Case Analysis Zee Entertainment Enterprises Ltd. v Invesco Developing Markets Fund Suit (L) 2021

This judgment ‘Zee Entertainment Enterprises Ltd. v Invesco Developing Markets Fund Suit (L) 2021’ was decided upon a constructive approach that acknowledged the legal complexities and entanglements in the law but did not extensively address the legal technicalities on the basis of the factual circumstances of the case. The judgment took no attempt in commenting on the reality of corporate governance. This judgment if precedential enables an established board of directors to use this interpretation of Section 100 of the Act to fend off activist shareholders, even if the proposed changes are in the best interests of the firm and its shareholders as a whole.

Citation: Suit (L) No. 22522 Of 2021 (Bom)

Coram- G.S. Patel, J.

Facts

• 11^th September 2021– Invesco issued the Requisition Notice for requisitioned Extraordinary General Meeting (hereinafter as EGM) that is signed by the shareholders holding more than 10% of Zee’s equity and delivered to Zee’s registered office.
• Items of Requisition Notice
  • Removal of Punit Goenka as a director with no mentioning of MIB approval
  • Removal of director Mr Manish Chokhani and Mr. Ashok Kurien with no mentioning of MIB approval.
  • Appointment of six independent directors subject to MIB approval.
• 14^th September 2021- Resignation of Chokhlani and Ashok Kurien which leaves the company with Managing Director and six other existing independent directors on the Board.
• 15^th September 2021 – Invesco intimated Zee whether MIB had approved for the appointment of independent directors or not. Later that day, Invesco delivered further documents outlining the qualifications and expertise of several of the directors it wanted to appoint.
• September 20, 2021 – Invesco submitted updated forms, annexures, and supplementary documents.

Procedural History

• Zee would have had time till October 3^rd, 2021 to convene the EGM as per the statute of the Companies Act but Invesco filed a petition before NCLT against Zee to call and hold an EGM of Zee on or before 28th October 2021 which is pending followed by order of NCLAT.
• 1^st October 2021- The Board upon the Board meeting concluded that the Resolution Notice was invalid hence the EGM cannot be convened since it was not in the best interests of Zee and its shareholders and decided that the company should question the validity of the Requisition Notice before the Court and the same was intimated to Invesco citing Requisitioned Notice is in contravention of the following provisions

1. 1. Regulation 17 of the SEBI Listing Regulations
   2. Section 203 of the Companies Act
   3. MIB Guidelines and contrary to Zee’s Articles of Association
   4. Mandatory statutory provisions regarding a Nomination and Remuneration Committee as also the approval and opinion of the Board, all of which were pre-requisites to the appointment or removal of any director
   5. Violate the SEBI Takeover Regulations and the Competition Act.

Issues

1. Whether the Court has jurisdiction to decide the issue at hand
2. Whether Board of Directors are entitled to refuse the convening of EGM or shareholder’s meeting in terms of requisition notice

[2.1] Scope of ‘Validity’ of Requisition Notice as required as per Section 100 of the Companies Act, 2013
[2.2] Determining legality of the resolution proposed in the Requisitioned Notice
[2.2.1] Whether the Court can assess the legality of the resolutions proposed at the requisitioned EGM

Rules

• Section 100 of Companies Act, 2013– Calling of EGM can be initiated by Board of Directors or by those shareholders who hold at least 10% of the equity shares of the company share capital. Such convening of the EGM shall be done by the Board of Directors within 45 days from the date of receipt of such requisitioned notice.

The matters to be considered in the EGM are to be addressed or set out in the requisition which is to be signed by requisitionists and sent to registered office of the company. Upon the receiving of a valid requisition, the Board is given a time frame of 21 days to hold EGM and if the same is not proceeded within 45 days of the receipt of requisition, EGM may be called and held by the requisitionists within three months of receipt of the requisition.[1]

• Section 430 of Companies Act, 2013- no civil court has the jurisdiction to decide upon the matters and proceedings that are solely empowered to be determined by NCLT/NCLAT and no injunction on the same would be granted in respect of any action taken or to be taken in pursuance of the power conferred by this Act or any other law for the time being in force, by the Tribunal, Appellate Tribunal.[2]

