The episode surrounding the Tata Group has taken further twists and turns. After several Tata Group companies expressed their support in favour of Mr. Mistry, who continues to be chairman of several of those companies, one company – Tata Global Beverages – adopted a different stance. In a board meeting held this week, the directors of Tata Global Beverages decided by a 7:3 majority to replace Mr. Mistry as chairman of the company. At one level, this might come as a surprise. Why did the board of this particular company adopt a stance that is different from the other companies? Is it possible that there could be divergence of opinion among the boards (particularly independent directors) of different listed companies within the Tata fold? Should there not be a uniform approach?
The answers to these questions lie in the fact that the board of directors of each of the Tata Group companies is bound by duties imposed under company law. In any actions they undertake, especially in crisis situations like the present one, they ought to be guided by those duties, which are now (at least partially) codified in section 166 of the Companies Act, 2013. According to this provision, a director must act in good faith for the benefit of the shareholders as a whole, and also in the best interests of the company. In addition, such director must also consider other stakeholder interests, a matter that I shall touch upon momentarily.
Interests of the Company or the Group?
It is an elementary principle of company law in India that directors owe their duties to the company, and not directly to shareholders. This includes the duty to act in the interests of the company. Although simple to begin with, the issue can get somewhat compounded in case of corporate groups such as the Tata Group of companies. The question then arises whether the directors of each of the group companies are to act in the interests of the company of which they are directors, or whether they are to act in the interests of the group as a whole. Here, the basic principle of company law that each company is a separate legal personality steps in. Hence, directors are to act primarily in the interests of the company as a separate entity. They may take into account the interests of the group as a whole, so long as those interests are consistent with, or operate in furtherance of, the interests of the individual company. If the group interests conflict with the interests of each individual company, then the directors must prefer the company’s own interests rather than the group.
Although these issues have not been put to significant test before Indian courts, they are coming alive in the Tata episode. Ultimately, the board of each company would have to take a decision that is in the company’s own interests. Some might see merit in aligning their own interests with that of the Tata Group (as the board of Tata Global Beverages has clearly done), while others may view the relationship as one of conflict whereby they will have to prefer their own interests and repose faith on the management of individual companies rather than the group as a whole (as some of the other companies have done).
Group considerations can be manifold. For instance, the support of a corporate group might be advantageous to a company in terms of raising finances, taking advantages of synergies within the group such as sharing of talent and other resources, use of a common brand. On the other hand, in some circumstances, being part of a group may turn out to be a hindrance if a company’s destiny is driven by group considerations. Ultimately, the board of each group company will have to decide, as some have already begun to, on what is in the best interest of such company.
Shareholder Interests: Short-Term or Long-Term?
Generally, in the case of solvent companies, the company’s interests tend to be synonymous with shareholder interests, although the reference is to shareholders as a collective body and not to each individual shareholder. However, there is less guidance when it comes to whether the shareholders’ interests need to be considered in the long term or the short term. Although this issue becomes more acute in the case of a takeover, the structure of the duties imposed on directors in section 166 of the Companies Act, 2013 seem to point towards the need to consider the long-term interests of the company (and hence the shareholders). Therefore, when directors consider their duties, they ought to keep a long-term perspective in mind, taking into account the interest of the present and future shareholders of the company in an extended time horizon. This is especially so in case of a corporate battle that is riddled with uncertainties regarding the future of the management.
Even though in the past it was open to directors to take into account the interests of stakeholders such as creditors, employees, consumers, environment and the community, it has now been imposed as a requirement by virtue of section 166. Hence, in taking any action, the directors must also consider these non-shareholder constituencies. For example, in the present scenario, the interests of the employees regarding the future prospects of the company become quite important. Similarly, the interests of banks and financial institutions as creditors to various Tata Group companies are crucial. Arguably, these are consistent with a longer-term outlook to be adopted by the directors. In that sense, there may be a great level of congruence between the long-term interests of the shareholders and those of the other stakeholders.
As would be evident from the above brief discussion, directors of each individual company within the Tata Group are faced with a number of considerations arising out of the present state of affairs. Although there is some level of guidance available under company law, it is arguably general in nature. Hence, the directors carry a daunting task of doing what is best for each company, by using its “long-term interests” as a touchstone. Unlike other jurisdictions such as the United States (Delaware) and the United Kingdom, there is scant guidance from the courts in enabling a more specific application of various directors’ duties. Hence, directors of the Tata Group companies will have to exercise their best judgment and in good faith, keeping in mind these broad principles. It is due to the subjective nature of this area of the law that we might see different approaches being taken by various Tata Group companies, as we have already witnessed.