PremiumA high court ruling on Zee didn’t just pre-empt a shareholder vote on the basis of its potential ramifications, odder still, it spoke of saving a company from its owners. It’s time for clarity
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Pardon observers for being more than just a little confused about the application of India’s company law by courts in the country. Consider the sorry spectacle that has become of a legal battle between the management of Zee Entertainment Enterprises Ltd and the Invesco combine that owns almost 18% of Zee’s stock and recently pushed for a shareholder vote to recast its board and oust its chief, Punit Goenka, amid a takeover tussle. After the National Company Law Tribunal ruled in Invesco’s favour, Zee appealed against such a poll at its appellate body as well as the Bombay high court. As Invesco had more than a tenth of Zee shares needed to call for a vote, the high court nudged the broadcaster last week to hold one. This was a “democratic right" of owners, it had observed, saying it would be a “dangerous precedent" for courts to judge the merits of a proposed resolution—a reference to the ouster move that Zee argued would result in multiple legal violations. On Tuesday, however, the same court upheld Zee’s contention and ordered an interim injunction against putting Invesco’s proposal to shareholders. It is unclear what this means for appellate court proceedings, but the muddled signals sent out should worry us.
Both adversaries appear to be in a race against time. Invesco probably wants a vote held before year-end, after which a voting-rule change for directorships might complicate its endeavour, while Zee’s top brass seems in a rush to seal a merger with Sony. If Zee’s board were to be reconstituted and its chief executive voted out without a replacement (or a whole-time director in place), the company would be left headless and hence fall afoul of Indian law, the high court held, pointing to other prospective offences. “Shareholder primacy or dominion does not extend to permitting shareholder-driven illegality," said its order. That a ruling like this was passed even before any legal perplexity got a chance to arise, though, was rather strange. That an analogy was drawn with a hypothetical gambling proposal by imagined shareholders was even stranger. The strangest part of all was a general observation by the court: “Sometimes, it happens that a company must be saved from its own shareholders, however well-intentioned." This jarred with a basic precept of business governance. After all, just as democracy cannot be cleaved apart from its electorate, a company can’t be placed beyond the reach of its owners.
While it may be true that an ownership nod for Invesco’s plan could push Zee into a legally untenable position, it is not clear how this likelihood could justify pre-emptive judicial intervention. Moreover, broad rescue-mission statements that lay claim to a rationale without any discernible basis should be avoided in a country that needs to empower common shareholders, whose capacity for judgement must never be dismissed. Another pressing need is for our economy to attract capital from around the world, but the convoluted processes of justice on display could put off global investors who track whether everyone is actually accorded equal rights, regardless of an investor’s place of origin. We need clarity and consistency on these matters. To that end, at least partly, our judiciary would be well advised to entertain a plea for courts to exercise some verbal restraint in their rulings. More often than not, they are much too expansive. If judges issue crisp judgements that are concise and confined to relevant points of law, it would aid our larger cause.
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