The last few years have witnessed a dispute between two families that relate to the right to nominate directors to the board of Yes Bank. Earlier this week, the Bombay High Court issued its judgment in Madhu Kapur & Ors. v. Rana Kapoor & Ors., which seeks to resolve the dispute - at least temporarily - and in the process clarifies some areas of corporate law and contract law. In this post, I discuss the Court’s ruling on some key issues and their broader implications.
Although voluminous records and submissions were placed before the Court, the essential facts relevant to the key questions are indeed straightforward. The dispute relates to the right to nominate directors to the board of Yes Bank, one India’s leading private sector banks. The Reserve Bank of India (RBI) granted a banking licence to the promoters of Yes Bank in 2002. The original promoters of Yes Bank are Ashok Kapur and Rana Kapoor, two individuals related to each other by marriage. They invited subscription by Rabobank. Accordingly, Yes Bank was established with a 51% shareholding collectively by Ashok Kapur and Rana Kapoor (by themselves, through their family members and investment entities), and with a 49% shareholding by Rabobank. In terms of management, Ashok Kapur was the chairman of Yes Bank, while Rana Kapoor was the managing director. Yes Bank also completed its initial public offering in 2004.
Tragedy befell in November 2008 – which triggered the present dispute – when Mr. Ashok Kapur became victim to the terrorist attacks on Mumbai. After his death, Ashok Kapur’s shares in Yes Bank were transmitted to his wife Madhu Kapur and to their children Shagun Kapur and Gaurav Kapur. From that time, Ashok Kapur’s heirs, who are the plaintiffs in this suit, have been seeking nominations on the board of Yes Bank, including the nomination of Shagun Kapur. While Rana Kapoor is alleged to have made initial assurances to accommodate the plaintiffs’ request, he has thereafter steadfastly denied the availability of any such rights to the plaintiffs. By way of this suit, the plaintiffs have sought to enforce their rights in the articles of association of Yes Bank to nominate directors, including themselves, and also to challenge the appointment of certain existing directors of the bank, both whole-time and independent.
Articles of Association
Since the plaintiffs rely on their rights in the articles of association of Yes Bank, their terms are vital and hence discussed here. The articles confer special rights on the founder shareholders. Most importantly, article 110(b) provides that so long as the Indian Partners hold 10% shares in the company, they “have the right to recommend the appointment of three directors collectively referred to as the ‘IP Representative Directors’”. In addition, article 110(c) provides that Rabobank and the Indian Partners may recommend the names of Independent Directors to the nominations committee of Yes Bank. There is a different mechanism for appointing the first independent directors, which is not of immediate concern. By way of an amendment, article 127A was inserted to provide that subject to a recommendation made by the Promoters (an expression that has not been specifically defined), the board shall also appoint whole time directors. Finally, article 127 provides that the Indian Partners shall have the right to recommend the name of the chairman as well as the CEO/managing director, with the first occupants of these positions being Ashok Kapur and Rana Kapoor respectively. In all, the Indian Partners have rights to recommend the names of the chairman, CEO/managing directors, the IP Representative Directors, whole time directors and independent directors, thereby conferring upon their extensive rights over the constitution of the board of Yes Bank.
Even more crucial to the determination of the dispute at hand is the definition of the expression “Indian Partners”, which has been used in the relevant provisions discussed above. The expression has been defined to refer collectively to Ashok Kapur and Rana Kapoor, and individually to each of them. Furthermore, each of Ashok Kapur and Rana Kapoor has been defined individually “unless it be repugnant to the context, [to] mean and [include] his successors, legal representatives and assigns”. It is the interpretation of these provisions of the articles, especially the definitions, which strike at the heart of the dispute.
Issues and Decision
In his detailed judgment, Justice G.S. Patel sets out various issues for consideration and rules on those issues. Here, I summarise the key rulings and reasoning, and also analyse some of the key legal issues.
Personal or Proprietary Rights?
