Relief for Zee Entertainment founders as HC restrains EGM called by Invesco

In a reprieve to the founders of Zee Entertainment Enterprises, the Bombay High Court today restrained Zee from holding the extraordinary general meeting of its shareholders which was called by its largest shareholder, Invesco. Zee had sought injunction against Invesco’s request to call a shareholders meeting to oust its present MD and CEO, Punit Goenka, and appoint six of its nominees on the company’s board.

With the Bombay High Court ruling today, the proceedings at the National Company Law Tribunal, initiated by Invesco, will become infructuous, say lawyers. The NCLT was scheduled to hear the Invesco petition tomorrow. Invesco, however, has the option to move the Supreme Court to appeal against the HC order, said a lawyer.

In its order, the HC said if a shareholder resolution is bound to cause a company to run aground on the “treacherous shoals of statutory compliance,” there is no conceivable or logical reason to allow such a resolution even to be considered.

“Shareholder primacy or dominion does not extend to permitting shareholder-driven illegality. A perfectly legal resolution, if carried, may well result in the diminution of the company’s profits or business. That is not a court’s concern. But the resolution must be legal. The interpretative question is, therefore, not over the word ‘valid’ at all but about the matters proposed to be considered at a requisitioned EGM. And the Court is never foreclosed from considering this,” the order said.

On Invesco’s submission that the Court cannot even examine the legality, the single-judge bench of G S Patel said it is 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,” said the court.

In its suit, Zee had appealed for a declaration that the requisition notice of September 11th by Invesco and its associate fund, OFI Global China, is illegal, invalid, bad in law and incapable of implementation. Zee also sought a declaration that its refusal to act on the requisition notice is valid. The company also sought an injunction against Invesco from acting in furtherance of the notice.

The court said the “Section 100” of the Companies Act, which deals with calling of an EGM, lies at the heart of the controversy. The Board of Directors may call an EGM at any time. But shareholders who hold the qualifying equity (at least 10 per cent) 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. “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 response from Invesco was 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. 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, the order said.

The principles of corporate governance and indoor management militate against the grant of any such injunction. Therefore, Invesco argued, the entire suit is premature and speculative: it assumes that the resolutions proposed at the requisitioned meeting will be passed by the necessary majority. 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’. “’On this last point, 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 order said.

Invesco had also raised a point of the High Court’s jurisdiction. On this, Zee argued that the dedicated tribunal, the National Company Law Tribunal or NCLT, does not have the power or authority to decide any such questions. It simply cannot be, Zee argues, that no court or tribunal can decide the question — even if the end-result is going to be an illegality that might well sink the entire enterprise.

The court said 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 a court precisely what Zee is doing today. The source or provenance of the resolutions is entirely immaterial. The shareholders have no greater immunity. If the Board cannot propose resolutions that are infirm or ineffective, neither can shareholders, the court said, rejecting Invesco’s argument that the high court does not have jurisdiction on these matters.