Zee Vs Invesco: Invesco's Arguments Against Bombay High Court Stay On EGM
Invesco's arguments against Justice Patel's stay on the Zee Entertainment EGM requisition.
Last week, Invesco Developing Markets Fund concluded its arguments before the Bombay High Court over a challenge against the single judge's order granting an interim injunction in favour of Zee Entertainment Enterprises Ltd.
The submissions were made before a division bench of Justice SJ Kathawalla and Justice Milind N Jadhav.
On Oct. 26, the high court had granted an injunction in favour of Zee Entertainment restricting Invesco to act on its September requisition to call an extraordinary general meeting.
Invesco and OFI Global China Fund LLC, both foreign institutional investors that together hold a 17.88% stake in the media company, are locked in a dispute with Zee Entertainment's current board and Managing Director and Chief Executive Officer Punit Goenka. The two funds are seeking to oust Goenka and appoint six new independent directors via an EGM.
Here are the main arguments made by Invesco challenging the stay order, based on written submissions and the hearings:
No Jurisdiction For Single Judge To Grant Stay
Questioning the jurisdiction of the high court in entertaining Zee Entertainment's plea, Invesco argued that civil courts don't have the jurisdiction to hear matters that fall under the National Company Law Tribunal's domain, according to Section 430 of the Companies Act.
Invesco had moved the NCLT, Mumbai seeking to conduct the EGM as the tribunal is empowered to call, hold or conduct an EGM, it said. This has been envisaged under Section 98 of the Companies Act.
If Zee wanted to oppose the holding of EGM, then it could have moved the NCLT, which is empowered to decide on such objections, and not the high court.
Since the appellants had already filed an application under Section 98, it is the NCLT who is empowered to decide whether or not to call hold or conduct a meeting, the bar under Section 430 of Companies Act, 2013 is attracted. The jurisdiction of civil courts is accordingly ousted.Invesco Developing Markets Fund Appeal
On jurisdiction, Justice Gautam Patel of the Bombay High Court had ruled that the NCLT rules framed by the central government provide the list of provisions over which the NCLT/NCLAT has jurisdiction and this does not include Section 100 [calling an EGM], among others.
Invesco argued against this in its appeal to the division bench. The government rules framed for the NCLT cannot override Section 430 and more so, there are no such rules which set out the list of matters over which the NCLT has jurisdiction, Invesco said.
EGM Requisition Can Only Be Tested On Numerical Threshold, Procedure
Two pertinent questions that Justice Patel considered in the stay order were whether the court can restrain calling an EGM and whether it is permitted to review the subject matter of the resolutions proposed for the EGM.
Backed by judicial precedents, Invesco had argued before the single judge that the "validity" of a requisition issued under Section 100(4) can be tested only against prescribed numerical and procedural requirements. And not with reference to its object.
As the corresponding provision to Section 100 of the 2013 Act is Section 169 of the Companies Act, 1956, Invesco had relied on the decision in the case of LIC versus Escorts to strengthen its argument.
However, the single judge rubbished this on two grounds—one, that the above decision was made under the 1956 Act, which did not demarcate listed and unlisted companies as the 2013 Act does; two, the issue in the precedent was on mala fides, not about legality of the resolutions proposed at an EGM.
Saying the view of the single judge is erroneous, Invesco in its appeal stated that Section 100 of the 2013 Act, too, doesn't distinguish between listed and unlisted companies.
Also, there is no other provision in the 2013 Act which creates a separate mechanism for the calling, holding, or conducting meetings of public listed companies, it said.
The term "valid" requisition, under the 1956 Act, has been construed in a restrictive manner. If the legislature wanted to alter this term, it could have done so, while enacting the 2013 Act, it further submitted.
If the legislature wanted to alter or expand the interpretation of the word “valid” whilst enacting the Companies Act, 2013, it could have done so as in the manner which the Impugned Order incorrectly seeks to do.Invesco Developing Markets Fund Appeal
Can Courts Look Into Legality Of Shareholders' Resolutions?
