The mathematical perplexity of a majority of two at Tata Sons

This article first appeared in BW Businessworld.

Corporate governance rarely turns on arithmetic. At Tata Sons, it now does. The dispute over the reappointment of N. Chandrasekaran as chairman has exposed a problem almost elegant in its simplicity. Article 121 of the Articles of Association requires a board decision to carry not merely an overall majority but also the affirmative vote of a majority of the directors nominated by Tata Trusts. Article 121A extends that protective architecture across specified reserved matters.

There are only two such directors on the board today: Noel Tata, chairman of Tata Trusts, and Venu Srinivasan.

What is a majority of two? It is two. What is a majority of three? It is also two. That one-number difference is now at the centre of India’s most closely watched boardroom battle.

On 17 September, four of the five participating directors reportedly voted to give Chandrasekaran another five-year term from February 2027. Noel Tata voted against the resolution while Srinivasan voted in favour. The board, chaired for that item by independent director Harish Manwani, treated the resolution as passed, reportedly relying on a casting vote to overcome the 1-1 division between the two Trust nominees.

Tata Trusts, which owns about 66 per cent of Tata Sons, called the resolution a legal nullity. Its statement was blunt: “Majority amongst two is two and not one.” Since one nominee voted against the proposal, it argued, the separate condition requiring affirmative support from the Trust nominees was not met. The chairperson’s casting vote, it said, applies only when there is equality at the overall board level, not to the separate Trust-nominee condition.

Two of India’s most distinguished legal minds now differ over that interpretation.

Former Chief Justice D.Y. Chandrachud, whose written opinion was tabled at the meeting, argues that the affirmative vote of the nominee directors is an independent and standalone requirement. It operates, in his view, on a different plane from the chairperson’s casting vote, which is intended to resolve equality among the directors voting collectively.

Harish Salve, advising Tata Sons, takes the opposite view. He has questioned why the casting vote should not be used when one nominee supports a resolution and the other opposes it. His argument is practical. An institution of Tata Sons’ scale cannot allow every disagreement between two nominee directors to immobilise its board. Where the vote divides equally, he argues, the chairperson should be entitled to break the tie.

The two positions address different dangers. Chandrachud’s interpretation stresses fidelity to the language of the Articles. Salve’s argument stresses the consequences for effective governance.

The difficulty lies less with either nominee than with the structure itself. With only two Trust-nominated directors, a requirement for majority support becomes a requirement for unanimity. A protection created for the majority shareholder as an institution consequently depends upon complete agreement between two individuals.

Article 104B allows Tata Trusts to nominate one-third of the directors on the Tata Sons board. With a six-member board, that produces two Trust nominees. Were the governance architecture to include three Trust nominees, a 2-1 decision would constitute a genuine majority without requiring unanimity.

Tata Sons itself defended the Trusts’ affirmative-voting rights during the Cyrus Mistry litigation and prevailed before the Supreme Court in 2021. The court accepted the rights as a legitimate entitlement of the majority shareholder rather than an oppressive arrangement. Tata Trusts now reminds the company of that history: it cannot disown a protection it went to the Supreme Court to preserve.

But Salve raises another important company-law principle, one that the Mistry judgment also recognised. A nominee director is not merely a representative of the institution that nominated him. Like every director, he owes fiduciary duties to the company on whose board he serves.

The challenge, therefore, is not to choose between shareholder rights and directors’ duties. It is to reconcile the two without rendering either meaningless. Trust-nominated directors must exercise independent judgement, but the company must also respect the affirmative rights written into its own constitution.

The RBI decision creates a second clock. The central bank has reportedly rejected Tata Sons’ application to surrender its core investment company registration and advised it to comply with the applicable regulatory framework. If Tata Sons continues to be treated as an upper-layer NBFC, that framework points towards listing.

Listing would involve a series of board, regulatory and shareholder decisions. It could require alterations to Tata Sons’ private-company structure and may engage the reserved-matter protections contained in its Articles. If the two Trust nominees remain divided, the company could return repeatedly to the same question: can a casting vote compensate for the absence of the affirmative support specifically required from them?

That arithmetic should ideally be resolved through governance design rather than serial litigation. The durable solution may be to change the denominator while preserving the principle of institutional representation.

Increasing the number of Trust nominees from two to three would require either enlarging the board to nine while retaining the one-third nomination formula or amending that formula itself. A majority among three would then be two. The Articles could also clarify that a casting vote operates only at the level of the board as a whole and cannot replace a separate affirmative-vote requirement.

Such a structure would preserve the Trusts’ institutional protection without making unanimity between two nominees the only route to a decision. Implementing it would not be simple. Altering the Articles would ordinarily require a special resolution carrying 75 per cent shareholder support. With approximately 66 per cent, the Trusts could not accomplish that alone. The process is further complicated by the reported regulatory restrictions affecting decision-making at the Sir Ratan Tata Trust. Any change to the existing protective rights would therefore require careful agreement among the principal stakeholders.

Yet procedural difficulty is not an argument for leaving the ambiguity untouched. Tata Sons now faces decisions involving its chairman, its regulatory status, its ownership structure and possibly its future as a listed company. Its constitutional machinery must be capable of producing decisions whose legitimacy is not immediately disputed.

Until the denominator or the drafting changes, every sensitive decision at Bombay House risks returning to the same mathematical perplexity. Mathematics can define the threshold. Governance must ensure that the institution can cross it.

Disclaimer: The views expressed here are solely those of the author and do not in any way represent the views of exchange4media.com.