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THEIR FAILINGS, OUR LEARNINGS

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TWO GENERATIONS – GAPS AND LAPSES

Context:

A large textile Company was caught in the middle of a dispute between a father and a son, intertwined with seemingly unjustifiable Related Party Transactions. The Board seemed to be missing in action while the Company was hurt by the family linen being washed in public.

  • A promoter Chairman became Chairman Emeritus of his Company in 2000, after serving as Executive Chairman for 20 years. He however continued to be a Director on the Board, and a member of several committees of the Board. His son became the Chairman and Managing Director (CMD) of the Company.
  • In 2015, he gave his stake in the Company, totalling to 37% (valued at approx. INR 1000 crores at that time), to his son, who was the CMD.
  • In 2017, the father accused his son of cheating him out of property, as well as throwing him out of the Company’s offices.
  • Under a 2007 agreement to settle a family dispute, it had been decided that the father could buy a property, which belonged to the Company, at a pre-determined price which was below the market price.
  • However, by 2017, when the father wanted to buy the property, the value of the property had risen significantly. The sale as per the earlier price would have resulted in a loss to the Company. The transaction was a Related Party Transaction (RPT). As a result, the Board recommended this transaction to the shareholders for approval.
  • The CMD of the Company too advised the Board against selling a valuable asset of the Company.
  • Shareholders rejected the proposal, with 97% voting against the resolution.
  • The father felt that the son could have decided the matter at the Board level, and need not have taken it to the shareholders.
  • In 2017, the father approached the Bombay High Court seeking possession of the property.
  • As per the annual report of the Company for FY 2017-18, on January 24, 2018, the father vacated the office of Director, in accordance with Section 167(1)(b) of the Companies Act, 2013, which states that if a Director absents himself from Board meetings for a period of 12 months, with or without seeking leave of absence, he will vacate the office of a Director. In FY 2016-17, he had attended 1 out of 4 meetings, and in FY 2017-18, he had attended no meeting.
  • He wrote several letters to the Company Secretary and to the Board. He complained that he was not being kept in the loop about Board meetings.
  • In August, 2018, he complained to the Board about his son removing him from the Company. He also mentioned that most of the Directors knew him personally and knew how he had built the Company.
  • In September, 2018, the Company Secretary wrote to him stating that “Considering the aspersions cast against the Board, the Company and the Chairman and Managing Director, including repeated unparliamentary language, the Board has decided to withdraw the title of Chairman-Emeritus, post your vacation of office as a Director”. The letter also stated clearly that the disagreement among the family members had nothing to do with this decision.
  • In response, the father stated that he would defy the Board unless or until the proof of the Board’s decision of sacking was shown to him.
  • The CMD, in a media interview, stated that the removal of the father was a decision of the Board, and the Board must have had its reasons for the same. He added that he had no role to play in it.

 

Points to ponder

  • When an inter-generational conflict, of a destabilising nature, affects a Company, should Independent Directors not ensure that the Company’s interests are not jeopardised?
  • Since reputation risk is to be addressed by the Board, was the Board found wanting while this drama was being played out?