As the volume of corporate activity rises in India, regulations are becoming extremely sophisticated. This article gives a brief view of how developed the Indian law is with regard to the role, duties and liabilities of the board of directors. To put some context, I will assess the standard of conduct required from the board of directors while making important decisions like those relating to – takeovers, mergers and sale of substantial shares of the company.
The Securities & Exchange Board of India (“SEBI”) enacted the (Substantial Acquisition of Shares and Takeovers) Regulations, 1997, which along with the 2002 amendment lay down the procedure for takeovers in India.
Board of directors are trustees for the entire body of stockholders, and both good morals and common law imperatively demand that they shall manage all the business affairs of the company with a view to promote, not their own interests but the common interests of all those who have made an investment in the company. By assuming office, they undertake to give their best judgment in the interests of the corporation in all matters in which they act for it, untrammeled by any hostile interest in themselves or others [1].
Norman v. Theodore Goddard, (1991) BCLC 1028: Board of directors of a corporation in managing the corporate affairs are bound to use that amount of care which, ordinarily, careful and prudent men would use in similar circumstances. A director must have such degree of skill that “may reasonably be expected from a person undertaking those duties”. Referring to the case above it was held in a subsequent case that “courts may not in future be prepared to accept minimalistic standard of competence said to be tolerated by law” and that, courts may “Impose an increasing objectivity in determining whether directors have acted reasonably”.
Miheer H Mafatlal v. Mafatlal Industries, AIR 1997 SC 506: Dealing with the question of the scope of company court’s jurisdiction in case of mergers, the Supreme Court held that, “the sanctioning court has to see that the scheme (of merger) as a whole is found to be just, fair and reasonable from the point of view of reasonable men of business taking a commercial decision beneficial to the class represented by them for whom the scheme is meant”.
The Supreme Court only laid down a “just, fair and reasonable” standard of conduct. The judgment does not emphasize that the court must ensure that the board of directors made every effort to protect the corporation from a raid or secured the best price possible in case of sale of the company (or a substantial portion of shares). Legal commentators have expressed the view that directors when faced with an unsolicited takeover bid should use all defensive tactics to thwart away the bid and in case the bid is in the interest of the company, they should ensure maximum price for the shareholders.
It is not often that decisions of the board of directors in India get challenged. Not because directorial wisdom is regarded so highly that no one seems to challenge their decisions but more because corporate takeovers have not been very common in India and the law is only just beginning to take shape. The case law in India is still in its infancy when it comes to directorial conduct in cases of mergers and buyouts.
It is the nature of judicial process that cases are decided only when real world facts raise a question. No amount of debate would lay down the law until facts warrant laying down a definite standard of conduct for directors in such cases. That would happen as the amount of takeover activity rises. As hostile offers become more common, the standard of conduct required of the boards of directors will surely become a matter for judicial determination. Two main reasons why hostile takeovers have not been traditionally very common in India are-
- Closely held corporations- Most big Indian corporations have their majority shareholding concentrated in the hands of a close group of people who owe allegiance to each other. For this reason it becomes pointless to attempt a hostile takeover.
- Most mergers in India are negotiated- Tender offers are usually made after consensus on price and other terms have been reached between the respective boards. Unsolicited tender offers are still not very common because of which the board of directors have not started adopting sophisticated takeover defenses. For example, the most powerful takeover defense and one that is employed by a majority of American corporations in the present day is the poison pill, first employed in the United States in the case of Moran v. Household International, 500 A.2d 1346 has been approved by the courts in the U.S. ever since. There is nothing in law that prevents companies in India to use a mechanism such as a poison pill.
The Supreme Court in the case of Sangramsinh P. Gaekwad v. Shantadevi P. Gaekwad, 2005 (11) SCC 315, observed that “directors may have a fiduciary duty where a takeover bid is made for a company and its directors advise its shareholders whether to accept or reject the bid, as they owe a duty to advise honestly”. Since the above was not a case involving a takeover bid, the court was not inclined to lay down any standard regarding the duty of directors in the absence of concrete facts.
All this has led to tender offers being made directly to the shareholders with the board of directors either negotiating the terms or playing merely an advisory role of giving an “honest opinion” about the offer (in the limited cases where the offer is unsolicited) and not employing any defensive tactics.
For a comparative position in the United States, see a later article regarding the standard of conduct expected from the board of directors in the United States – Takeover Defenses.
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[1] P Ramanatha Aiyer: The Law Lexicon 2nd Edition Reprint 2002
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