Sunday, May 11, 2014

Court-Convened Meetings and Postal Ballot

Background

In one of the first few cases interpreting the provisions of the Companies Act, 2013 (the 2013 Act), the Bombay High Court last week issued its judgment on the use of postal ballot facility at a court-convened meeting to consider a scheme of arrangement. In re Godrej Industries Limited, the court was concerned with a scheme of amalgamation of Wadala Commodities Limited into Godrej Industries Limited under sections 391 to 394 of the Companies Act, 1956 (the 1956 Act).[1] The narrow question at the initial stage for summons for direction to convene the meetings was “whether in view of the provisions of Section 110 of the [the 2013 Act] and SEBI Circular dated 21st May 2013, a resolution for approval of a Scheme of Amalgamation can be passed by a majority of the equity shareholders casting their votes by postal ballot, which includes voting by electronic means, in complete substitution of an actual meeting. In other words, whether the 2013 Act, read with various circulars and notifications, has the effect of altogether eliminating the need for an actual meeting being convened.”

The court answered this question in the negative to effectively find that while the mechanism of postal ballot (which includes electronic voting) ought to be offered as an additional facility for voting by shareholders, that cannot do away with the need for conducting a meeting. In arriving at this conclusion, the court considered various aspects of the purpose and conduct of shareholders’ meetings, issues of corporate law and governance contained in the 2013 Act as well as various SEBI circulars.

Reasoning

Even though the issue at hand was quite focused, the opinion of the court rendered by Justice G.S. Patel is elaborate and insightful on various legal and practical matters involving shareholder rights and corporate democracy (and hence I have taken the liberty of extracting some of the important observations). Some of the key issues considered are as follows:

Purpose and Importance of a Meeting

One consideration before the court was whether the purpose of corporate democracy is to simply permit shareholders to cast their vote or whether it was still important to hold a meeting of shareholders so as to enable them to deliberate on the issues and express their opinions. If deliberation is a crucial aspect of corporate democracy, then even where a postal ballot is provided for it is not possible to avoid a meeting altogether. The court expressed its views in the following manner:

We must remember that at the heart of corporate governance lies transparency and a well-established principle of indoor democracy that gives shareholders qualified, yet definite and vital rights in matters relating to the functioning of the company in which they hold equity. Principal among these, to my mind, is not merely a right to vote on any particular item of business, so much as the right to use the vote as an expression of an informed decision. That necessarily means that the shareholder has an inalienable right to ask questions, seek clarifications and receive responses before he decides which way he will vote. It may often happen that a shareholder is undecided on any particular item of business. At a meeting of shareholders, he may, on hearing a fellow shareholder who raises a question, or on hearing an explanation from a director, finally make up his mind. In other cases, he may hold strong views and may desire to convince others of his convictions. This may be in relation to matters that are not immediately obvious to the shareholder merely on receipt of written information or a notice. The right to persuade and the right to be persuaded are, as I see it, of vital importance. In an effort for greater inclusiveness, these rights cannot be altogether defenestrated. To say, therefore, that no meeting is required and that the shareholder must cast his vote only on the basis of the information that has been send to him by post or email seems to me to be completely contrary to the legislative intent and spirit to the express terms of the SEBI circular and amended Listing Agreement’s Clauses 35B and 49.

Hence, the purpose of shareholder democracy is not simply to exercise franchise but to meet, deliberate, persuade and be persuaded as a collective, which is possible only when the facility of a meeting is provided, and not simply when each shareholder casts a ballot in isolation without interaction.

Possibility of Amendments

An important aspect of shareholder right is the ability to propose amendments to resolutions put forth at a meeting. The court found that if the only facility provided is postal ballot without a shareholders’ meeting, then it would take away the power of directors or shareholders to propose amendments, as a result of which the resolution can only be put to vote as originally proposed. This is not desirable. The schemes of both the 1956 Act as well as the 2013 Act provide that schemes are “subject not only to approval by voting but also, possibly, to an amendment at the meeting itself”. The ability to decide upon the scheme along with amendments is important for achieving a meeting of minds, especially on crucial matters such as the share exchange ratio.

Broader Corporate Governance Concerns

The court also expressed its views on the broader governance impact that necessitates greater shareholder participation in companies, especially on crucial matters such as amalgamations.

Nothing could be more detrimental to shareholders’ rights than stripping them of the right to question, the right to debate, the right to seek clarification; and, above all, the right to choose, and to choose wisely. A vote is an expression of an opinion. That vote must reflect an informed decision. Dialogue and discourse are fundamental to the making of every such informed decision. [Counsel’s] submission seems to me to relegate shareholders, in the guise of greater inclusiveness, to a very distant second place in the scheme of corporate governance, seeing them merely as a necessary evil. Nothing could be further from the mandate of corporate law and governance. We strive today to greater transparency; that means that more should be given the opportunity to speak and to exercise their rights as shareholders. But that cannot come at the price of their right to speak, to be heard, to persuade, even to cajole. What corporate governance demands is the government of the tongue, not the tyranny of a finger pressing a button.

