The Tata-SP Feud: A Corporate Battle that Could Redefine Shareholder Rights

The ongoing tussle between the Tata Trusts and the Shapoorji Pallonji (SP) Group over the transfer of pledged shares in Tata Sons has taken a new turn. At the heart of the issue lies the SP Group’s attempt to raise fresh loans by transferring shares currently held as collateral. Tata Trusts’ vehement opposition to this move underscores a deeper conflict—one that involves governance, legacy, and liquidity in one of India’s most storied conglomerates.

This dispute—a culmination of years of strained relations—has raised important questions about the balance of power between majority and minority shareholders in private companies. For decades, the SP Group has been a significant minority shareholder in Tata Sons, holding an 18.37% stake. However, financial pressures, exacerbated by the adverse economic conditions, have compelled the group to explore refinancing options that depend on leveraging its holdings in Tata Sons through a pledge. The Tata Trusts, citing the Articles of Association (AoA) of Tata Sons, have opposed the creation of a pledge, arguing that such moves could jeopardize the integrity and governance of the group.

Control and Governance: The Core of the Conflict

The Tata Trusts’ objections are rooted in the governance clauses of Tata Sons’ AoA, particularly the Right of First Refusal (RoFR). This clause ensures that existing shareholders have the first opportunity to purchase any shares proposed for sale or transfer. While this provision is designed to protect the strategic interests of Tata Sons, it also limits the financial flexibility of minority stakeholders like the SP Group.

The legal nuances of the RoFR provision come into sharp focus in this case. While pledging shares is not the same as transferring ownership, it introduces potential complications. Lenders acquiring pledged shares in case of default could disrupt Tata Sons’ carefully guarded shareholding structure. The SP Group’s argument that pledging does not breach RoFR—as the ownership remains unchanged—stands in contrast to the Tata Trusts’ stance, which emphasizes the potential risks of external influence on governance.

Adding another layer to this debate, the AoA of Tata Sons requires that any member wishing to transfer shares must first offer them to other shareholders. A view could be taken that even if lenders were to invoke the pledge, they would be obligated to offer the shares to existing members before selling them in the open market. This stipulation strengthens Tata Trusts’ ability to maintain control over the company’s shareholding pattern, even in scenarios involving financial distress.

Read More | SP Group Shares in Tata Sons and The Illiquidity Risk for Minority Shareholders

The SP Group’s counterargument is equally compelling: as a minority shareholder, it has the right to derive financial benefit from its stake, especially during times of crisis. By blocking the transfer, the Tata Trusts effectively render the SP Group’s holding illiquid, putting additional strain on an already precarious financial position. This raises broader questions about whether such governance structures—while legally valid—are fair in today’s competitive and often volatile business landscape.

A Broader Narrative on Shareholder Rights

At its core, the Tata-SP feud represents a critical test case for minority shareholder rights in India. The SP Group’s attempts to monetize its stake through loan refinancing challenge the rigidity of existing corporate governance frameworks. For minority stakeholders in closely held entities, the ability to access liquidity is often constrained by majority-driven governance mechanisms. The SP Group’s plight highlights the tension between safeguarding majority shareholder interests and ensuring equitable treatment of all shareholders.

Tata Sons’ status as a private entity adds another layer of complexity. Unlike publicly listed companies, private firms enjoy more leeway in structuring shareholder agreements, often at the cost of minority rights. This case underscores the need to strike a balance between strategic control and financial autonomy—a balance that is becoming increasingly relevant as businesses face economic headwinds.

What Lies Ahead

The Supreme Court’s role in resolving this feud will be pivotal. A verdict favoring the SP Group could set a precedent for loosening restrictions on minority shareholders in private companies, potentially reshaping the contours of corporate governance in India. On the other hand, a decision supporting Tata Trusts might reaffirm the sanctity of AoA, reinforcing the authority of majority stakeholders in dictating the terms of engagement.

Beyond the legal battle, a negotiated settlement remains a possibility. A buyout of the SP Group’s stake by Tata Sons could offer a pragmatic resolution, though it would hinge on mutually acceptable valuations. The SP Group has pegged its stake at approximately ₹1.75 lakh crore—a figure that Tata Sons might contest given the strategic implications of such a transaction. Reaching a middle ground will require careful deliberation, not just on valuation but also on the future implications for governance and control.

Lessons for India Inc.

The Tata-SP feud serves as a cautionary tale for corporate India. It underscores the importance of clear and adaptable shareholder agreements that balance governance imperatives with financial flexibility. While clauses like RoFR are crucial for protecting strategic interests, they must also account for the legitimate needs of minority stakeholders, particularly in times of economic distress.

Read More | Tata Sons vs SP Group: A Corporate Clash with National Stakes

This dispute also highlights the criticality of financial foresight. For minority stakeholders, relying solely on legacy arrangements without contingency plans can lead to significant challenges. For majority stakeholders, preserving governance structures should not come at the expense of alienating partners who have historically played a vital role in the company’s growth.

A Defining Moment

As the Tata Trust-SP Group feud unfolds, it is not merely a corporate conflict but a defining moment in India’s corporate governance journey. The stakes extend beyond Tata Sons and SP Group, touching upon broader issues of equity, governance, and financial adaptability in the Indian business ecosystem.

Whether resolved through the courts or the boardroom, this case will likely leave a lasting imprint on how shareholder rights and responsibilities are balanced in the future. For now, it stands as a stark reminder of the complexities involved in navigating the interplay between tradition and modernity, governance and liquidity, and majority control versus minority protections.

The author is senior partner, Khaitan Legal Associates. Views expressed are personal.