Articles of Association (“AoA”) are a public document of the company that lays down the rules & regulations for the internal management & governance of the company. They are one of the key incorporation documents of a company, along with the Memorandum of Association (“MoA”). MoA lays down what is to be done and AoA lays down how it is to be done. The provisions related to AoA are given under Section 5 and 6 of the Companies Act, 2013(“Companies Act”).
Shareholders’ Agreement (“SHA”), on the other hand, is a contract between shareholders of the company that outlines the rights, duties and obligations of all the shareholders. The primary goal of SHA is to resolve any potential conflict between shareholders that may arise in the future. SHA is not explicitly defined under the Companies Act or any other law, however, it is enforceable as a contract between shareholders and the company under the Indian Contracts Act, 1872.
Conflict between SHA and AOA
According to Section 6 of the Companies Act, the provisions of the Companies Act shall override any other agreement. Hence, AoA should have precedence over SHA because AoA is explicitly given under the Companies Act. The courts have, on multiple occasions, expressed their views on this issue. Let us now examine the key judicial precedents.
In V.B. Rangaraj v. V.B. Gopalakrishnan (1991) an agreement was entered into between shareholders of a private company wherein a restriction was imposed on a living member of the company to transfer his shares only to a member of his own branch of the family, but these restrictions were not included in the AoA. The main issue was whether the shareholders can among themselves enter into an agreement which is contrary to or inconsistent with the Articles of Association of the company. The Hon’ble Supreme Court held that the clauses of the SHA, even if they comply with the Companies Act, are not enforceable unless they are incorporated in the AoA.
In Mafatlal Industries Ltd., v. Gujarat Gas Co. Ltd (1997), the Hon’ble Gujarat High Court relied on V.B. Rangaraj judgement and held that the preemptive rights of Shareholders of a public company are not enforceable as they are not explicitly mentioned in the AoA.
However, in Premier Hockey Development Private Ltd vs. Indian Hockey Federation (2011), the Hon’ble Delhi High Court ruled in favour of enforcing the provisions of SHA. ESPN and the Indian Hockey Federation (“IHF”) entered into a SHA and formed a new company called Premier Hockey Development Private Ltd (“PHDPL”) to organise a hockey league, where ESPN subscribed to 49% share and 51% shares were allotted to IHF. IHF was violating the SHA by organising a hockey league with a third party, and due to this, PHDPL filed a petition. The IHF contended that the board of Directors of PHDPL had not fulfilled the quorum requirements mentioned in clauses 10.3.2 and 10.3.3 of the SHA while initiating the resolution to file the petition against IHF. To this, PHDPL argued that none of these clauses of the SHA were incorporated into the AoA of PHDPL, and therefore, unenforceable. To this, the Hon’ble Delhi High Court held that no provision of Companies Act or clauses in the AoA are in conflict with clause 10.3.2 and 10.3.3 of the SHA and therefore the SHA and its provisions are binding on the Shareholders and the company.
In the case of Vodafone International Holdings BV vs. Union of India (2012), the Hon’ble Supreme Court disagreed with V.B. Rangaraj judgement without overruling it. The Hon’ble Supreme Court held that in case of conflict between the SHA and AoA, the provisions of AoA would prevail. Shareholders can enter into any agreement in the best interest of the company, but the only thing is that it shall not go contrary to the provisions in the AoA.
The Hon’ble Delhi High Court in World Phone India Pvt. Ltd. and Ors. Vs. WPI Group Inc (2013) took a similar stand. In this case, there was a conflict between the appellants and respondents, both of whom are shareholders. Respondent argued that appellant passed a resolution in the absence of respondent, hence violating clause 6.2 of SHA. The Hon’ble Delhi High Court held that clause 6.2 of the SHA giving affirmative rights to shareholders is not binding. Since AoA did not mention the requirement of an affirmative vote, the same provision in SHA cannot be considered binding on the company or its shareholders.
Conclusion
The above precedents make it clear that Indian law gives primacy to the Articles of Association over the Shareholders’ Agreement. It is a settled position that in case of any conflict between the SHA and the AoA, the AoA will prevail. Therefore, in order to mitigate risks, it is always advisable to first amend the AoA before incorporating provisions in the SHA that are not already covered by the AoA. Provisions in a SHA will only be binding if they are supported by the AoA.
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