Analysis

Issue of Jurisdiction

It was the submission of the defendant counsel that Section 430 of the Companies Act bars civil court’s jurisdiction in the determination of any matter or proceeding that the NCLT and NCLAT are empowered to. However, the Court discarded this submission with the backing of NCLT Rulings which do not include Sections 100, 149, 150 or 168 in the list of provisos over which NCLT/NCLAT have jurisdiction. Moreover, since the present petition has prayed for grant of injunction against Invesco, Defendant Company, from holding the EGM and not against the NCLT from passing order on the petition of Invesco, the very same contention of the defendant counsel has been dismissed.

Whether Board of Directors are entitled to refuse the convening of EGM or shareholder’s meeting in terms of requisition notice

As per Section 100, the convening of the EGM shall be done by the Board of Directors within 45 days from the date of receipt of such requisitioned notice. The matters to be considered in the EGM are to be addressed or set out in the requisition which is to be signed by requisitionists and sent to the registered office of the company. Upon the receiving of a valid requisition, the Board is given a time frame of 21 days to hold EGM and if the same does not proceed within 45 days of the receipt of the requisition, EGM may be called and held by the requisitionists within three months of receipt of the requisition.

‘Valid’ Requisition- Judicial Interpretation

The counsel for defendants substantiated his submission of interpretation of a ‘valid’ requisition by referring to the case of Cricket Club of India Ltd & Ors v. Madhav L Apte & Ors.[3] where the Court held that a resolution is deemed to be valid if it is in consonance with the requirements prescribed in the relevant proviso (Section 169 of 1956 Act), i.e. is the contents, number of requisite signatories and similar matter.

The Court disregarded the interpretation of the validity of requisition notice that should be determined on the basis of the objective embedded in such requisition notice and held that the Board was bound to call the requisitioned meeting even though the proposed requisition points would be invalid.

However in the present case, since the question before the court is whether or not the court has the power or remit to grant an injunction in the present case, the Court placed reliance on the case of Centron Industrial Alliance Ltd v. Pravin Kantilal Vakil & Anr.[4], where the petitioners sought to Court to grant an injunction on the EGM that sought a resolution that the company should withdraw its petition filed before Bombay High Court for the purpose of renegotiating with Brooke Bond India Ltd.

In this referred case, Bombay High Court was posed with the question whether shareholders can requisition a meeting compelling the company to resile from its legal obligation to present a petition for confirmation of the scheme.

While examining the nature of concerned requisitioned meeting, the Court had referred upon the decision of the case Foss v. Harbottle[5], in which it reaffirmed that the courts would generally refuse to interfere in the internal management of the company unless there comes a situation where a general meeting is called where nothing legal could be done, in such cases, injunction restraining the meeting might be granted.

While observing the cases of Isle of Wight Railway Co. v. Tahroudin[6], Foss v. Harbottle[7] and Cricket Club of India Ltd. v. Madhav L. Apte[8], the Court, in this case, had observed that the requisitioned meetings in question were all related to discussing the internal management of the company, thus explaining the court’s reluctance in granting an injunction on the same. The Court in this case was thus of the opinion that there is no point in requisitioning a meeting to pass a resolution that would be wholly illegal.

Whether the resolution sought to be done through the requisitioned EGM is plainly illegal

The Court looked into the case of Queensland Press Limited v. Academy Investments No 3 Pty Ltd & Anr [9], an unreported decision of the Supreme Court of Queensland, where the proposed resolution required the directors of the Board to ratify a proposal for disposing of the company’s major asset. Since the board of directors, who are not just agents of the shareholders, had to decide whether a major asset should be sold, the objective of the requisition was determined to be one that could not be legally effectuated, hence entitling the directors to refuse the convening of the meeting.

In the case of Rose v. McGivern[10], the proposed resolution was to replace an entire Board of Directors which is something that cannot be practically implemented. Hence, the Court in this case was of the opinion that the directors should be entitled to refuse to convene a meeting in relation to the proposal, even if it the matter to be transacted as per the proposal is an object rather than a resolution.

