Wednesday, July 12, 2017

Bombay High Court on the Permissibility of Shareholder Representative Suits

Bar & Bench yesterday reported that the Bombay High Court denied leave to certain shareholders of various Tata group companies to bring a representative suit that made certain legal claims in the aftermath of the ouster of Mr. Cyrus Mistry from the board of Tata Sons as well as other Tata group companies. The order of the court in Pramod Premchand Shah v. Rata Tata is now available.

Facts and Ruling

Various shareholders of Tata group companies brought a representative suit under Order 1 Rule 8 of the Code of Civil Procedure, 1908 (the “CPC”) against Tata Sons, its directors and various Tata group companies. The plaintiff shareholders’ claim was that Mr. Mistry was wrongfully ousted as the chairman of Tata Sons, which then led to his removal from the boards of various Tata group companies. These led to a massive decline in the share value of the Tata group companies. As a result, the plaintiff shareholders sought relief from the court to nullify Mr. Mistry’s removal and they also claimed damages in the sum of about Rs. 41,832 crores. The plaintiffs assert their rights as a representative of all “non-promoter shareholders” of the Tata group companies.

The plaintiff shareholders experienced temporary victory when on December 9, 2016 a judge of the Bombay High Court granted leave under Order 1 Rule 8 enabling them to pursue the suit on behalf of all interested persons. This is generally considered to be significant as the decision to grant leave in a representative suit is an important hurdle for plaintiffs to cross in such suits. This victory was short-lived as another judge of the Bombay High Court by way of the present order under discussion revoked the leave earlier granted to the plaintiff shareholders, thereby putting an end to the current set of claims.

The Court was largely concerned with the interpretation of Order 1 Rule 8, and whether all the shareholders of the various Tata group companies enjoyed the same interest. For this purpose, it would be useful to briefly set out the relevant text of Order 1 Rule 8, which is as follows:

One person may sue or defend on behalf of all in same interest.

(1) Where there are numerous persons having the same interest in one suit,--

(a) one or more of such persons may, with the permission of the Court, sue or be sued, or may defend such suit, on behalf of, or for the benefit of, all persons so interested;

The Court sought to analyse the background and the reason for the enactment of Order 1 Rule 8:

This scheme is an exception to the general rule that all persons interested in the suit must be made parties to it. The object of this exception is clearly to facilitate the redressal of grievances in which a large body of persons are interested, but where several practical difficulties would arise if every individual so interested were to either join in one suit or file a separate suit under the general rule. …

The Court placed considerable emphasis on the terminology used in the legislative provisions, which is “same interest in one suit”, and discussed relevant English case law at some length. Thereafter, it applied the principles to the facts of the present case.

At the outset, a distinction was sought to be made between rights and interest. All shareholders enjoyed the same rights in the form of proprietary interest in the shares they held in the various Tata group companies. However, when it came to interests, the shareholders were found not to enjoy the same level of commonality. The Court relied substantially on the perception that individual shareholders held not only on the events that transpired on the board of Tata Sons and other group companies, but also regarding the views of individual shareholders regarding the acceptability of the consequent decline in the market value of Tata group company shares. For instance, it was mentioned that long-term shareholders may not necessarily view the temporary decline in share values of the companies unfavourably. On this point, the Court concluded:

In short, each of the non-promoter shareholders in the present case may have the same type of proprietary right in the share and thereby, the same interest in protecting its value, but so far as the complaint of prejudice to that interest is concerned, other non-promoter shareholders may not have a common cause with the Plaintiffs. It is this prejudice or accrual of liability arising therefrom, which forms the subject matter of ‘interest in the suit’ and not the proprietary right per so or the interest in protecting its value. …

Similarly, the Court found a lack of commonality of interests in the two reliefs sought (as discussed above). For these reasons, it concluded that the requirements of Order 1 Rule 8 did not stand satisfied, and revoked the leave granted to the plaintiff shareholders.

Some Thoughts

At the outset, this decision calls into question several considerations that arise when some shareholders bring a collective suit to assuage the concerns of fellow shareholders with whom they share a similar interest. Usually, this also depends upon the type of suit or claim involved. Company law recognises specific types of shareholder suits. The first is an action for oppression or mismanagement that is brought directly by shareholders for their own benefit. It is uncommon for such actions to be brought on behalf of shareholders other than those who brought them. These rights are well-recognised under the Companies Act, 2013. The second is a derivative action, which is brought by some shareholders, but on behalf of the company. Such a claim is not codified in the Companies Act, 2013, and is still premised upon Order 1 Rule 8. As a co-author and I have argued in this paper, the representative suit under Order 1 Rule 8 is available for some shareholders (or other interest holders) to bring suits on behalf of others similarly situated, while a derivative action is brought on behalf of the company instead. Despite these incongruities, there seems to be no legislative momentum to codify derivative actions in India. Minority shareholders may instead derive some solace by the presence of the third type of action statutorily provided in the Companies Act, 2013, namely the shareholder class action. This is a direct action that shareholders can bring on behalf of the entire class, and the mechanism for the same has been elaborately set out in section 245.

The interesting aspect of the present suit initiated by the shareholders of the Tata group companies is that it falls in none of the well-recognised shareholder remedial mechanisms provided under company law. In other words, it appears to be a sui generis claim. Understandably, it is not structured as a derivative action because the benefits would have enured to the company rather than the shareholders, thereby defeating the purpose of their damages claim. It is not structured as a shareholder class action because that requires the support of at least 100 shareholders or those holding at least 10% of the share capital of the company. In the present case, obtaining the support of shareholders holding at least 10% of the share capital will be a daunting task, while obtaining the numerical support of shareholders may be more likely, if at all. Given the broad scope of claims that can be initiated through the class action mechanism, that may be a more appropriate route to follow in circumstances as the present one. On the other hand, even assuming the hurdle of obtaining leave of the court to bring a representative suit can be crossed, the substantive issues surrounding a sui generis claim could give rise to interesting but challenging legal issues.

On the substance of the Bombay High Court’s decision itself, there remains the issue of whether “perception” of shareholders can be treated as a significant criterion for determining whether they share a common “interest” for purpose of passing the bar set by Order 1 Rule 8. The difficulty with excessive reliance on perceptions is that they are bound to differ when one considers a group of persons such as shareholders. Some might be in favour of legal action, while others may not (and may even accept the circumstances as they are). Hence, caution needs to be exercised while using investor perception as a criterion to determine whether shareholders constitute a common interest group for bringing representative suits.

1 comment:

Ashwij Ramaiah said...

I think it is extremely disturbing that the court set such a high standard for what constitutes 'common interest'. According to this judgment, for all practical purposes, if an individual shareholder wants to bring a representative suit on behalf of 10000 other shareholders, then he/she has to prove beyond all reasonable doubt that ALL 100000 of them had the exact same interest arising out of the subject matter.

Not only is this practically impossible but also a marked deviation from the holding of Karia District Cooperation case. In this case, the court accepted without hesitation that vegetarianism is the 'common interest' of all jains with much less degree of proof.

Your thoughts on this sir?