resolution is not appoint all six. If the company says, the maximum that can be done is to appoint three and the balance can’t be, the matter will end. That’s not the hawala level of illegality that we’re speaking of.
Justice GS Patel’s Observations

But if you can show me that even the appointment of the three is something that’s going to result in an inevitable manifest illegality, that’s the only circumstance in which I will consider this, the court told Zee’s counsel.

In response, Subramanium reiterated the legal infirmities which lead the board to reject Invesco’s EGM requisition:

• Requirement of prior approval of Ministry of Information and Broadcasting for any board appointments.
• Non-compliance with SEBI’s Listing Regulations that lay down Nomination and Remuneration Committee-led process for appointing independent directors.
• Violation of company law that lays down stringent criteria for appointment of independent directors.
• Non-compliance with Takeover Code, Competition Act and Zee’s Articles of Association that caps the number of directors.

Is the board a rubber stamp in requisition cases, court asks Invesco

As it did for Zee on Thursday, the court posed some tough questions to Invesco’s counsel today.

It asked senior advocate Janak Dwarkadas if, for a requisitioned meeting, the board is a rubber stamp?

Not in so many words, but Dwarkadas answered this question in the affirmative.

The company law says board “shall” call a meeting if the numerical threshold is met, he argued.

“It doesn’t say board “may” call, or look at the object, or look at the reason or what prevails in the mind of the requisitonist–nothing. It just says if 10% or more were to submit a requisition, the board “shall” call an EGM of the company.
Invesco’s Counsel Janak Dwarkadas

Reason being, it’s for the [shareholder] meeting to decide; it is the democratic right of the member to decide what they should be doing, he said.

To this, the court asked, if it’s not the board’s fiduciary duty under company law to assess whether these resolutions will result in an illegality, and non-compliance with various statutes. Or is it for the board to say that you can propose any “madcap thing” you want and we will have to put it to vote?

“Can a shareholder who has the numbers requisition a meeting for a resolution that Zee should start online gambling? I’m asking can that be done.
Justice GS Patel’s Observations

To this, Dwarkadas said, what’s illegal will remain to be illegal, cannot be cured even if 100% of shareholders approve. The precedents bolster Invesco’s position, he added.

“The Supreme Court says the objects cannot be looked into, reasons need not be given and even if they are given, they aren’t’ justiciable. The Bombay High Court says objects can’t be looked at. This is the law as far as we are concerned.
Invesco’s Counsel Janak Dwarkadas

Can we read into Section 100, what it doesn’t envisage because something is provided under English law, Dwarkadas pointed out. If the legislature intended that resolution should be subject to the “duty of the board” and it can decide whether it’s a valid requisition under law, why would it give power to the requisitonists to call the meeting themselves, Dwarkadas said while summing up Invesco’s position.

The Bombay High Court will pronounce its judgment on Oct. 26. Bloomberg