Role of Shareholder Activism to Shape Corporate Governance in India- A Corporate Battle

Shareholder activism in India has emerged as a powerful force within the ambit of corporate governance.[1] There has been a proactive involvement of the shareholders in the operations and administration of a business in which they have invested through dialogue, voting in board meetings, and, at times, litigation to bring in certain changes or curb any such corporate mishaps. This activism typically arises from shareholders’ desire to safeguard their investments, protect the company’s policies and prevent any potential harm to the brand’s reputation. Although shareholder activism can serve as an effective tool to hold the management accountable, it also has the potential to be misused, leading to a difficult situation between the shareholders and the management. In some cases, it may be wielded by investors with short-term interests, acting more as a weapon than a constructive force. This article delves into the positive and negative aspects of shareholder activism and its influence on companies from a corporate governance standpoint.

Impact of Shareholder Activism

Recently, shareholders in India have increasingly resorted to activism to achieve various objectives. The activist shareholders are raising amendments to the governance framework, which includes the composition of the board of directors, the appointment of independent directors, alterations in the management compensation structure, modifications in the internal control mechanisms and other demands that often lead to decisions of contention. 

For the most part, shareholder activism is a well-intentioned attempt to address any governance issues that may be found in the company. Like in the case of Invesco[2], the shareholders made a requisition for the extraordinary general meeting ("EGM”) to remove three directors and appoint six directors in Zee Entertainment Enterprises, which Zee opposed on the grounds that the proposed requisition is in contravention of the laws of India. The High Court[3] upheld the shareholder rights to call for an EGM, stating that under Section 100 of the Act, a board can convene an EGM at its discretion but must do so upon a requisition by shareholders holding at least 10% of the paid-up share capital with voting rights. Shareholder activism was seen in Reliance Industries Limited with regard to share swap controversy, wherein significant shareholder opposition emerged[4]. Similarly, the rejection of proposed salary increases by shareholders of Tata Motors Limited[5] through a postal ballot, the rejection of director appointments by minority shareholders of Fortis Healthcare[6] due to their involvement in the governance issues of the company and the raising of  alarm by the institutional investors of Coal India Limited[7] on issues like dividend distribution and corporate governance practices, amongst other matters, underscoring the growing influence of shareholder activism on corporate decision-making.

Despite the growing significance of shareholder activism, it has been observed that such increased involvement of the shareholders has also not turned out well within the management of the companies worldwide. Instances involving companies such as Trell[8], Barclays[9], Exxon[10], Flipkart[11] highlight a trend where shareholders are no longer content to passively wait for promised improvements and instead demand immediate changes as soon as they get involved. Similarly, under pressure from activist shareholders, the chief executive officers of Starbucks[12], SmartRent[13], and Wolfspeed[14] have announced their exit from the companies.

Tools under the Indian Legal Regime

The Companies Act of 2013 (“Act”) empowers shareholders to actively participate in the management of the company. For instance, the Act grants shareholders the right to receive notice and freely cast their votes during a general meeting.[15] Furthermore, shareholders holding at least 10% of the paid-up capital can request the board to convene a shareholders' meeting.[16] It is clear that shareholder approval is essential for major transactions of the company, including but not limited to related party transactions[17], corporate restructuring[18], board composition and remuneration[19], amongst others, which are crucial to safeguarding shareholder interests. Besides that, shareholders who meet the criteria under Section 244[20] of the Act, have the right to file an application with the Tribunal in cases of oppression or mismanagement that negatively affect the shareholders. At the outset, shareholders must understand the scope and limitations of their rights within the legal framework.

Observation

In recent years, India has witnessed a surge in shareholder activism, particularly concerning board-related activities, which has expanded the role of shareholders beyond mere demands to ensure structural stability within companies. This shift allows shareholders to influence a company's performance based on regulatory and legal factors rather than just focusing on profits. While this is a positive development for corporate governance, it may not be sustainable for companies in the long term, as the pressure from shareholders could potentially lead to a revolt. Notably, shareholders now demand changes in administrative operations rather than focusing solely on mergers and acquisitions, signalling a broader shift towards sustainable governance and strategic direction.

