IGHT OF FIRST R EFUSAL EFUSAL: A CONTRACTUAL R ESTRICTION ESTRICTION ON R IGHT TRANSFER O OF SHARES
PROJECT (Towards (Towards partial fulfilment of mid-term examination e xamination in the subject of Company Law- I)
SUBMITTED B Y :
SUBMITTED
TO: Krati Chouhan (1061)
Mr. Anindhya Tiwari
Semester V
Faculty o !aw
NATIONAL LAW UNIVERSITY , JODHPUR SUMMER SESSION ULY -N (JULY -NOVEMBER 2015)
TABLE OF CONTENTS
1.
Ta"le Ta"le o Contents...................................... Contents............................................................. .................................................................... ............................................. .#
2.
Ac$nowled%ement................................... Ac$nowled%ement............ ............................................... ............................................... ...............................................& ........................&
3.
A"stract..........................................................................................................................'
4.
ntroduction...................................... ntroduction............................................................. .............................................. ....................................................... ................................
5.
*re+,m-tie /i%ht.......................................... /i%ht................................................................. .............................................. .........................................6 ..................6
6.
ac$%round................................. ac$%round........................................................ .............................................. ............................................................ .....................................
7.
2udicial *recedents........................ *recedents............................................... ............................................... ..........................................................3 ..................................3 +
4i%h Courts iew................................................................. iew...................................................................................... .............................. .........3 3
+
Su-reme Courts iew.......................................... iew................................................................. .......................................... ......................10 ...10
8.
Current *osition in ndia............................................................ ndia.............................................................................................. .................................. 1#
9.
*roision under the Com-anies Act5 136.......................................... 136...................................................................1' .........................1'
10. Messer
+
4oldin%s !imited v. Shyam v. Shyam Madanmohan /uia and rs................................16 Analysis.......................................... Analysis................................................................. .............................................. ...........................................13 ....................13
11.*roision under 12. /estrictions
The Com-anies Act5 #01&.............................................. #01&..................................................................13 ....................13
on the transera"ility o shares in *u"lic and *riate Com-anies............#1
13. The
/i%ht o First /eusal still remains a si%niicant unresoled controersy in ndian Cor-orate !aw......................................... !aw................................................................ .............................................. ..............................................## .......................##
Conclusion........................................................... .............................................. .............................................. ..................................#' ...........#' 14.Conclusion.................................... i"lio%ra-hy........................................................... .............................................. .............................................. ...............................#6 ........#6 15.i"lio%ra-hy.................................... +
Articles.............................................................................................................#6
+
oo$s.................................... oo$s........................................................... .............................................. .............................................. ..............................# .......#
+
Cases................................................................................................................#
+
/e-orts 7 8otiications........................................................ 8otiications........................................................................ ........................... ...........# #
+
Statutes.............................................................................................................#9
+
:e"sites...........................................................................................................#9
*a%e 2 o 30
TABLE OF CONTENTS
1.
Ta"le Ta"le o Contents...................................... Contents............................................................. .................................................................... ............................................. .#
2.
Ac$nowled%ement................................... Ac$nowled%ement............ ............................................... ............................................... ...............................................& ........................&
3.
A"stract..........................................................................................................................'
4.
ntroduction...................................... ntroduction............................................................. .............................................. ....................................................... ................................
5.
*re+,m-tie /i%ht.......................................... /i%ht................................................................. .............................................. .........................................6 ..................6
6.
ac$%round................................. ac$%round........................................................ .............................................. ............................................................ .....................................
7.
2udicial *recedents........................ *recedents............................................... ............................................... ..........................................................3 ..................................3 +
4i%h Courts iew................................................................. iew...................................................................................... .............................. .........3 3
+
Su-reme Courts iew.......................................... iew................................................................. .......................................... ......................10 ...10
8.
Current *osition in ndia............................................................ ndia.............................................................................................. .................................. 1#
9.
*roision under the Com-anies Act5 136.......................................... 136...................................................................1' .........................1'
10. Messer
+
4oldin%s !imited v. Shyam v. Shyam Madanmohan /uia and rs................................16 Analysis.......................................... Analysis................................................................. .............................................. ...........................................13 ....................13
11.*roision under 12. /estrictions
The Com-anies Act5 #01&.............................................. #01&..................................................................13 ....................13
on the transera"ility o shares in *u"lic and *riate Com-anies............#1
13. The
/i%ht o First /eusal still remains a si%niicant unresoled controersy in ndian Cor-orate !aw......................................... !aw................................................................ .............................................. ..............................................## .......................##
Conclusion........................................................... .............................................. .............................................. ..................................#' ...........#' 14.Conclusion.................................... i"lio%ra-hy........................................................... .............................................. .............................................. ...............................#6 ........#6 15.i"lio%ra-hy.................................... +
Articles.............................................................................................................#6
+
oo$s.................................... oo$s........................................................... .............................................. .............................................. ..............................# .......#
+
Cases................................................................................................................#
+
/e-orts 7 8otiications........................................................ 8otiications........................................................................ ........................... ...........# #
+
Statutes.............................................................................................................#9
+
:e"sites...........................................................................................................#9
*a%e 2 o 30
ACKNOWLEDGEMENT
This -ro;ect is a ma;or milestone in our ;ourney o learnin% in the su";ect o Com-any !aw. would li$e to "e%in "y than$in%
-erience has deinitely "een an interestin% and enrichin% one.
