SC mum on Tata Sons valuation, Mistry comp details but Articles of Association specify terms, methodology – The Economic Times

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Provisions last amended in 2000 in presence of Mistry and with his consent. Shares cannot be transferred to an infant, insolvent or those “adjudged to be lunatic” and if a buyer cannot be found for a selling shareholder within a specific time period, then the stake can be sold to a third party at a price that the seller deems fit.

There are at least five provisions in the Articles of Association of Tata Sons that specify how the board should address shareholder exits, transfer of shares, their transmission and the process of arriving at a fair market valuation of the shares.

The articles state that Tata Sons shares cannot be transferred to an infant, insolvent or those “adjudged to be lunatic” and they stipulate that if a buyer cannot be found for a selling shareholder within a specific time period, then the stake can be sold to a third party at a price that the seller deems fit.

These provisions have been in place since 1917, when Tata Sons was incorporated, when the Pallonji Mistry family bought into the Tata Group 50 years later in 1965 and they were restated on September 13, 2000, when several clauses were amended in the presence of former chairman Cyrus Mistry and with his consent.

The three-judge Supreme Court bench, while ruling in favour of Tata Sons in its dispute with Mistry, said a company’s Articles of Association constitute “a contract between shareholders” and form “the bedrock of the Companies Law.”

The court, therefore, refused to go into the details of the compensation to be awarded and whether the Tata Group could or could not use Article 75 of its Articles of Association, which effectively gives the company the right of first refusal on Tata Sons shares.

The SP Group had sought to separate from Tata Sons and wanted a substantial valuation for its 18.4% stake.

The issue of resolving the value of the stake that the Mistry family holds in Tata Sons has been left to the parties, allowing them to even seek legal remedy. The court held that there was no oppression of minority shareholders of the Tata Group or any mismanagement at Tata Sons.

The Tata Trusts, which hold a majority stake in Tata Sons, declined to comment.

According to articles 58 and 59, a shareholder seeking an exit has to inform the Tata Sons board through a formal written notice, which, once given, cannot be withdrawn. The board then has to provide for a buyer within three months and determine the fair value of those shares. The buyer has to complete the transaction within seven days.

If the board fails to find a buyer, the stake may be sold to any third party at a price the seller deems right within six months, subject to Article 66, which empowers the directors to reject a buyer.

Article 75 is a mirror provision that stipulates that Tata Sons can also ask a shareholder to sell their shares through a special resolution. However, it does not specify the reasons under which the company can do so.

Article 60 is on valuation and tasks the board with fixing the price at which the company’s ordinary shares may be purchased “based on the annual audited accounts of each year.”

Article 62 delves into the transfer of preference shares.

Chartered accountant YH Malegam has been valuing Tata Sons each year and is considered an expert with intimate knowledge about the holding company. Tata Sons, as per the latest valuation, is worth Rs 3.8-4.3 lakh crore, which values the SP Group’s 18.4% stake at Rs 70,000 crore to Rs 80,000 crore.

This estimate is 55% to 61% less than what the SP Group has claimed as its true worth – Rs 1.78 lakh crore.

ET has reviewed the Tata Sons AoA.

As per Article 77, if any individual or corporate entity that was not a shareholder of Tata Sons as of September 13, 2000, becomes a shareholder by acquiring a stake of 5% or more, then the buyer has to pay a “premium” for the Tata brand and goodwill. The board will decide the value of the premium in conjunction with a reputed firm of brand valuers or chartered accountants.

According to Brand Finance in 2020, the Tata brand was valued at Rs 1.5 lakh crore.

The issues of valuation and transfer of shares came to the fore last March, when the Mistry family tried to pledge their Tata Sons shares and raise funds from Brookfield, Edelweiss and Deutsche Bank, among others. The Tatas moved court to block that.

However, Tata Group experts said there could be only one buyer for the Mistry family’s stake.

“Who will step into their shoes for that 18% block, pay a packet but not enjoy any minority rights?” asked a senior professional close to the conglomerate. “Nobody would want to come and antagonise the majority shareholder.”

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