Way Forward

A balanced approach ensures that shareholder activism serves long-term corporate interests rather than short-term financial gains. The key factors to be considered are as follows:

1. Shareholder activism should focus on strategic and governance improvements rather than frequent leadership changes or aggressive takeovers;
2. Institutional investors should lead responsible activism, focusing on sustainable growth over immediate financial returns;
3. Retail and minority shareholders should be more aware of their rights and responsibilities under the Act to ensure informed decision-making;
4. Companies should uphold high governance standards, board independence, transparency, and fair compensation to pre-empt activism; and
5. Courts must interpret shareholder rights clearly, guiding companies and investors on legitimate versus excessive interventions.

References

[1] Transformations in Corporate Governance: The Rise of Shareholder Activism and its Implications | Manupatra (October 09. 2024) 

[2] Shareholder Activism in India: The Zee -Invesco Decision | Mondaq,  https://www.mondaq.com/india/shareholders/1330510/zee-vs-invesco-case-update

[3] 2022 SCCOnline Bom 630

[4] Reliance Industries the largest target of shareholder activism | Business Standard, https://www.business-standard.com/podcast/companies/in-focus-reliance-industries-the-latest-target-of-shareholder-activism-121100100317_1.html

[5] Tata Motors shareholders reject pay proposals of 3 executives | Business Today, https://www.businesstoday.in/auto/story/tata-motors-shareholders-reject-executive-salary-proposal-138151-2014-07-04

[6] The Fortis-IHH saga: Of Sadhus, suppression & a sucker punch | The Economic Times, https://economictimes.indiatimes.com/opinion/et-commentary/fortis-ihh-healthcare-case/articleshow/94542230.cms?from=mdr

[7] The Predicament of Corporate Governance in Public Sector Undertakings: Coal India Ltd | SSRN, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2967681

[8] Will Not Take A Hit Lying Down” – Trell Cofounder Sends Seething Note To Investors | Inc42, https://inc42.com/buzz/will-not-take-a-hit-lying-down-trell-cofounder-sends-seething-note-to-investors/ 

[9] Record number of activist investors joined shareholder rebellion in 2024 | Reuters, https://www.reuters.com/markets/record-number-activist-investors-joined-shareholder-rebellion-2024-2025-01-02/

[10] U.S. Republican states support Exxon in shareholder activism dispute | Reuters, https://www.reuters.com/sustainability/boards-policy-regulation/us-republican-states-support-exxon-shareholder-activism-row-2024-05-24/

[11] How Walmart decided to oust Flipkart co-founder Binny Bansal | Business Standard,  https://www.business-standard.com/article/companies/revealed-how-walmart-decided-to-oust-flipkart-co-founder-binny-bansal-118111500702_1.html 

[12] Activist Starboard Value Takes Stake in Starbucks | Wall Street Journal, https://www.wsj.com/business/deals/activist-starboard-value-takes-stake-in-starbucks-ea0409e2

[13] Concerned Stockholder Urges SmartRent Leadership to Address Strategy, Communication, and Governance Matters | PR Newswire, https://www.prnewswire.com/news-releases/concerned-stockholder-urges-smartrent-leadership-to-address-strategy-communication-and-governance-matters-302060140.html 

[14] Activist Jana, in a letter, urges Wolfspeed to eye sale. Other strategic alternatives | Reuters, https://www.reuters.com/business/activist-jana-letter-urges-wolfspeed-eye-sale-other-strategic-alternatives-2024-04-22/ 

[15] Companies Act, 2013, Section 173. 

[16] Companies Act, 2013, Section 100. 

[17] Companies Act, 2013, Section 188. 

[18] Companies Act, 2013, Section 230. 

[19] Companies Act, 2013, Section 149, read with Section 197. 

[20] Companies Act, 2013, Section 244.