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Fundamental Flaw In Invesco’s Construct: Bombay High Court

Zee had sought an injunction against Invesco from taking any action or steps in furtherance of the requisition notice including calling and holding an EGM

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Post Zee seeking an injunction against Invesco from acting in furtherance of the Requisition Notice in question, The Bombay High Court's recent judgement reports 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.

"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," it reads.

It further mentions that the 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."

On Goenka, the Court says that the requisition demands his 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. 

"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’"

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

"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."

The final order reads, "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."

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