Whether the Court can assess the legality of the resolutions proposed at the requisitioned EGM

Now, as to the contention of the defendant counsel that the Court is precluded from looking at the legality of the proposed resolutions, the court opined that the legality of the resolution must be left to the general body and the same cannot be subjected to questioning until the said resolution has taken place. However, the implementation of the resolution can be restrained by the court where the court would have to look into the whole issue itself. This opinion was based upon the reliance placed on the case of Kaye and Anr. v. Oxford House (Wimbledon) Management & Ors.[11]

Now the Companies Act of the U.K has provided an express statutory provision that a resolution does not have to be moved at the general meeting if it would render it ineffective upon its passing, in terms of any inconsistency of the resolution proposed with any enactment or with the company’s constitution or otherwise.[12] However, the Companies Act, 2013 has nowhere incorporated such proviso in the Code but the same has not precluded the Court in the present matter from asserting otherwise.

Moreover, the case of Cricket Club of India [13] was brought before this court at a time when the Act of 1956 made no special provisioning exclusively for Public Listed Companies, as opposed to the present case. Additionally, with the extant parallel legislations like SEBI, and others, it is essential that a company is found to be compliant of these regulatory statutes as the consequential offences and penalties followed through that could render the company non-functional.

Personal Analysis

The dimension of analysis took a transition from determining what constitutes a ‘valid’ requisition to the ‘legality’ of the resolution proposed in the concerned requisition notice. While the court has constantly reasserted through the reliance placed on the foreign jurisdictional cases that the non-compliance of statutory regulations as illegal, but can it really be given such a blanket labelling.

It is to the author’s understanding that the requirement of prior approval before the appointment of directors, in this case, independent directors, as per the MIB guidelines is more of a pre-condition to be followed and not something that can be relevantly factored into determining the legality of the said appointment of the directors.

Conclusion and Suggestions

The Court in this case allowed this petition by granting an injunction against defendants that would restrain them from holding EGM in furtherance of the requisition notice. EGM as the name suggests is only called for or meant to be called in cases that requires addressing urgent legal and administrative matters. EGM is a contributory proviso enabled for strengthening or ensuring smooth corporate governance with the purpose of safeguarding the interest of the company and the shareholders.

This judgment was decided upon a constructive approach that acknowledged the legal complexities and entanglements in the law but did not extensively address the legal technicalities on the basis of the factual circumstances of the case. The judgment took no attempt in commenting on the reality of corporate governance. This judgment if precedential enables an established board of directors to use this interpretation of Section 100 of the Act to fend off activist shareholders, even if the proposed changes are in the best interests of the firm and its shareholders as a whole.

This decision tandems to a setback of the shareholder activism in the Indian corporate scenario. This decision has the effect of curtailing the shareholder rights to voice and vote in the matters of ensuring corporate governance. It exemplifies the difficulties of adopting a consistent legal interpretation in the face of many legislation, rules, regulations, and other instruments, all of which appear to apply to the same topic. This case highlights that traditional binary interpretations of the law might not be enough rather read these instruments properly, a greater understanding of the regulatory framework is essential.

Note- Given the significance of the legal issues and the commercial stakes involved, the matter is bound to go on appeal.

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[1] Companies Act, 2013, § 100.

[2] Companies Act, 2013, § 430.

[3] Cricket Club of India Ltd & Ors v Madhav L Apte & Ors., 1974 SCC OnLine Bom 40.

[4] Centron Industrial Alliance Ltd v. Pravin Kantilal Vakil & Anr., 1982 SCC OnLine Bom 318 .

[5]Foss v. Harbottle, [1843] 2 Hare 461.

[6] Isle of Wight Railway Co. v. Tahroudin, [1884] 25 Ch D 320 (CA).

[7] Supra at 3.

[8] Supra at 1.

[9] Queensland Press Limited v. Academy Investments No 3 Pty Ltd & Anr, Civil petition No. 110 of 1987.

[10] Rose v. McGivern, [1998] 2 BCLC 593 (Ch D).

[11] Kaye and anr. v. Oxford House (Wimbledon) Management & Ors, [2019] EWHC 2181 (Ch).

[12] Companies Act 2006, § 303(5), Available Here.

[13] Supra at 1.

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