Tata Trusts within right to seek merger, but Tata Sons can challenge: Lawyer

Tata Trusts’ proposal to merge two operating companies of the Tata Group — Tata Electronics Systems Solutions Private Ltd and Tata Consulting Engineers — with Tata Sons to avoid a listing could trigger a governance and legal battle if the holding company’s board refuses to approve it, according to legal experts.

“Tata Sons can legally challenge such a direction if what is asserted goes beyond the rights conferred under the Articles [of Association] or the Companies Act,” said Sooraj Sharma, Partner at Clavius Legal.

However, he added that if Tata Trusts has only placed a proposal before the board, “there may presently be nothing to challenge.”

A legal dispute would arise only if either side claims governance powers that the other disputes. For instance, if Tata Trusts asserts that the board is bound to implement the restructuring regardless of its statutory decision-making process, Tata Sons could contest that position.

“Any such dispute would primarily depend on the interpretation of Tata Sons’ Articles, the respective powers of shareholders and the board, rights of Trust-nominated directors, and directors’ statutory duties,” Mr. Sharma said. Depending on the nature of the claim, proceedings before the National Company Law Tribunal (NCLT) could follow, he added.

On whether Tata Trusts has the right to propose such restructuring, Mr. Sharma said “as the controlling shareholder, Tata Trusts is entitled to propose restructuring and exercise shareholder and governance rights available under the Companies Act, 2013 and Tata Sons’ Articles of Association.”

However, he clarified that Tata Trusts has sought the board’s approval rather than issuing a binding directive.

Section 179(3)(i) of the Companies Act requires the board to approve amalgamation, merger or reconstruction proposals through a resolution. That power, however, remains subject to the Act and the company’s Articles, according to him.

Tata Sons’ Articles provide Tata Trusts with significant governance rights, including nomination rights under Article 104B and affirmative voting provisions under Article 121.

“In Tata Consultancy Services Ltd. v. Cyrus Investments Pvt. Ltd. (2021), the Supreme Court described Article 121 as conferring a limited right regarding the manner in which matters before the board are decided,” Mr. Sharma said.

Therefore, while Tata Trusts cannot replace the board’s decision-making role, the board must also operate within the governance framework laid out in the Articles. Trust-nominated directors, meanwhile, remain bound by their statutory duties, including exercising independent judgment under Section 166 of the Companies Act.

If Tata Sons challenges the proposal, the restructuring process could become prolonged. Any merger would still require multiple approvals, including board approval, member and creditor approvals under Sections 230–232 of the Companies Act; NCLT sanction; and regulatory clearance, including from the Reserve Bank of India where applicable.

The proposed restructuring aims to ensure that the reorganised Tata Sons no longer falls under the NBFC/Core Investment Company (CIC) framework. However, whether that objective is achieved would depend on the final structure and RBI’s regulatory assessment, not on a unilateral decision by either Tata Trusts or Tata Sons, Mr. Sharma said.

A legal contest could delay both the restructuring plan and any alternative route, including a potential listing. It could also lead to judicial interpretation of the extent of Tata Trusts’ special governance rights under Tata Sons’ Articles.

“The issue is not merely whether Tata Trusts can direct Tata Sons. The real question is where decision-making power lies at each stage — with shareholders, the board under Tata Sons’ Articles, or statutory and regulatory authorities,” he said.