In a recent judgement, a Division Bench of the Bombay High Court has held (among other things) that in case of a “public company”, the agreements between the shareholders which provides for restrictions on free transfer ability of shares are to be respected as they are not in contravention of Section 111A of the Companies Act 1956 (the Act). It further held that unless there are specific restrictions in the Articles of Association (the Articles) relating to transfer of shares, the Act does not expressly restrict or curtail the right of shareholders to enter into consensual arrangement/ agreement in respect of shares held by them.
The Division Bench of the Bombay High Court has analyzed and interpreted the provisions of Section 111A of the Act. In brief, the Division Bench held that:
1. A company or all shareholder of the company need not have to be a party to a shareholder’s agreement and that such an agreement need not be embodied in the Articles for it to be enforceable on contracting parties.
2. If arrangement by a particular shareholder relating to his own shares by way of pledge or preemption was to be restricted by the Company, then there ought to be an express provision in that behalf in the Articles.
3. The sweep of Section 11 1A of the Act was intended mainly to restrict the right of Directors of the Company to refuse transfer of shares. It is not intended to and does not affect the right of shareholders to deal with their specific shares or to enter into any consensual arrangement or agreement regarding their shares (by way of pledge, pre- emption, sale or otherwise).
4. The shareholder has freedom to transfer his shares on terms defined by him, such as Right Of First Refusal (ROFR), provided the terms are consistent with other regulations.
5. The fact that shares of a public company can be subscribed and there is no prohibition for invitation to the public to subscribe to shares, unlike in the case of a private company, does not curtail the right of the shareholder of a public company to arrive at consensual agreement which is otherwise in conformity with the extant regulations and the governing laws.
6. The legal provision of Section 111A of the Act does not expressly restrict or take away the right of shareholders to enter into consensual arrangement or agreement in respect of shares held by them. The expression “freely transferable” in Section 111A of the Act does not mean that the shareholder cannot enter into private arrangement with the third party (proposed transferee) in relation to specific shares.
Conclusion:
- The decision will put to rest an uncertainty created by the decision of the Single judge of the Bombay High Court in case of Western Maharashtra Development Corporation Limited vs. Bajaj Auto Limited (2010), where it was held that in case of a “public company”, its shares are freely transferable under the Act even if the Articles of Association (the Articles) contain restrictive provisions relating to transfer of shares.
- In view of the Division Bench decision, existing arrangements in Articles of public companies which contains restrictions on transfer of shares and debentures such as ROFR, Tag-along rights, Drag-along rights and similar other arrangements can continue to be enforceable.
- One needs to see if the decision is challenged before the Supreme Court.
- It would be interesting to know the stand of the Government to this issue while piloting the revamped Companies Bill 2009 in the Parliament.
