Bombay HC restrains Invesco from calling ZEEL EGM

In a major relief to ZEE, the court restricts Invesco from taking any action or steps in furtherance of the requisition notice including calling and holding an EGM

e4m by exchange4media Staff
Updated: Oct 26, 2021 5:45 PM

The Bombay High Court has passed an order today temporarily restraining Invesco Developing Markets Fund and OFI Global China Fund from calling or holding an Extraordinary General Meeting (EGM). ZEEL had moved the Bombay HC against Invesco's EGM demand. The company has cancelled its board meeting which was scheduled for 27th October to announce the Q2 results.

“In view of this discussion, there will be an injunction in terms of prayer clause (a) of the Interim Application, restraining Defendants Nos. 1 and 2 (including their employees, agents and anyone acting by, through or under them) from taking any action or step in furtherance of the Requisition Notice dated 11th September 2021, including calling and holding an EGM under Section 100(4) of the Companies Act, 2013,” Justice GS Patel said in an order on ZEEL's interim application.

He added, "it seems to me that there is a fundamental disconnect in Invesco’s construct. The section itself contemplates a refusal or failure by the Board to convene a requisitioned meeting; and the section then provides for what is to happen if the Board does not act."

“The decision taken by the Hon’ble Bombay High Court is a huge win for all the stakeholders of the Company,” said Zee's spokesperson in an official statement.

ZEEL had prayed for a declaration that a Requisition Notice dated 11th September 2021 issued by Invesco is illegal, ultra vires, invalid, bad in law and incapable of implementation. Secondly, the company had sought a declaration that its refusal to act on the Requisition Notice is in accordance with law, valid and justified. Third, it has also sought an injunction against Invesco from acting in furtherance of the Requisition Notice in question. The Interim Application follows the third prayer. The interim application has been argued at considerable length and the order was reserved on 22nd October.

ZEEL has contended that Invesco’s Requisition Notice contravenes various provisions of the Companies Act, 2013; the Securities & Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015; the Securities & Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011; various guidelines by the Ministry of Information & Broadcasting (MIB); and the Competition Act, 2002.

It also said that the resolutions proposed by Invesco in the Requisition Notice are all illegal, ultra vires and invalid. If passed, they would put ZEEL afoul of a raft of controlling statutes and regulations. Shareholders’ rights, including the right to requisition an EGM, do not extend to allowing shareholders to demand acts of illegality and non-compliance with statutes.

"There is one fundamental flaw in Invesco’s construct. It assumes that resolutions at an EGM requisitioned by shareholders are somehow special or more sacrosanct than resolutions proposed by the Board itself. There is no warrant for this. If the Board itself proposes an EGM to consider these very resolutions, or ones equally vulnerable, it is entirely possible for anyone with sufficient legal standing, even a shareholder in a derivative action, to ask of a Court precisely that which Zee does today. The source or provenance of the resolutions is entirely immaterial. Shareholders have no greater immunity. If the Board cannot propose resolutions that are infirm or ineffective, neither can shareholders," noted the HC order. 

It added, "Therefore, ZEEL said, it is entitled to the two declarations mentioned earlier: that the Requisition Notice is illegal, invalid, ultra vires and bad in law; and that Zee’s action, through its Board of Directors, in refusing to call the requisitioned meeting was valid. Therefore, Zee claims, it is entitled to the consequential injunctions, both permanent and temporary.

The order noted that Section 100 of the Companies Act lies at the heart of this controversy. The Board of Directors may call an EGM at any time. But shareholders who hold the qualifying equity (at least 10%) of a company that has a share capital may also requisition an EGM. The section says the Board ‘shall’ call an EGM within the specified time, 45 days from the date of receipt of the requisition.

The requisition must set out the matters to be considered at the EGM. The requisition must be signed by the requisitionists, and it must be sent to the registered office of the company. The Board has 21 days to call the requisitioned EGM. Time runs from the date a ‘valid’ requisition is received. Should the Board not do so, i.e. should it not call the meeting within 21 days, the requisitionists may call and hold the meeting themselves within three months of the date of the requisition.

The requisition demands Punit Goenka's ouster — but without proposing a replacement. This puts Zee into a statutory black hole, for it would then be totally in violation of Section 203(1); and it, and its directors, would have to face the liabilities, including fines, set out in Section 203(5). No shareholder can be permitted, he submits, to drive his company into a state of non-compliance and penalty.

That nomination of identified individuals speaks — and not well — of their ‘independence’. It is impossible not to see these as ‘nominees’ of the requisitionists, and there is little achieved by protestations of the excellence of the Chosen. In the scheme of the Companies Act, shareholders do not get to choose individual independent directors. They may only demand that there be independent directors.

Invesco has contended that it is not for the Board or the company to decide whether or not a particular proposed resolution — or all the proposed resolutions — are, according to the Board or the company, illegal or valid. It added that the general body of shareholders will decide in general meeting whether or not to pass a particular proposed resolution or any of the proposed resolutions. The shareholders’ rights to call an EGM cannot be curtailed by the company or its Board.

If a resolution is ‘ineffective’, it will simply be ‘still-born’ and will not be put into effect. But that does not mean that the EGM should be interdicted. Principles of corporate governance and indoor management militate against the grant of any such injunction. Therefore, Invesco argues, the entire suit is premature and speculative: it assumes that the resolutions proposed at the requisitioned meeting will be passed by the necessary majority.

Justice Patel added, "I am inclined to agree with Mr Subramaniam on all counts. I do not see how Goenka can be removed at all, leaving a managerial void only to be possibly later filled. His removal causes an immediate vacancy and non-compliance. How this is to be done without prior permission of the MIB is also unclear. I see no method of circumventing the NRC or directly proposing named persons as ‘independent directors’.

But Invesco’s submission that the Court cannot even examine the legality seems to me to be entirely an exercise in futility. It advances a general theory that even what I can only describe as a ‘madcap resolution’ must always and in all circumstances be put before the general body.

Sometimes, it happens that a company must be saved from its own shareholders, however well-intentioned.

This is a case where the form must follow the substance. If the substance is illegal, the form is illegal. The substance of the proposed resolution will dictate its form."

He also noted that The word ‘valid’ in Section 100 merely requires compliance with the qualifying criteria in that section itself — the minimum percentage shareholding, whether the Requisition Notice is signed, and whether it has been delivered to the company’s registered office. The word used in the section in relation to the Board’s obligations is ‘shall’, and there is no call to read it permissively as ‘may’.

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