The core legal question relates to whether the bundle of rights conferred in the articles of association are rights personal to Ashok Kapur and Rana Kapoor as individuals, or whether they flow to their successors. If the rights are found to be personal, the plaintiffs cannot avail of those rights. If proprietary, they can exercise them.
From a substantive perspective, Justice Patel has approaches the question by examining the legal nature of the articles of association of a company. Given that they are nothing but a contractual arrangement between the parties, he proceeds to interpret the articles on similar lines as interpreting a contract. He finds no difficulty from the plain language of the articles that the rights in the articles are expressly available to “successors, legal representatives and assigns”. Moreover, the bundle of rights granted by the articles to the Indian Partners can be exercised by the individual specified or the successors, with the only exception being the appointment of the two individuals as chairman and CEO/managing director respectively. In interpreting the articles as a contract, Justice Patel pays regard to surrounding circumstances such as the conduct of the parties whereby Rana Kapoor had initially never denied the existence of the right of the plaintiffs. In essence, the Court came to the conclusion that the rights in the articles are not personal to Ashok Kapur and Rana Kapoor and that they can be exercised by their successors, thereby indicating the proprietary nature of those rights.
Manner of Exercise of Rights
The next question relates to the precise manner in which the Indian Parties can exercise the rights in the articles. More precisely, it relates to whether they can be exercised jointly or individually. Here, the Court was emphatic in its conclusion that the right can only be exercised jointly. Justice Patel observes (at para 8.44):
This takes us immediately to the second question: how is that right to be exercised? I believe this question more or less answers itself. The right in Articles 110(b), 127(b) and 127A(a) must be exercised jointly or not at all. Nothing in either of those Articles lends itself to an understanding that each Indian Partner was entitled to exercise that right unilaterally, i.e., to the exclusion of the other. In fact, this follows directly from my conclusion that the right was not personal to the two individuals in question but accrued and accrues also to their successors. The words in the clauses do not employ the disjunctive at any stage. Nothing suggests that Ashok Kapur and Rana Kapoor each were entitled to a separate exercise of the right.
In buttressing this point further, Justice Patel envisages a scenario where Ashok Kapur may have survived. Even then, he concludes, the core of the matter would lie in how any disagreement between him and Rana Kapoor would be resolved. They were entitled to exercise the right jointly and not individually, and the fact that the rights have now flown to the successors ought not to make a difference. Hence, the right can only be exercised jointly by Ashok Kapur’s successors and Rana Kapoor, and never singly.
The relevant articles permit the Indian Parties to “recommend” individuals for appointment as directors. The Court was concerned with the precise remit of this right, and whether it amount to making a mere suggestion as to individuals who may be considered for appointment by the company, or whether they amount to nomination of those individuals. It concludes that if the right were merely one of making suggestions, it was available in any event and need not have been contained in the articles. Hence, this can only be a right to nominate. Of course, in the end the nominees must be appointed in the manner prescribed by law, which includes obtaining the approval of the shareholders and the requisite clearance from the RBI as required for banking companies.
One legal question that arose is whether by considering the nominations of the Indian Parties, the board of Yes Bank is fettering its discretion that thereby amounts to a breach of the directors’ fiduciary duties. The Court concludes there is no such fetter on discretion since the actions of the board are subject to the articles. Attention was drawn to section 179(1) of the Companies Act, 2013 that deals with the allocation of powers between the board and the shareholders, which makes the power of the board subject to the articles. In any event, the board was not required to accept all nominations, particularly if the candidates were found not to be qualified or suitable for the director post. Moreover, the Court reemphasized the role of nominee directors whereby their allegiance is primarily to the company and not to the shareholder that nominated them.
