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Mistrys send notice to Tata Sons directors, question their role in share pledge hindrance

SP Group, controlled by former Tata group chairman Cyrus Mistry's family, sought explanation from Tata Sons directors on whether the alleged oppressive action that caused prejudice to a minority shareholder (SP Group) was with their concurrence

twitter-logoNevin John | September 18, 2020 | Updated 02:24 IST
Mistrys send notice to Tata Sons directors, question their role in share pledge hindrance

Shapoorji Pallonji (SP) Group tried to gain advantage over Tata Sons in the share pledge dispute by sending a legal notice to its directors for damages. The financially troubled SP Group is in talks with multiple lenders to raise about Rs 11,000 crore by pledging a part of the 18.37 per cent stake that it holds in Tata Sons.

SP Group, controlled by former Tata group chairman Cyrus Mistry's family, sought explanation from Tata Sons directors, particularly independent directors, on whether the alleged oppressive action that causes prejudice to a minority shareholder (SP Group) was with their concurrence.

Tata Sons, however, threw a spanner in SP Group's Rs 3,750 crore deal with Brookfield and moved an urgent application before the Supreme Court on September 5 to block direct or indirect pledge of shares.

ALSO READ: Mistrys to raise Rs 11,000 crore pledging Tata Sons stake; Tatas object in SC

Tata Sons argues that SP Group will violate several provisions of the Article of Association (AoA) by pledging its shareholding in Tata Sons to a third party. These provisions include Article 57 (restricts the right to transfer the shares of Tata Sons), Article 58 (notice of transfer) and Article 59 (procedure of transfer). To create such a high value pledge in this manner, without informing the Appellant (Tata Sons) and seeking leave of the court is in absolute derogation of spirit of the court's earlier order, Tatas argued in the application.

In their counter affidavit to Tata's application to block the pledge of shares, SP Group argued that there is no restriction in the AoA of Tata Sons against pledge of shares. It stated that Tatas had failed to disclose a crucial fact that the lending documents entered into by SP Group had a specific covenant that lenders would comply with the AoA of Tata Sons in the event that a pledge of shares were ever invoked.

ALSO READ: Tata Sons AGM: Mistry family flags concern over losses in Group businesses

Ramesh Vaidyanathan, Founder and Managing Partner, Advaya Legal said that the shares are movable property in which the holders have proprietary rights. "In my view, SP Group should be entitled to pledge their shares under the present circumstances. The lenders are presumably put to notice on Tata Sons' right of first refusal in the shares as described in the Article of Association. The lenders' pledge enforcement rights will be circumscribed by SP Group's obligations under the Article of Association," he added.

Tata Sons may be looking to protect its rights over the shares held by SP Group. They would be trying to bring on record that Tata Sons has the first right to own the shares in case SP Group defaults in its repayments. "In such cases, if default happens, usually the lenders will enter into the shoes of the borrower and negotiate with the person/company, which has the first right over the shares, and facilitate the sale if they manage to agree on the price," said Vaidyanathan.

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