New Delhi: The latest dispute between Tata Trusts and Tata Sons over the reappointment of N Chandrasekaran has brought renewed focus on a crucial aspect of the Supreme Court’s 2021 judgment in the Tata-Mistry battle.
The immediate trigger for the current dispute is the Tata Sons board meeting that considered Chandrasekaran’s reappointment. The proposal secured approval through a 4-1 majority vote.
Noel Tata, who serves as chairman of Tata Trusts and is a Trusts nominee director for Tata Sons board, voted against the proposal, while the other Trust nominee director voted in favour. The split among the Trusts nominees has now become the basis of Tata Trusts’ challenge to the decision.
Tata Sons, the holding company that sits at the apex of the Tata business empire, is itself majority-owned by philanthropic trusts (principally the Sir Dorabji Tata Trust and the Sir Ratan Tata Trust). Together, these trusts hold roughly 66 percent of Tata Sons. In other words, while Tata Sons holds controlling stakes in the group’s operating companies, the Tata Trusts exercise significant influence over Tata Sons through their majority shareholding.
The origins of the 2021 Supreme Court ruling lie in the dramatic fallout between Cyrus Mistry and the Tata Group. In October 2016, Mistry was removed as the executive chairman of Tata Sons, a move he challenged before the National Company Law Tribunal (NCLT).
The challenge was not limited to his removal. It also attacked the governance structure of Tata Sons, particularly the special rights enjoyed by Tata Trusts under the company’s Articles of Association. He alleged oppression and mismanagement, arguing that Tata Trusts exercised excessive control over the company through provisions that gave Trust-nominated directors a decisive say in key decisions.
The NCLT in 2018 dismissed Mistry’s claims, holding that Article 121 was not oppressive and that Tata Trusts’ special governance rights were valid.
But in 2019, the National Company Law Appellate Tribunal (NCLAT) reversed the decision, and reversed the decision questioning the effect of Trusts’ affirmative voting rights.
However, in March 2021, the Supreme Court overturned that decision, restored the Tata Sons governance framework and upheld the legality of the Trusts’ special rights.
One of the central issues before the Supreme Court was whether the special governance protections available to Tata Trusts, particularly under Article 121, were incompatible with modern corporate governance principles.
Also read: Tata Trusts challenges Chandrashekhar’s reappointment. ‘Condition failed, & so did resolution.’
The striking similarities
The present dispute bears a striking resemblance to the issues that reached the Supreme Court in the Tata-Mistry litigation. In that case, the battle ultimately arose from the removal of Mistry as Executive Chairman of Tata Sons.
The current controversy may concern the reappointment of Chandrasekaran, but the underlying legal issue is remarkably similar. Both disputes revolve around board resolutions relating to the leadership of Tata Sons and more fundamentally, around the extent of Article 121.
Article 121 of Tata Sons’ Articles of Association provides that certain board decisions require not merely a majority vote of directors but also the affirmative approval of a majority of the Trust-nominated directors.
Ordinarily, a board resolution succeeds if a majority of directors vote in its favour. Article 121 introduces an additional layer of approval. For matters covered by the provision, board approval alone is not sufficient; there must also be support from the directors nominated by Tata Trusts.
Tata Trusts is now arguing that because the two Trust nominees voted differently on Chandrasekaran’s reappointment, the affirmative-vote requirement recognised by the Supreme Court was not fulfilled. Tata Sons, on the other hand, relies on the fact that the board itself approved the proposal by a clear majority.
These provisions were extensively challenged during the Mistry litigation. They argued that the affirmative-voting mechanism undermined board independence and effectively transferred control from the board to Tata Trusts. According to that argument, modern corporate governance requires directors to act independently rather than remain tied to the interests of those who nominated them.
The Supreme Court rejected those arguments. It held that affirmative voting rights are not unusual in corporate governance structures and are frequently employed around the world to protect the interests of significant shareholders.
In a language that has now become central to Tata Trusts’ position, the court observed that “affirmative voting rights for the nominees of institutions which hold majority of shares in companies have always been accepted as a global norm”.
Court emphasised that a shareholder or a group of shareholders who constitute majority, can always seek to be in the driving seat by reserving affirmative voting rights. So long as these special rights are incorporated in the Articles of Association and so long as they are not in contravention of any of the provisions of the Act, the same cannot be attacked on these grounds.
The Court also addressed the broader corporate governance argument raised by Mistry’s side. It acknowledged that company law places fiduciary duties on directors and expects them to act in good faith. It, therefore, found “nothing abhorring” in the validity of the affirmative voting rights granted to Trust nominees.
The court noting the previous NCLT decision held that the Articles formed a binding contract among shareholders and that the provisions granting affirmative rights to Trust-nominated directors were neither illegal nor oppressive.
This is precisely why Tata Trusts is relying on the 2021 judgment today.
(Edited by Ajeet Tiwari)
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