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ZEE VS INVESCO CASE UPDATE | SHAREHOLDER ACTIVISM

The Bombay High Court (Court)in the recent case of Zee Entertainment Enterprises Limited v Invesco Developing Markets Fund granted an interim injunction in favour of a company restraining a share-holder from moving National Company Law Tribunal (NCLT) under the provisions of the Companies Act, 2013 (Companies Act), seeking directions to call and Extraordinary General Meeting (EGM) for requisitions which the Court perceived as invalid and/or illegal. This update analyzes the order of the Court and tries to point out the lacunae therein.

FACTS:

  • Defendant No 1 - Invesco Developing Markets Fund (Invesco) holds 17.88% shares in the Plaintiff Company namely Zee Entertainment Enterprises Limited (ZEE) , and had issued a Requisition Notice on 11 September 2021 (Requisition) , inter alia seeking to:

    • Appoint six independent directors on the Board of Directors (BOD) of ZEE, in addition to the existing directors; and

    • Remove Mr Punit Goenka, the current Managing Director (MD) and Chief Executive Officer (CEO) of ZEE:

  • While the BOD of ZEE did not act upon the Requisition, Invesco, in the exercise of their statutory right under Section 98(1) and 100 of the Companies Act, moved the NCLT by way of a company petition on 29 September 2021. During the hearing, ZEE submitted that the threshold of 21 days under Section 100 of the Companies Act was getting over on 3 October 2021 and that the BOD can rightfully scrutinize the Requisition till then. The matter was then adjourned by NCLT to 4 October 2021 with a direction to the BOD to consider the requisition.

  • On 1 October 2021, the BOD met, Mr Punit Goenka recused himself from voting on the Requisition and the BOD responded to Invesco, stating that the Requisition was ``invalid`` on several grounds.

  • On the same day ZEE also instituted a suit before the Court and moved an application for interim injunction thereunder, seeking to restrain Invesco from proceeding any further on the Requisition, which also includes pursuing the proceedings before the NCLT. Such injunction was granted by the Court for the reasons mentioned in the following paragraphs.

  • On the next date of hearing before the NCLT, ZEE brought to the attention of NCLT the institution of the said Suit. However, NCLT directed Zee to file a reply stating the difficulty in considering the Requisition within 2 days. ZEE challenged this NCLT order before an appeal before the National Company Law Appellate Tribunal (NCLAT) which disposed of the same , without going into the merits of the case, but simply stating that NCLT erred in not granting sufficient time to ZEE for filing the reply. NCLT, accordingly, in the next hearing on 8 October 2021 extended the time for filing the reply till 22 October 2021. The matter before NCLT is pending as on the date of the order of the Court.

ISSUE:

  • Whether the Court can be moved to ascertain the validity of the proposed resolutions at a requisitioned EGM?

  • Whether the resolutions proposed by Invesco were valid within the meaning of Section 100 of the Companies Act?

  • Whether the High Court has the jurisdiction to decide the issues circumventing the jurisdiction of NCLT?

CONTENTIONS OF THE PARTIES:

ZEE`s contentions:

It was stated on behalf of the Plaintiff that the Requisition was invalid on the following grounds:

  • It was in contravention of Regulation 17 of the Securities Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, (LODR Regulations) which mandates that the approval of Nomination and Remuneration Committee (NRC) before the appointment of directors.

  • It was in contravention of the guidelines issued by the Ministry of Information and Broadcasting (MIB) which require the MIB`s prior approval before making any changes in the BOD.

  • The number of independent directors sought to be appointed breached the outer limit of number of directors stipulated in the Articles of Association (AOA) of ZEE.

  • It violated Section 203 of the Companies Act which requires a company to have an MD and CEO.

  • It also violated certain provisions of the Securities Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 and Competition Act, 2002>

Invesco`s Contentions:

Invesco raised following contentions for opposing the grant of interim injunction:

  • Under the Companies Act, the shareholders have an unfettered right to propose any resolution at an EGM, the only requirement being having the necessary number and compliance with the provisions of Section 100 of the Companies Act

  • The Suit presumes the outcome of the EGM as a foregone conclusion and thus is premature

  • The High Court has no jurisdiction to entertain a Suit of such nature, as Section 430 of the Companies Act vests the exclusive jurisdiction to try such disputes with the NCLT.

HELD:

  • With respect to the issue of Jurisdiction, the Court held that:

``Court`s jurisdiction is not ousted. It can, and must, when presented with a case like this, perhaps an outlier, consider whether the resolutions proposed would be ineffective, that is to say, not merely undesirable or sub-optimal, but ones that cannot in law be given effect to. In that scenario, a court is not forbidden, either expressly or by necessary implication, from intervening.``

  • With respect to the issue on merits, a view was taken by the court that on the basis of the grounds mentioned by ZEE, the nature of the resolution proposed in the Requisition was not only ``invalid`` within the meaning of Section 100 of the Companies Act but was also patently illegal, and the BOD itself could not have called for an EGM for such proposed resolutions. It is thereafter stated by the Court that since the BOD cannot call for such EGM, the shareholders do not have any superior right to call such EGM and therefore Invesco ought to be restrained from acting further on the Requisition.

MHCO Comment :

The order is problematic on several grounds:

  • It does not consider that the nature matters raised by ZEE was inherently conditional and the resolutions were subject to being passed in the EGM.

  • While the order rests its conclusions on strict technicalities of law, it has an impact on the corporate realities and sets a discouraging precedent on the shareholders` activism.

  • The Court has also gone beyond its jurisdiction and entered the sphere of disputes which is exclusively to be decided by the NCLT.

  • The existing order implies that the existing management cannot be substituted by the shareholders who are the actual owners of the company.

It is thus expected that Invesco would challenge the order in appeal.

This update was released on 9 November 2021.

The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or legalupdates@mhcolaw.com for any assistance.

Legal Update Team
MANSUKHLAL HIRALAL & COMPANY
Advocates, Solicitors and Notaries
T: +91 22 40565252
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