Tata-Mistry Shareholders vs Board - Battle for supremacy Corporate Governance Research Private and confidential Proxy Advisory Services For limited circulation only Corporate Governance Scores Stakeholders’ Education Stakeholders Empowerment Services 2012 – 2013 | All Rights Reserved Tata-Mistry-Shareholders vs Board-Battle for supremacy 2016 EXECUTIVE SUMMARY Decision to remove Mr. Cyrus Mistry from position of chairman of Tata Sons has created some sort of a crisis and has threatened the perceived ethically numero uno position enjoyed by house of Tata in India Inc. Hitherto Tatas have been viewed as ethical and no nonsense business house. Their position is at risk. SES does not find any legal issue with the decision of removal per se, however optically the decision does not sound convincing. (Read More- Annexure-A) Action of removal (with immediate effect) is disproportionate to the reasons cited, raising doubts and millions of questions. The issue of non-performance, if true, admittedly has been persisting for long therefore, immediate removal does not make sense. (Read More- Annexure-C) Letter war between two sides is not helping the cause of stakeholders. While on one hand E Mail of Mr. Mistry raises some crucial issue, which needs to be effectively addressed or clarified. On the other hand, it questions board decisions to which he and / or IDs were themselves a party. He raises some issues about future write-off which SES finds bordering scare mongering. (Read More) Mr. Mistry has raised several questions in his letter, raising many issues on governance, decision making, past decisions, interference etc. It would serve interest of all stakeholders if all these are addressed effectively. Tata’s must address all issues to turn the pointed finger back. (Read More). Transaction with Mr. Sivasankaran must be explained and truth must be brought to the notice of investors. (Read More) A certificate from the person being accused serves no purpose. In this case accused are Tata Sons, its directors, trusts and its directors. Therefore, it will be in the interest of stakeholders and in the interest of Tata Brand that a third party must be asked to examine and give its report on the issues raised by Mr. Mistry in his letter. If Tata’s are effective in countering the allegations, it will not only restore lost credibility but also comfort investors and regulators. (Read More) Reports have appeared about threat given by Tata’s to withdraw its brand name and guarantees. SES is of the view that such statement is bit premature. Further did IDs consider this aspect and evaluated loss of value before backing Mr. Mistry? What makes them back Mr. Mistry ignoring all these concerns which ordinary shareholder has? Why they were silent till now? (Read More) The Board battle has put role of Independent directors at forefront. It is in real sense a testing time for them. Without questioning their decision and their right, SES raises fundamental questions on the issue. On what basis IDs of IHCL and Tata Chemicals have decided to back Mr. Mistry? Do they know the truth? If yes, please tell the same to all investors? If not, can they adjudicate based on letters of two sides and decide? Does their job involves adjudication? Are they competent for adjudication? In one way, they are guilty of same hurried decision, which is being complained of by Mr. Mistry. Adjudication is a process and one cannot decide without serious application of mind taking into account all factors. Have IDs done that? Is opposing dominant shareholder a sign of independence? Is it the right thing? (Read More) IDs on IHCL Board have unanimously reposed faith in Mr. Mistry. No questions on this, subject to their ability to adjudicate. However, a serious question arises here. Amongst many issues raised by Mr. Mistry, issues at IHCL are very prominent and serious. Boards have collective responsibility so these IDs along with Mr. Mistry are equally responsible for mis-governance as well. However, SES is of the view that a least three IDs have placed them in inexplicable position. Mr. Cyrus Mistry attributes all the problems as legacy problems and hotspots. These three IDs were part of legacy and hotspots. Mr. Dadiseth and Mr. Parekh have been independent director since year 2000 and Mr Nadir Godrej has been director since year 2008. What is more Mr Cyrus Mistry’s brother, Mr Shapoor has been director since 2001. Surely stakeholders are confused and asking questions why these directors had kept mum for all these years and allowed the problems to persist. Why they are supporting Mr. Mistry when all of them are collectively responsible for affairs of IHCL from year 2000 onwards, in cases points raised by Mr. Mistry on IHCL are correct? 