Removing Cyrus Mistry as director of Tata companies won’t be easy

MUMBAI: The decision by the board of Tata Sons to oust Cyrus Mistry and the acrimonious exchange that followed raised questions over the latter continuing on boards of group companies. Those boards where Mistry is chairman can re-designate him as non-executive director by voting on resolutions which will require a simple majority to go through. But if listed companies seek to remove Mistry entirely from the board, the process can be extremely onerous.
Section 115 of the Companies Act, 2013, says only shareholders holding not less than 1% of total voting power or holding shares of at least Rs 5 lakh can send a special notice to the company for a director’s removal. A group of shareholders can join hands for this purpose, but the notice has to be signed by all these shareholders who get together.
Here’s the fine print on what it will take for Bombay House to evict Cyrus Mistry+ from group companies:
Replacement of chairperson
Who can replace+ ? The board of directors (BOD) has the right to replace a board member from the position of the chairperson (the technical term used is replace and not remove, as another person is appointed in lieu of the replaced member as the chairperson). According to legal experts, the Companies Act, 2013, doesn’t provide for any specific process for removal of a chairperson. “A chairperson is the first among equals, however, he can be replaced by a simple majority of the board of directors, present and voting,” explains Shriram Subramanian, founder and MD, InGovern Research Services.
What is the process? A meeting of the BOD is required to be called under section 173(3) by giving a seven days notice in writing to every director at his registered address. A leeway is also available for a shorter notice period. “Such a meeting can be called by giving a shorter notice, the only requirement is that at least one independent director should be present at this proposed board meeting,” says a legal expert. For instance, Ratan Tata replaced Cyrus Mistry, as chairperson of Tata Sons.
Removal of a director of a company
Who can remove? Only the shareholders have the right to vote on a resolution for removal of a director before the expiry of his term. They can either initiate the process of removal themselves or can vote on a resolution proposed by the board of directors. The removal is done by an ordinary resolution passed by a simple majority of the shareholders who are present and voting. Section 169 (1) merely requires that the director who is sought to be removed shall be given a reasonable opportunity of being heard. A special notice is required of any resolution to remove a director.
Process initiated by shareholders: It is not just any shareholder, who can give a special notice, but only shareholder or shareholders holding a certain minimum shares or value of shares. This makes the process slightly more complex.
Section 115 prescribes that only shareholders holding not less than 1% of the total voting power or holding shares of at least Rs 5 lakh (paid up share capital as on the date of the notice) can send a special notice to the company for removal of the director.
A group of shareholders can join hands for this purpose, but the special notice has to be signed by all these shareholders who have got together. The Life Insurance Corporation is the largest institutional investor in Tata group companies. The insurer has 13.6% stake in Tata Steel, 13.12% in Tata Power and 9.81% in Tata Global Beverages. LIC insiders say that it is almost impossible to remove a director in the normal course.
When a company, receives this special notice from a shareholder or group of shareholders, it has to immediately intimate the director whose removal has been sought. This director can send a written representation to the company, asking that it be circulated to all shareholders together with the notice of the proposed meeting. The company also has to send the notice to all shareholderon needs to hold an extra ordinary general meeting.
Typically all shareholder meetings require a 21 day notice (whether it is an annual general meeting or extra ordinary general meeting). However, a shorter notice period is also possible if 95% or more of the shareholders entitle to vote consent to it.
Process initiated by the company: The Board of Directors of the Company can also call for removal of a director and seek shareholder approval. “The resolution for removal of a director, as proposed by the BOD (or the company) can be passed by a simple majority of shareholders, present and voting. However, in this case, the BOD have to provide shareholders with an explanatory statement reasoning why they have proposed this resolution.” explains Shankar Jaganathan, founder and chief executive, CimplyFive Corporate Secretarial Services.

You May Also Like

Leave a Reply

Your email address will not be published. Required fields are marked *