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On 26 March 2021, the Supreme Court of India finally brought the Tata Sons - Cyrus Mistry saga to an end. The Supreme Court approved the decision of the Board to ‘replace’ Cyrus Mistry in 2016 and held that allegations of oppression and prejudice raised by the Mistry could not be sustained.
The genesis of the legal dispute lay in the ouster of Cyrus Mistry from his post as the Chairman of Tata Sons in October 2016. The board had made its decision “on the recommendation of the principal shareholder”, which is the Tata Trusts charitable foundation headed by Ratan Tata. The resolution was approved by six out of eight board members while the other two members abstained from voting.
This abrupt decision had sent shockwaves throughout the stock market with 24 out of 28 Tata’s listed companies trading in red, was not completely unforeseeable. The Board had added 2 new members in the months prior to the meeting and Nitin Noharia, Dean of the Harvard Business School, had requested Mistry to step down before the board meeting took place. Further, Court filings reveal that the Board had even sought legal opinion on the legality of such a resolution before it was made part of the agenda of the October 2016 Board meeting.
(Image Credits: Business Today)
The Appointment
Cyrus Mistry’s appointment in 2012 as Chairman of Tata Sons came amid much fanfare. He was only the second chairman—after Nowroji Saklatwala, who led the group from 1932 to 1938—of the 144-year-old group to not bear the Tata surname. His appointment, while initially only for a tenure of five years, was supposed to signal a break from the past.
Cyrus Mistry represented the perfect balance between someone who understood the company’s ethos but would be free to take the conglomerate in a new direction, as was done by his predecessor Ratan Tata. Mistry belonged to the Shapoorji family, which holds around 18% stake in Tata Sons and has been associated with Tata Sons since the 1930s. His sister is married to Ratan Tata’s halfbrother. He had joined the Tata Sons board in 2006 after his father vacated his seat and had served as a Director of Tata Elxsi Limited, from 24 September 1990 to 26 October 2009 and Director of Tata Power Co. Ltd until 18 September 2006.
His appointment led to much being written over the importance of corporate succession planning in India where companies are more or less operated by promoters with key managerial positions are occupied by family members and Tata Sons is leading the charge in changing this status quo. “Be your own man”, was Ratan Tata’s advice to Cyrus Mistry.
The Dissatisfaction
At the time of Mistry’s joining as the Chairman, amendments were made in the Articles of Association, which mandated any significant business decisions to require the affirmative vote of Tata Trusts’ nominated Directors. This amendment would restrict the powers of the Chairman, give Tata Trusts decision-making power but most importantly would point towards a lack of confidence in the choice hand-picked by Ratan Tata himself. Mistry termed these amendments as “changing the rules of engagement between the Trusts, the Board of Tata Sons, the Chairman, and the operating companies.”
This was also the first time when the Chairman of Tata Sons and Tata Trusts were different persons. The only exception being a short period in the past where J.R.D. Tata headed Tata Trusts when Ratan Tata as Tata Sons chairman. Tata Trusts along with other philanthropic organizations control 66% votes of the Tata Sons. According to Mistry, as chairman of Tata Trusts, Ratan Tata was able to maintain an invisible presence on the board of Tata Sons
Mistry had taken several radical decisions during his tenure, including disposal of some of Indian Hotels Co’s overseas properties and especially the move to shut the UK steel operations. He also focused upon expanding the empire by ensuring the capital expenditure in its international operations that earned almost 70% of its revenue. Tata group had also expanded into the defense manufacturing business under his tenure. Mistry also viewed and created Group Executive Council (GEC) to focus on crucial decisions which were in close supervision with him which did not bode well with the Board.
Cyrus chose to disinvest in UK-based Corus, which was said to have sentimental value for Ratan Tata. He also made the decision to stop the production of Tata Nano for valid reasons. Mistry also did not show much interest in other dream projects: - the aviation business and deal with Docomo. The decision to cease production of Tata Nano was reversed after Mistry’s departure.
Mistry was shown the door months after he finalized Tata Power's acquisition of Welspun's solar farms for $1.4 billion, which was said to be without the approval of Ratan Tata and other key shareholders and in a business sector that doesn’t yield much profit.
Bad Decisions or Mismanagement?
After sacking Mistry from the chairpersonship of the Tata Sons board, the process began to have him remove as chairperson or non-executive chairman from other Tata companies’ boards too.
The first boardroom battle was won by Mistry as he retained the chairpersonship at Indian Hotels with the support of the independent directors. Tata Chemicals also backed him, citing good performance. Independent directors at Tata Motors refused to take sides but said they stood by decisions that were made by the board. This was also the case with Tata Steel. He was also voted out in EGM conducted by TCS.
Finally, Mistry resigned from the board of all listed companies, including Tata Power, Tata Motors, Tata Chemicals, Tata Steel, and India Hotels, and approached the National Company Law Tribunal alleging Tata Sons had indulged in oppression and mismanagement by opting to keep loss-making projects like Tata Nano operational, which affected profitability and returns to shareholders.
He also alleged Tata Sons extended undue favors and concessions to Chennai-based businessman and Aircel founder C Sivasankaran. The Sivasankaran-owned Sterling was given shares in Tata Teleservices at a discounted price and several favors were extended to him at the behest of Ratan Tata.
Mistry had introduced a proposal to litigate against the Siva group to recover the Rs 694 crore it owed to Tata Sons, the latter's board agreed unanimously. However, at the very next board meeting, he was removed as the chairman.
After contradictory decisions rendered by NCLT and NCLAT, the Supreme Court finally put the matter to rest by holding that the allegations of oppression and mismanagement were not proved and Mistry’s ouster was valid and justifiable. The Court ruled that the court rules that failed business decisions in the context of Corus, Nano, Siva, etc. cannot be projected as oppression.
Out Of The Dust Of The Battles Of Giants
While the decision to “replace” Cyrus Mistry has been held to be legally sound, Shapoorji Pallonji Group continues to hold around 18% stake in Tata Sons. We may see Tata Trusts or some other institutional investor buy them out given the sour state of the relationship between them and Tata Sons.
In all probability, while these issues will definitely get resolved in the near future and a large number of companies within Tata Group will continue to operate, there definitely are some lessons to be learned from this saga.
While family-run corporations where managers in most cases are de facto owners, the incentives to maximize the surplus is likely to be strong as their name and reputation associated is closely associated with the company, the concerns that they may exercise undue influence over management and use this influence to cause oppression of minority shareholders and mismanagement cannot be ignored.
In the case of Tata Sons, the issues of corporate governance and differences between Board members at a private company had an effect on several publicly traded companies. Hence, this raises the question of whether governance or transparency norms must be imposed on promoters themselves, in addition to the listed companies.
The rapidly evolving business ecosystem around the world has led promoter-driven companies to acknowledge that hiring professional managers to run business has helped the company grow and become more “corporatized”. Yet, in India, retaining tight control on professional managers and hindering their decision-making abilities has resulted in missed potential business opportunities. While much was written about written over the importance of corporate succession planning on the appointment of Cyrus Mistry, these works have gained much greater importance in the aftermath of Mistry - Tata saga.