Electronic Voting at the Meeting

The court held that the facility of electronic voting must be made available at the meeting itself for those who wish to attend and vote at the meeting. In other words, electronic voting is not limited only to those who are unable or unwilling to attend the meeting. The objective behind this situation is that “[g]reater inclusiveness demands the provision of greater facilities, not less; and certainly not the apparent giving of one ‘facility’ while taking away a right.” Based on the court’s reasoning, the voting options available to shareholders are as follows:

1.         Shareholders may exercise their votes through postal ballot or electronic votes in advance and not attend the physical meeting;

2.         Shareholders may exercise their votes through postal ballot or electronic votes in advance and nevertheless attend and speak at the physical meeting so as to be able to persuade the other shareholders as to their point of view on matters discussed at the meeting (but they cannot vote again at the meeting);

3.         Shareholders may attend and speak at the meetings, and then vote electronically at the meeting itself.

This way, there could be a “single integrated system of voting” for all shareholders who exercise their votes, whether or not they attend the meeting.

Notification of Rules under the 2013 Act

Finally, the court was confronted with some procedural issues relating to the notification of various provisions of the 2013 Act as well as the Rules thereunder. It observed:

A final word about the manner in which these rules and sections are purportedly being brought into force. The website of the Ministry of Corporate Affairs has, on its front page, a link to a single scanned PDF file entitled “COMPANIES ACT 2013 - STATEMENT OF NOTIFICATION OF RULES”. Some 21 rules are listed. They are all said to be effective 1st April 2014. Several of these are not yet gazetted; at least I have not been able to find any gazette. I do not see how any such rules can be made effective on this basis where a ministry simply puts up some scanned document under the signature of one of its officers but sans any publication in the official gazette. That publication is not an idle formality. It has a well-established legal purpose. That purpose is not and cannot be achieved in this ad-hoc manner. Therefore, till such time as these rules are gazetted, or there is some provision made for the dispensation of official gazette notification, none of the rules in the Ministry of Corporate Affairs PDF document that are not yet gazetted can be said to be in force. [footnotes omitted]

These are significant questions, which will require urgent attention of the Ministry of Corporate Affairs (MCA).

Analysis

The judgment of the Bombay High Court is a significant one as it clarifies the rights of shareholders to attend and vote for (or against) resolutions proposed by the company, especially in the case of court-convened meetings for schemes of arrangement (and amalgamation). The courts grants wide amplitude to shareholder franchise and re-emphasises that the methods of voting are a facility provided to shareholders that cannot be circumscribed. Moreover, it highlights the importance of deliberations at a general meeting and the power of persuasion, both of which cannot be treated as empty formalities. This judgment also provides further impetus to shareholder participation in corporate decision-making, which is an important component of the overall phenomenon of shareholder activism, which is gaining ample momentum in the Indian context.

Furthermore, the judgment also raises questions regarding the implementation of the 2013 Act and highlights some key gaps such as the notification of the Rules. Such matters require urgent regulatory attention.

Although the judgment is only at the initial stage of summons for directors (for convening class meetings in a scheme of amalgamation), it raises significant issues that are pertinent more generally to similar cases. The fact that the court has observed that the matter requires fuller consideration and has sought to hear various interested parties such as the Registrar of Companies, the Central Government (through the Additional Solicitor General) and SEBI suggests that the issues will be subject to still further scrutiny. The wider ramifications of the judgment are evident in the observations of the court that “[o]n a prima-facie view that the elimination of all shareholder participation at an actual meeting is anathema to some of the most vital of shareholders’ rights, it is strongly recommended that till this issue is fully heard and decided, no authority or any company should insist upon such a postal-ballot-only meeting to the exclusion of an actual meeting.” 


[1] The scheme was considered under these provisions of the previous 1956 Act as they continue to be in force. The equivalent provisions of sections 230 and 232 of the new 2013 Act are yet to come into force.

4 comments:

zacarias said...

By extending the reasoning of requiring a gazzetted notification of the Rules in order for them to be in force, would the notification bringing into force the substantive provisions of the Act also need to be by way of a gazzetted notification?

RNS said...

Good judgment

Vatsala said...

Sort of unrelated, but isn't this is the first case on the new Act (and not amongst the first few cases)?

Umakanth Varottil said...

@Vatsala. That might very well be the case, although we have no way of confirming if any decisions have been issued by any of the other High Courts in the interim.