Tata Sons Ltd’s articles of association gives it the power to ask shareholders to sell their holdings by passing a special resolution, a rule that can be potentially used to force Mistry family firms to exit the Tata group holding firm amid a bitter battle.
Tata group has spoken to a large Indian state-owned financier, a foreign state-owned investment company and one of the largest pension funds in the world. The names of the firms are not being disclosed because they declined to confirm their interest.
The Mistry family firms—Cyrus Investments Pvt. Ltd and Sterling Investments Pvt. Ltd—own 18.4% of ordinary shares in Tata Sons. That is less than the shareholding needed to block a special resolution, which requires 75% support.
The Mistry family stake could be valued at up to $16 billion, according to Bloomberg columnist Andy Mukherjee’s calculations. On 6 February, Tata Sons shareholders voted to oust Cyrus Mistry from the board of directors, almost four months to the day he was replaced as chairman. The battle between Tata Sons and the Mistry family firms is now being fought in the courts.
Article 75 of the Tata Sons articles of association says: “The company may at any time by Special resolution resolve that any holder of ordinary shares do transfer his ordinary shares. Such member would thereupon be deemed to have served the company with a sale notice in respect of his ordinary shares.”
“The article does give power to the company to pass a special resolution and shareholders to transfer their shares,” said J.N. Gupta, co-founder and managing director of Stakeholder Empowerment Services (SES), a proxy governance firm. “Whether this article will withstand the scrutiny of law is another question altogether, even though Articles generally are a law unto themselves.”
Finding a buyer won’t be easy at a time when the case is being heard by the National Company Law Tribunal, although such a move may not be in violation of the tribunal’s orders, according to Tejesh Chitlangi, partner at law firm IC Legal.
“If the board of Tata Sons want to reduce Mistry’s shares they would need to do so via a special resolution and the shareholders can be compelled to transfer their shares. However, this holds true for only equity shares (excluding preferential shares). Considering that NCLT has not passed any interim orders, just an undertaking to not file proceedings in other courts, such move may not be in ‘any’ violation,” said Chitlangi.
Apart from the $16 billion asking price, Tata Sons is an unlisted company and there is the question of liquidity in its shares. Secondly, the articles of association of Tata Sons imposes onerous requirements on shareholders. For instance, shares are to be sold only to other existing shareholders, or outsiders selected by the board. The board also decides the fair value of the shares, another article says.
Thus, unless the stake is broken up, only big pension funds and long-term investors can afford to pick up a stake in the holding firm. On 28 October Ratan Tata, chairman of the Tata Trusts, was seeking a partner to buy out the stake held by the Mistry family firms.
The Mistry family has held a stake in Tata Sons for at least 50 years and had a board seat in the holding company for a significant portion of them. When Cyrus Mistry was removed as director on 6 February, it was the first time in a decade that the Shapoorji Pallonji group did not have a representative on the board.
“On the face of it, the relevant article doesn’t violate any law. However, the judiciary will examine the same from the issue of principles of natural justice and oppression of minority,” said Gupta of SES. “At times, if minority becomes a hindrance, then it can also amount to oppressing the majority. An uncomfortable marriage needs to be dissolved in the best interest of all.”