“Coerced voting” as understood in the US context, refers to situations where controlling shareholders compel other public shareholders to vote in a predetermined manner in relation to a specific matter. This may potentially involve instances of bribing, offering incentives, or entry into arrangements to make them vote in a certain way. Such voting mechanisms inherently involve a level of influence exerted by the controlling shareholder.

THE COMPANIES ACT

The Companies Act, 2013 (the “Companies Act”), together with rules made thereunder, serves as the primary legislation regulating company affairs in India. There is no guidance under the Companies Act in relation to coerced voting that determines the legality or illegality of such arrangements. Unlike Delaware law, Indian company law does not mandate fiduciary duties of controlling or majority shareholders towards minority shareholders. The Companies Act does however include statutory safeguards to protect the interests of minority shareholders.

As regards liability, one potential recourse could be under Section 447 of the Act in relation to fraud. Pursuant to Section 447, ‘fraud’ includes “any act, omission, concealment of any fact or abuse of position committed by any person or any other person with the connivance in any manner, with intent to deceive, to gain undue advantage from, or to injure the interests of, the company or its shareholders or its creditors or any other person, whether or not there is any wrongful gain or wrongful loss”. Any occurrence where a majority shareholder engages in coerced voting by means of bribery, influence, misinformation or deception against minority shareholders, with the aim of securing approval for a resolution in its favor, resulting in undue advantage or one which injures the interest of the company or the shareholders, may, on the facts of a particular case, amount to a fraudulent practice punishable under Section 447.

However, as the Indian company law jurisprudence is largely silent so far regarding the implications and legality of such arrangements, it is relevant to reflect on Delaware law where courts have taken a stance on coerced voting.

DELAWARE LAW ON “COERCED VOTING”

In Delaware, the position on coercive shareholder voting has largely been shaped by judicial interpretation. Typically, courts deem arrangements determining voting behavior acceptable unless there is evidence of fraud. If shareholders have consented to a transaction with full disclosure of material facts, free from coercion or undue influence, courts are unlikely to scrutinize their decision.

For instance, in the case of Corwin v KKR Financial Holdings LLC (125 A.3d 304 (2015)) where a merger approved by an independent board and a majority of disinterested shareholders, faced challenge, the Supreme Court of Delaware declined to review the claim and upheld the rule that when a fully informed, uncoerced majority of the disinterested shareholders have voluntarily approved a transaction with a non-controlling shareholder, their judgement would not be questioned.

However, the Court of Chancery of Delaware has rejected the application of this rule in Sciabacucchi v Liberty Broadband Corporation (2017 WL 2352152 (2017)) stating that the voting was “structurally coerced”. This implies that the transaction was structured in a way which precluded shareholders from exercising a free choice. In this case, if the shareholders did not approve the share issuances to Liberty Broadband Corporation and the proxy voting agreement which increased Liberty Broadband Corporation’s total voting stake to 25.01%, they would not have derived the benefits of the merger of Charter communications, Inc. with Time Warner Cable and purchase of Bright House Networks, LLC.

The principle of “structural coercion” could have relevance to shareholder votes in an Indian context as well.

Another area of discussion has been “vote-buying” agreements. The premise for such agreements is that shareholders have a proprietary interest in the shares they hold and can legally choose to relinquish their right to vote. In Hewlett v Hewlett Packard Company (2002 WL 818091 (2002)), there were allegations that vote-buying, coercion and intimidation by the HP management changed the voting behavior of Deutsche Bank in respect of the HP-Compaq merger, at the eleventh hour.

In this regard, the court noted as follows:

“Initially, I believe the facts as alleged in the complaint support a reasonable inference that the switch of Deutsche Bank’s vote of 17 million shares to favor the merger was the result of enticement or coercion of Deutsche Bank by HP management. The Hewlett Parties allege that just four days before the stockholders’ meeting Deutsche Bank was named as a co-arranger of a multi-billion dollar credit facility. The same day (March 15), Deutsche Bank had submitted all of its proxies and voted 25 million shares against the merger. On Monday, March 18, it is alleged that Deutsche Bank expressed fear over losing future business as a result of HP’s negative reaction to Deutsche Bank’s vote against the HP management sponsored merger. Finally, the complaint alleges that, on March 19, the date of the special stockholders’ meeting, HP delayed the meeting while HP management was involved in a purportedly coercive telephone conference and then closed the polls immediately after Deutchse Bank switched 17 million of its votes as a result of the understanding arrived at during the call.”

Relying on Schreiber v Carney (447 A.2d 17 (1982)), the court held vote-buying arrangements are illegal if the object or purpose is to defraud or in some way disenfranchise the other shareholders.

The Schreiber court had noted that a notion that vote-buying was illegal per se as a matter of public policy “was obsolete because it is both impracticable and impossible of application to modern corporations… and that the courts have gradually abandoned it.” However, the Schreiber court held that the principle that vote-buying is illegal if entered into for fraudulent purposes survives.

The court in Hewlett observed that Schreiber is instructive in demonstrating how a vote-buying arrangement in which a board expends corporate assets to purchase votes in support of a board-favored transaction may be validly consummated. There a vote-buying agreement was being contemplated in which corporate assets to be loaned to a 35% shareholder on favorable terms as consideration for that shareholder’s agreement to vote in favor of a management-endorsed merger. The company formed a special committee to consider the merger and also the advisability of entering into the vote-buying agreement. The special committee hired independent counsel and then determined that both the merger and the shareholder agreement would be in the best interests of the company and its shareholders. The board of directors unanimously approved the agreement as proposed and submitted the vote-buying arrangement to the shareholders for a separate vote. As a condition for passage of the vote-buying proposal, a majority of the outstanding shares, as well as a majority of the shares neither participating in the agreement nor owned by directors and officers of the company, had to be voted in favor of the proposal.

The Schreiber court noted all of these protective measures and ultimately held that “the subsequent ratification of the shareholder agreement by a majority of the independent stockholders, after a full disclosure of all germane facts with complete candor precludes any further judicial inquiry.”

The court in Hewlett held that “each case must be evaluated on its own merits to determine whether or not the legitimacy of the shareholder franchise has been undercut in an unacceptable way.” The Hewlett court concluded that votes were bought from Deutsche Bank with corporate assets and no steps were taken to ensure that the shareholder franchise was protected. On this basis, the court rejected the motion to dismiss the vote-buying claim.

CONCLUSION

Indian courts have acknowledged that the right to cast one's vote is a proprietary right and the holder of shares may exercise this right in any manner it pleases.[1]

It is evident that this freedom would be compromised in cases of coerced voting which have the effect defrauding other shareholders. However, it remains to be seen whether Indian courts will be tempted to follow an approach adopted in early Delaware case law (which has since been abandoned) of per se illegality on the basis that vote-buying is illegal per se as a matter of public policy.

Footnotes

[1] Mohan Lal Chandumall And Ors. v. Punjab Company Ltd., AIR 1961 PUNJAB 485; Rolta India Ltd. and Ors. v. Venire Industries Ltd. and Ors. (29.10.1999 - BOMHC): MANU/MH/0189/2000