Daniel Albuquerque explains that business contracts, just like the matrimonial ones, can be dissolved with due legal processes. The analogy of the frayed relationships in a marital divorce illustrates the pain of the dissolution of a business relationship. For the affected are not only the legal entities but also the stakeholders – promoters, employees, shareholders, the government and the people.
The Parties to the dispute: The Tata Group (Tata) and Shapoorji Pallonji Group (SP Group).
The Case History: Tata Sons versus Shapoorji Pallonji is a very big corporate dispute. It is going to end. The two giant entrepreneurships were cemented together 70 years ago, in the early years of India’s independence, fired by an idealism to advance the enterprise of the young democratic republic. After the progress and prosperity of all these years, it is time to part. Here is the story and a couple of lessons for other entrepreneurs.
Tata Group, founded in 1862 by Jamsetji Tata has grown into a worldwide conglomerate affecting the lives of the people of not only India but the world. While every industry sector has been well covered with a wide range of verticals, at the same time it has an extensive philanthropic network across the globe. The Tatas operate on twin models that are unique in the world: it is owned by charitable trusts of the family, which is a means to fulfil the noble purpose of investing in people; its business model consists of value creation for stakeholders and corporate citizenship which allows every company in the group to strive for excellence. Ratan Tata has been the chairman of the Group for over two decades; although doesn’t hold this position presently, but he is still the Pater Familias – the father figure of the Tata industrial family who still holds and exercises his moral authority over the entire conglomerate. The Tata board, after much deliberation, had appointed Cyrus Mistry, a non-Tata as the Chairman of Tata Group and successor to Ratan Tata in December 2012.
Shapoorji Pallonji Group is a conglomerate with worldwide focus on infrastructure, industrial engineering and real estate. It was founded by Pallonji Mistry, the grandfather of Cyrus Pallonji Mistry, the party to the tussle with the Tatas, in 1865. Thus, both the great entrepreneurial groups started their ventures merely three years apart. Jamsetji Tata and Pallonji Mistry were not only friends but also related to each other through several family liaisons. Seventy years ago both the families joined together in the enterprise of Tata Sons, the largest component of the Tata Group as a minor shareholder. The large family of Tatas hold 81% of the shares while the SP Group 18%. Presently, this partnership is going to be dissolved as per SP Group’s submission before the Supreme Court of India. The Tata Group is going to accomplish it by buying back the shares as it has deposed before the said Apex Court.
Causes of Dispute and Respective Positions:
S P Group: Cyrus Investments Pvt. Ltd., and Others versus Tata Sons Ltd., and Others on 18 December, 2019 – Company Appeal (AT) No. 254 of 2018 in National Company Law Appellate – the position of the SP Group becomes clear. a) On 24 October 2016, Cyrus Mistry, the chairman, is dismissed by the Tata Sons Board. The appellant, SP Group felt it as grievance and moved application under Sections 241 and 242 of the Companies Act, 2013, the sections are concerned about the oppression of the minority shareholder and the ground for appeal under the power of the Tribunal, respectively.
Section 241 of the Act reads as: Any member of a company who is of opinion that (a) The affairs of a company are conducted in prejudice to public interest, any member or company’s interest, or (b) any material change, not being a change brought about by or interest of creditors that can be through an alteration in the board of directors or managers or in the ownership of the company’s shares; if it has no share capital, in its membership; or in any other manner.
Tata Group: The defendant argued that the removal of the executive chairman is a matter of directorial complaints under Sections 254 and 268; in other words not within the scope of 241 of the Companies Act, 2013. Further, in the close to four years of Mistry’s tenure had lost complete trust of the Tata Trusts, the majority holders, and had failed to deliver all that was stated in the terms and conditions accepted at the time of appointment. Mistry also failed to lead the Tata Group in a cohesive manner as exhibited by unilateral and harmful decisions and did not deliver as a leader to maintain the ethos of the company.
What then follows is a corporate saga rarely witnessed in Indian business world. Allegations and counter allegations followed, suits and counter suits were filed against each other. The Mistry camp accused Tatas of high-handedness and refusal to change according to modern needs and setting up of efficient corporate systems. The Tatas defended that the Group will not budge from the basic principles of ethical standards which have set them apart as a caring and compassionate corporate house. However, the above cited case in the NCLAT, although given its major part of the judgment, which it kept at abeyance but reinstated Cyrus Mistry as Chairman for the next four months, until his term would end.
The Cyrus Capitulation and Tata Buyback Run: Post judgment in December 2019 brought gloom and dismay to Cyrus and in early January 2020 he gave up; he declared he didn’t want to be the Chairman. Some more to-and-fro run to the Supreme Court of India exacerbated the patience of SP Group. At the same time Cyrus was aware of the Pallonji family’s self-esteem and would explore options to claim his rights as minority shareholder. After due consideration, finally the decision to exit from Tata Group was taken and was conveyed to the Supreme Court in the final week of September 2020. The Tata Group approached the Court with the offer to buyback SP Group stakes.
But staking the claim for SP Group is not easy even for the Tatas if it is Rupees Two Lakh crores! The Tatas will bargain, of course – that would be a long and arduous ride of valuation and negotiations from professionals. Corporate India will be watching it with bated breath for several months after the process begins. While Cyrus the Chairman of the SP Group will aggressively pursue his goal to strike the bargain in his family’s favour, the onus of guiding the Tata Group is upon the new Chairman of Tata Group N Chandrasekaran who has for over three decades held top leadership positions in one or the other Tata Group of Companies.
Until then there is enough opportunity for the companies, whether big or small to look at themselves, their governance structures and above all their vision and mission that anchors their enterprise. From the SP Group the lesson to be learnt is take the litigation path only as a last resort. From the Tata Group it is to hold on to the fundamental principles of the organization as would a democratic country hold on to its ‘basic structure’ of the constitution.
