On 17 September, Tata Sons’ board overruled the opposition of its majority shareholder, Tata Trusts, to a third five-year term for chairman Natarajan Chandrasekaran, marking a rare episode in corporate India where a company’s board has opposed the view of its controlling shareholder.
Tata Trusts has called the board’s decision illegal, bringing the Articles of Association (AoA) of Tata Sons—the holding company of the Tata Group—under scrutiny. The two sides differ over how the provisions apply to the chairman’s reappointment. Mint breaks down what each side claims and what the Articles say.
What are Tata Sons’ Articles of Association?
The Articles of Association (AoA) are a company’s legal rulebook, setting out rules on matters such as the powers of the board, appointment of directors, conduct of board meetings and decision-making and how the company should conduct its business. Both private and public companies have AoAs. Private companies, however, can have more customised governance arrangements between shareholders, subject to the Companies Act and other applicable laws.
Tata Sons is unusual because its AoA contains specific provisions protecting the interests of Tata Trusts, the charitable organisations that collectively own 65.9% of the company. The Supreme Court examined these provisions in its 2021 judgment on the ouster of Cyrus Mistry as Tata Sons chairman in 2016 and upheld the Trusts’ special rights.
What special powers do the Trusts have?
As long as Tata Trusts collectively hold at least 40% of Tata Sons’ shares, Article 104B of the company’s AoA gives the Sir Dorabji Tata Trust (SDTT) and the Sir Ratan Tata Trust (SRTT) the right to jointly nominate one-third of Tata Sons’ board of directors. They can also remove a director.
SDTT and SRTT are the principal Tata Trusts, holding 27.98% and 23.56%, respectively, of Tata Sons. Presently, Tata Sons has six board members, of whom two are Trust nominees—Noel Tata and Venu Srinivasan.
Further, Article 115 says a Tata Sons board meeting will not have the necessary quorum if a majority of the Tata Trusts’ nominees appointed under Article 104B are not present. Article 121 says the board cannot decide any matter tabled before it without the affirmative vote of a majority of such nominee directors.
The AoA also sets out special rules for appointing the chairman of Tata Sons. As long as the Trusts hold a 40% stake in aggregate, a selection committee must be formed comprising three persons jointly nominated by SDTT and SRTT, one person nominated by the Tata Sons board from among its members, and one independent member, also nominated by the board. Any decision by this committee is also subject to the approval of a majority of the three Trust nominees, as per Article 121.
What is Tata Trusts’ argument?
Trust argues that the 4-1 board vote on 17 September approving Chandrasekaran’s reappointment as chairperson for a third five-year term was invalid. Chandrasekaran excused himself from the vote, while Noel Tata voted against it. The other four directors, including Srinivasan, voted in favour.
The Trusts’ argument has two parts. First, a chairperson can be reappointed only when a majority of the Trusts’ representatives on the Tata Sons board vote in favour, as prescribed under Article 121. Since Srinivasan voted in favour and Noel Tata opposed, there was no majority, the Trusts argue. The resolution was therefore invalid.
Second, Tata Trusts says Chandrasekaran’s reappointment did not follow Article 118 of the AoA, which requires a five-member selection committee. Chandrasekaran’s reappointment in 2022 for a second five-year term followed this route, the Trusts claim, setting a precedent that should be followed.
“Now, it fortunately doesn't require rocket science to decide that the majority of two is two, because the majority of two has to be more than one, and that is only two. Now, therefore, two have to decide in this case to go this way or that way jointly. The moment one of the two says no…there is no majority as per Article 121. The matter ends there,” senior Supreme Court advocate Abhishek Manu Singhvi, who is counselling Tata Trusts, said in an interview to CNN-News18 on Tuesday.
What is Tata Sons’ argument?
Tata Sons’ position rests on a different interpretation of the same provisions. First, the company points to a provision under Article 121 that provides for a chairman’s casting vote when the Trust nominees are split, as they were on 17 September.
Harish Manwani, an independent director on the board and chair of Tata Sons’ nomination and remuneration committee, cast the deciding vote in favour of Chandrasekaran. Tata Sons argues that this was permitted under the company’s AoA. The company obtained this view from Kolkata-based veteran lawyer Sudipto Sarkar.
Second, Tata Sons says Article 118 applies to the appointment of a “new chairman”, not the reappointment of an existing one. Since Chandrasekaran was already chairman, the company argues that the selection committee mechanism was unnecessary and that his reappointment could instead be approved by board resolution.
Importantly, Tata Sons also contests Noel Tata’s claim that Article 121, rather than Article 118, was followed in Chandrasekaran’s 2022 reappointment.
Mint could not independently verify which article was relied upon when Chandrasekaran was reappointed in 2022.