2 Page © 2012 - 2013 STAKEHOLDERS EMPOWERMENT SERVICES | All Rights Reserved Tata-Mistry-Shareholders vs Board-Battle for supremacy 2016 SES raises fundamental question, what for good governance is propagated? What is the objective? SES is of the view that underlying objective is to take care of stakeholders’ interest and compliance with laws and ensure that no illegality is attached in any of the actions/ business. Does the decision of IDs to support Mr. Mistry fulfils the objective of good governance? Is their action protecting shareholder value? Can a divided board enhance shareholder value or it destroys the same? Do they have duty to stakeholders or to an individual? Was there any illegality in seeking to remove Mr. Mistry? Was Mistry selected by them? SES finds that somewhere, in the anxiety to project and prove the independent mind, IDs have forgotten about stakeholder’s interest. Once again we have a situation where form has won over substance. (Read More) Are employees the key stakeholders? Are they free to support any one they want or go by what IDs have decided? It seems IDs feel that if unions support Tata then it is upon instigation. If that be the case employees can question their (IDs) stand in the same manner. (Read More) SES also raises issue in this Report on governance structure and role of dominant shareholder. SES is of the view that in Indian context where majority companies are promoter oriented, rather than continuing with opaque involvement of promoters in day to day management, an institutionalised mechanism needs to be evolved within the framework of Insider Trading, PFUTP and LODR regulations, without in any manner compromising minority rights. (Read More) SES is of the view that in this case, there are no issues which can be amicably settled as the issues raised are not only affecting two individuals but millions of stakeholders. Therefore, SES does not recommend amicable settlement sitting across the table as recommended by many. Their logic is - Do not wash dirty linen in public and cause value loss. SES is of the view that whatever may be the dirty linen, let it come out so that there is no risk of value erosion in future. Value systems cannot be strengthened when the foundation is based on doubts. (Read More) SES finds faults with process adopted by Tata Sons in various instance. For example, removal of Mr. Mistry as Chairman from TCS. This decision even if within legal right is not optically correct. (Read More) Going forward, all the seven companies where Mr. Mistry is a director on the board, might see an EGM being called for removal of Mr. Cyrus Mistry. This will give an opportunity for shareholders to vote on resolution for removal of Mr. Mistry. At this point, SES is not making any recommendation on the issue as the same will be decided based on contents of notice and explanatory statement, opinion of directors and explanation, if any, by Mr. Mistry. However, SES has done detailed analysis of past voting pattern, current equity structure. Our analysis indicates that to win the battle, either side will require support of institutional investors. Key to future event lies with the Institutions. The largest shareholders are insurance companies lead by Life Insurance Corporation. Future will tell whom LIC has insured. (Read More) SES would have never questioned IDs, had they spoken earlier. Their pre-emptive action would have established their independent mind without any doubt. They could have put a check to alleged violation of governance issues and earned laurels. These IDs have been part of the Board(s) of Tata companies for long, all allegations of Mr. Cyrus Mistry relate to past, and in most of the cases these directors were part of decisions, Board processes. Therefore, how come suddenly virtues of independence and governance which were missing till now have been kindled? For any mis-governance of past they are equal partner. THE DECISION In the Board meeting of TATA Sons Limited held on 24th October, 2016, Mr. Cyrus Mistry, the Chairman of TATA Sons was replaced with immediate effect and Mr. Ratan Tata was appointed as the interim Chairman of TATA Sons. Further, the Board constituted a Selection Committee comprising Mr. Ratan N. Tata, Mr. Venu Srinivasan, Mr. Amit Chandra, Mr. Ronen Sen and Lord Kumar Bhattacharyya, as per the provisions in the Articles of Association of Tata Sons, to choose a new Chairman within four months. Link It was also stated that the three members of Group Executive Council of Tata Sons viz. Madhu Kannan, NS Rajan, Nirmalya Kumar resigned. Link. The suddenness and enormity of decision stirred India Inc. The action has no parallel in Indian corporate history and evoked strong reactions with surprise. Return to Top 3 Page © 2012 - 2013 STAKEHOLDERS EMPOWERMENT SERVICES | All Rights Reserved Tata-Mistry-Shareholders vs Board-Battle for supremacy 2016 TATA SONS- ALTERATION OF ARTICLES OF ASSOCIATION As indicated in Mr.