Impetus to Shareholder Activism in India – Invesco v. ZEE Case

Posted On - 21 April, 2022 • By - Souvik Ganguly


Over the last few years, it has been observed that non-promoter shareholders have started participating actively in the corporate decision-making and have in fact taken serious efforts to question and influence the decisions of the management. With the advent of such shareholder participation which is at times influenced by the views of proxy advisors, shareholder activism and corporate governance are seeing a much-needed permeation into the Indian corporate setup.

Shareholder activism

Shareholder activism entails a set of proactive efforts taken by the shareholders to bring about the desired change in the operations or decisions of a company. By making strategic investments in companies, shareholders expect a certain return on their investments. However, at times, the decisions of the management may leave the company in an undesirable position, making it unsuitable for shareholders to continue with their investments. In such situations shareholders may take certain proactive steps to protect and further their investments, thereby indicating their shift from being passive to active investors.

There have been several instances in the recent past in India, wherein minority shareholders have exercised their influence to attain desired changes in the decisions of the management. In the year 2014, India’s largest passenger car maker Maruti Suzuki faced pressure from minority shareholders. Maruti put forth the proposal to purchase vehicles from its related entity Suzuki Motor’s Gujarat plant, however, the proposal was opposed by the minority shareholders as it would be detrimental to the interests of Maruti and eventually forced Maruti to change the terms of the proposal. Similarly, in July 2017, the shareholders opposed a related party transaction between Raymond Limited and its promoters, involving the sale of an asset at a significant undervalue. Shareholder activism has been a catalyst in blocking undesired transactions, forcing renegotiation of terms, allowing changes in the composition of the Board, and in deterring unprofitable mergers & acquisitions.

Recently, in the case of Invesco Developing Markets Fund v. Zee Entertainment Enterprises Limited, the Division Bench of the Bombay High Court allowed the appeal filed by Invesco Developing Markets Fund (Invesco) and OFI Global China Fund LLC (OFI) against its Single Judge bench judgment dated 26 October 2021. The Single Judge Bench of the Bombay High Court ruled in favour of Zee Entertainment Enterprises Limited (Zee), granting an interim injunction thereby restraining Invesco and OFI (collectively referred to as Investors) from calling for and holding an extraordinary general meeting (EGM) of Zee. This decision comes as a relief amongst investor shareholders in India as it restores the primary right of a shareholder to convene an EGM to change the composition of the board of directors (Board) of a company.

This article examines the judgment of the Division Bench of the Bombay High Court, which set aside the order passed by the Single-Judge Bench of the Bombay High Court.

Invesco v. Zee – Factual matrix

The Investors having 17.88% equity stake in Zee, its largest shareholders issued a requisition dated 11 September 2021 (Requisition) under Section 100(2)(a) of the Companies Act, 2013 (Act) proposing to convene an EGM. The Requisition proposed the appointment of 6 (six) independent directors on Zee’s Board and the removal of the CEO therefrom. The EGM sought to be convened was opposed by Zee on the grounds that the proposed Requisition is in contravention of the laws of India. On this count, Zee denied convening the proposed EGM and simultaneously filed a petition before the Bombay High Court seeking to declare the Requisition invalid, ultra vires, illegal and bad in law.

The Single Judge-Bench of the Bombay High Court vide its order dated 26 October 2021 granted an injunction in favour of Zee and restrained the Investors from taking any action in furtherance of the Requisition including, calling/holding the EGM. Aggrieved by this decision, the Investors filed an appeal which came to be allowed by the Division Bench of the Bombay High Court vide its judgment dated 22 March 2022.

Key points and analysis

The key question that came up before the Bombay High Court lies at the root of Section 100 of the Act inter alia dealing with the rights of the shareholders to call an EGM. Sub-Section (1) of Section 100 empowers the Board to call for an EGM, whenever it deems fit. Sub-Section (2) of Section 100 casts an obligation upon the Board to convene an EGM at the requisition made by the shareholders. However, to avail of the benefit under Sub-Section (2), the requisition shall necessarily be made by members who hold 10% or more of paid-up share capital with a right to vote.

Further, Sub-Section (4) of Section 100 supposes a discretionary right in favour of the shareholders to call for the requisitioned EGM in case the Board fails to do so within the prescribed time. This itself suggests that the very nature of Section 100 (2) of the Act is to grant powers to the shareholders (subject to procedural requirements) to call for an EGM and the Board “shall” without seeking disclosures of any sort, is bound to convene the EGM. The position of law in this regard stands settled with the decision of the Supreme Court of India in Life Insurance Corporation of India v. Escorts Ltd (LIC Case).

Placing considerable reliance on the LIC Case, the Division Bench of the Bombay High Court held that on a plain reading of Section 100 of the Act, there appears to be no discretion/power vested upon the Board to sit in judgment over the legality of the Requisition sought to be convened by the shareholders. Whereas the Board is mandatorily obligated to requisition a meeting if the numerical and procedural requirements appearing in Section 100 are satisfied. The division bench held that the scope of the expression “valid requisition” under Sub-Section (4) is limited to the satisfaction of procedural and numerical requirements and does not in any manner mean to include judicial / Board review of the matters mentioned under the requisition. Further, the Division Bench judgment also observed that the language of Section 98 and 100 of the Act aids corporate democracy and protects shareholder rights and that this intent and object of the legislature cannot be ignored whilst construing the provisions of the Act.

The interpretation adopted by the Division Bench is not only a step in upholding shareholders’ rights, but it also overturns the decision of the Single Judge Bench which essentially ran parallel to the settled judicial position adopted by the Courts in India and disturbed the decisions recorded in the LIC Case and in Cricket Club of India v. Madhav L Apte. Both the pronouncements substantially uphold the rights of the shareholders to convene an EGM without having to disclose the reasons therein. Moreover, the Courts stated that, in any event, the reasons provided cannot be subjected to judicial review, let alone the review of the Board.

Our thoughts

Corporate democracy is protected on the basis of supremacy of shareholders’ rights granted under the Act. The management and the board of directors of a company is ultimately accountable the owners of the company, i.e., the shareholders. Any failure to defeat the manipulations which disturb the rights of shareholders will result in dilution of shareholders’ rights in India. The decision in Invesco Vs. Zee, as discussed above, re-establishes the primacy of shareholders’ rights which is exercised in accordance with applicable law. We understand that this judgment will go a long way in encouraging non-promoter / investor shareholders to act pro-actively in protecting their investments and thereby increasing the standards of corporate governance and reducing the asymmetry of information between promoters and investors. If practiced in a responsible way, shareholder activism will certainly benefit the development and growth of the companies.

Author: Souvik Ganguly

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