In a recent judgement of Western Maharashtra Development Corporation Limited vs. Bajaj Auto Limited, the Bombay High Court has held (among other things) that in case of a “public company”, its shares are freely transferable under the Companies Act, 1956 (the Act) even if the Articles of Association (the Articles) contain restrictive provisions relating to transfer of shares.
One of the distinctions between private companies and public companies is with regard to freedom to transfer shares as is evident from the definitions in the Act. The definition of “private company” and “public company” as per the Act relevant to this alert are reproduced below:
“private company” means a company which has a minimum paid-up capital of ….. as may be prescribed, and by its articles,
(a) restricts the right to transfer its shares, if any;
(b) limits the number of its members to fifty not including –
(i) ; and
(ii) ; and
(c) prohibits any invitation to the public to subscribe for any shares in, or debentures of, the company;
(d) prohibits any invitation or acceptance of deposits from persons other than its members, directors or their relatives:
“public company” means a company which
(a) is not a private company;
(b) has a minimum paid-up capital of…… as may be prescribed;
(c) is a private company which is a subsidiary of a company which is not a private company
It therefore follows that Articles of a private company is required to contain restrictions on transfer of its shares. There is no requirement in the Act to provide restrictive conditions in Articles on transfer of shares in case of a public company.
In case of unlisted public companies, the Articles could contain restrictions interse the shareholders with respect to transfer of shares in such companies. The conditions relating to transfer of shares as agreed between the shareholders under a joint venture agreement/ shareholders agreement or similar arrangements are generally incorporated in the Articles of such companies so as to make them binding on the companies.
The Bombay High Court interpreted provision of section 111A of the Act and held that the shares of public companies are freely transferable irrespective of any restriction contained in its Articles.
Section 111A of the Act is applicable to public companies. Section 111A was enacted in the Act as a consequence of enactment of the Depositories Act 1996 to allow free transfer ability of shares. The relevant extract of the provisions of Section 111A (2) of the Act is as under:
“(2) Subject to the provisions of this section, the shares or debentures and any interest therein of a company shall
be freely transferable: “
Rationale of decision:
The summary of the rationale given by the Bombay High Court with regard to the interpretation of provisions of Section 111A of the Act is as under:
Source: Judgement of the Bombay High Court dated 15th February 2010 in case of Western Maharashtra Development Corpn. Ltd. Vs. Bajaj Auto Limited.