Based on the conclusions arrived at on the principal issues, the Court then goes on to consider whether appointments already made to the Yes Bank board in alleged violation of the nomination procedure set out in the articles are valid. While the Court considers each director’s case separately, here I discuss some of the principles emanating from that in a consolidated fashion. The first issue pertained to the reappointment of Rana Kapoor as managing director. While the plaintiffs made a number of arguments alleging the invalidity of his appointment, including on account of non-compliance with the provisions of the Companies Act, 2013 pertaining to related party transactions, the court refused to entertain those objections at this stage.
In respect of certain other directors who were treated as IP Representative Directors, where there was a unilateral nomination by Rana Kapoor under the articles, the Court invalidated their appointment. With respect to certain independent directors, at an annual general meeting they were ‘treated’ as independent and as not being liable to rotational retirement. The Court concluded that as a matter of law these directors ought to have been appointed by a shareholders’ resolution by virtue of section 152(2) of the Companies Act, 2013, and their placement on the board was carried out in a manner unknown to law. Similarly, it was found that certain whole-time directors were yet to be approved by the shareholders.
Finally, and most importantly, the board considered the nomination of Shagun Kapur as a director. This was found not to comply with the “joint” nomination requirement under the articles as earlier enunciated by the Court. Furthermore, the Court refused to be drawn into a discussion of the actions of the nomination committee in rejecting her candidature or in evaluating her credentials on the merit. Rightfully, the Court declined to sit in judgment over such matters, as they are not within its purview. Consequently, the court concluded that the plaintiffs are not entitled to a reserved seat on Yes Bank’s board.
The dispute between the parties is replete with a number of legal issues, which are of importance. While the issues were rather straightforward, the detailed facts, background and documentary evidence made its resolution rather complex. In all, the Court applied legal principles and techniques of contractual interpretation to resolve the dispute at hand. In that sense, the Court’s effort was to apply the law to the facts of the case at hand, which it did so in an astute manner, but it is hard to say that the legal issues themselves were controversial enough for the Court push the boundaries of the law by laying down new principles.
In terms of broader implications, the dispute at the outset and the judgment underscore the importance of the articles of association of a company, particularly when there are special provisions among identified shareholders, as was the case here. It is usually not the case that sufficient attention is paid to detailed drafting of the articles, but this dispute would caution against that approach. In this particular case, however, there is no indication of inadvertence in drafting the articles, in as much as the Court observes (in para 8.27) that the articles are cautiously worded and that parties must have intended what they meant.
Continuing with the articles, one issue that has not found mention is a principle that emanates from common law that prescribes the type of rights that are enforceable when found in the articles of association. Known as the qua member rule, it prescribes that a shareholder can only enforce “membership” rights and not other rights that are contained in the articles. English cases have sought to elaborate on this rule, although none have actually attempted to define a membership right. Although this approach of constricting the enforceable rights in the articles has attracted its own share of criticism, the courts have not rejected it. On a wider plane, membership rights will include the right to receive dividends (when declared), the right to attend and vote at shareholders’ meetings and similar rights that are intrinsically associated with being a shareholder of a company. Whether the right to nominate directors is a membership right is a questionable proposition.
In terms of the final outcome, it is a pyrrhic victory of sorts for both sides. While the Court has confirmed the availability of the basket of rights in the articles to the plaintiffs, they cannot exercise that unilaterally. They will necessary have to exercise it jointly with Rana Kapoor. In that sense, the judgment has not resolved the dispute, and the impasse would continue. What it has achieved is to clarify the relative legal rights of the parties, which would provide a platform on which the parties may take further efforts to break the deadlock. As the Court has observed, an ultimate breakthrough can be achieved only when the articles are amended to untangle the situation.
 Rayfield v Hands  Ch 1; Eley v Positive Government Security Life Assurance Co Ltd (1876) 1 Ex D 88 (CA); Hickman v Kent or Romney Marsh Sheepbreeders Association  1 Ch 881.
 See, RR Drury, “The Relative Nature of a Shareholder’s Right to Enforce the Company Contract” (1986) 45 Cambridge Law Journal 219-246.