Justice Patel's finding that Indian courts are not precluded from looking into the legality of the proposed resolutions is faulty and contrary to the law laid down by the Supreme Court, contended Invesco.
The single judge had come to this conclusion after referring to a U.K. decision under the U.K. Companies Act, 2006, which provides that a resolution can be properly moved at a requisitioned meeting unless it would, if passed, be ineffective.
Though there is no similar provision under the Indian Companies Act, Justice Patel proceeded to apply this U.K. principle.
I see no reason to hold that Indian company law should be in departure from a general, and evidently salutary provision, merely because it has not made this aspect a part of the code.Bombay High Court Order On Zee Vs Invesco - By Justice Patel
This is in stark contrast with the Indian Companies Act, 2013, argued Invesco.
The very question of the single judge—can a court be asked to assess the validity of the resolutions proposed at the requisitioned EGM itself is wrong, the appeal said.
NRC Approval Not Required, Says Invesco
The effect of the single judge's order is that the shareholders cannot add six directors and remove Punit Goenka because they don't have approval from Zee Entertainment's nomination and remuneration committee. However, Invesco challenged this arguing that shareholders don't need the committee's approval as they have an absolute right in calling an EGM. In fact, the committee's role is quite limited—it cannot curtail the right of shareholders.
This apart, Justice Patel ruled that Goenka cannot be removed as a director because it would leave a "managerial void" as he is the only whole-time director in the board, which also has six other independent directors.
Countering this, Invesco said Goenka would be removed only in the capacity of a director and not as the chief executive officer. CEO is one of the whole-time managerial positions stipulated by Section 203 of the Companies Act.
Even if there is a void, Zee would have six months to fill that position, it said.
EGM Not Affected By MIB Approval
The requirement to obtain prior approval from the Ministry of Information and Broadcasting before effecting a change in the board is key, Zee Entertainment had presented as its argument against an EGM. Justice Patel agreed and said since the ministry's approval wasn't sought, it would make Invesco's proposed resolutions illegal.
To this point, Invesco said that right of the shareholders to remove directors at a requisitioned general meeting is not affected by the MIB regulations of approval.
The MIB guidelines don't prohibit shareholders appointing or removing directors; it only requires prior permission before such appointment is made effective, it said.
Shareholders' EGM Resolution Not Be Discredited
Adding on to its array of arguments, Invesco contended that the single judge had committed a fundamental error in ruling that there is no difference between shareholders' resolutions calling for an EGM and those proposed by the board itself.
If shareholders are trying to raise an issue by calling an EGM, it should not be discredited due to a technicality, said Invesco. This is because of the following reasons:
The majority shareholders in a company have the power to appoint, by election, directors of their choice and the power to remove them by moving a resolution.
And, an injunction cannot be granted to stay the conduct of a general meeting to remove a director.
Every shareholder has the right to call an EGM in accordance with the Companies Act and they cannot be restrained from doing so.
As per the Companies Act, shareholders while calling an EGM don't have to disclose reasons for moving the resolutions.
Invesco also contended that the board cannot sit in judgment over any matter in consideration for which a meeting has been requisitioned.
To reiterate, shareholders holding 10% or more of the paid-up share capital are allowed to requisition for an EGM. This is essential to maintain corporate democracy apart from keeping a check on the board of directors, Invesco argued.
This is a paramount right of a shareholder in a corporate democracy. By the exercise of this right, shareholders can check the constitution of the Board and the continuance of a particular director.Invesco Developing Markets Fund Appeal
This, in fact, was the rationale for conferring this right on shareholders in the first place i.e., to secure the calling of an EGM despite an unwilling board, Invesco maintained.
Ultimately, Invesco said that the resolutions in the requisition are only a proposal, the fate of which is left entirely to the shareholders' wisdom.
Zee is expected to commence its counter arguments on Dec. 13.