Krati Chouhan
*a%e 3 o 30
ABSTRACT
The aim of this project is to analyse the current position of the clause i!ht of "irst efusal (#$"%) which is one &ey term in commercial contracts involvin! shareholders of corporate entities. $" is a pre-emptive option of a non-sellin! shareholder to purchase shares of a company that a sellin! shareholder proposes to li'uidate. If the non-sellin! shareholder refuses to purchase such shares the sellin! shareholder can sell the shares to a third party usually with a stipulation that the terms of such sale and more importantly the sale price should not be more favourable than those offered to the non-sellin! shareholder. In a nutshell $" forms an inte!ral part to investors protection in a shareholders a!reement (#*+,%). $" (amon! other shareholders ri!hts such as ri!ht to first offer ta! alon! dra! alon!) has however been viewed as a hindrance to the principle of free transferability of shares of a public limited company laid down in *ection -, of the Companies ,ct /01.
*a%e 4 o 30
INTRODUCTION
Amon% arious -roisions o incor-oratin% documents such as shareholder?s a%reement in a cor-oration5 an item will oten a--ear la"elled @/F/ B @/i%ht o First /eusal. /F/ is a contractual ri%ht that o"li%es the sellin% shareholder not to sell its shares in the com-any to a third -arty without oerin% his shares to another -arty (usually the other e>istin% shareholders). the e>istin% shareholder(s) does not acce-t the oer5 the sellin% shareholder is ree to sell his sta$e to a third -arty5 prov!"! #$" %&'" % (o# o( )or" *&vo+r&,'" #"r)% #$&( #$o%" o**"r"! #o #$" "-%#(. %$&r"$o'!"r% . Meanin% there"y5 the /F/ re=uires the
owner o a -ro-erty to oer the same to the ri%ht holder5 on the same terms as those oered "y the third -arty5 "eore the owner can sell the -ro-erty to that third -arty. y ado-tin% this -roision5 the shareholders o the cor-oration -romise that they only will sell their shares ater ne%otiatin% a -rice with a third -arty and oerin% the shares at that -rice to their ellow shareholders. /i%ht o First /eusal in a shareholder?s a%reement -roides the %rantee with a contin%ent o-tion to -urchase an asset i the %rantor elects to sell the shares1. eore ta$in% into account the le%al -osition with re%ard to the aoresaid issue5 it would "e worthwhile to hae a "rie insi%ht into some o the ocal conce-ts -ertainin% to the -roisions incor-orated in a%reements such as 2oint Venture A%reements? or Shareholders A%reement?. These a%reements si%ned amon%st the shareholders may include some -roisions5 which "roadly include the ollowin%D i. ii.
The /i%ht o irst reusalE ra%+Alon% /i%htE and A ri%ht that ena"les a ma;ority shareholder to orce a minority shareholder to ;oin in the sale o a com-any. The ma;ority owner doin% the dra%%in% must %ie the minority shareholder the same -rice5 terms5 and conditions as any other
iii.
seller. Ta%+Alon% /i%ht. a ma;ority shareholder sells his or her sta$e5 then the minority shareholder has the ri%ht to ;oin the transaction and sell his or her minority sta$e in the com-any.
1 aid . :al$er5 ethin&in! the i!ht of "irst efusal 5 th Stanord 2ournal o !aw5 13335 iscussion *a-er 8o. #615 The 4arard !aw School. *a%e / o 30
A /oo essentially means that i a shareholder entity decides to sell its share in the com-any5 the sellin% shareholder must irst oer its shares to the other shareholder (to whom a /oo is %ranted)5 who in turn may oer a -rice or the shares to the sellin% shareholder. satisied "y the -rice oered "y the other shareholder or i the sellin% shareholder is una"le to o"tain a hi%her -rice rom a third -arty5 then the sellin% shareholder entity only has the o-tion to sell its shares to the shareholder who has the /oo ri%ht. 4oweer5 i the sellin% shareholder receies a -rice hi%her than that oered "y the other shareholder rom a third -arty5 the sellin% shareholder is ree to sell shares to the third -arty at the hi%her -rice. For instance5 i there are two shareholders in a -riate com-any5 say5 A and 5 with a /oo in aour o %ranted "y A5 and A decides to sell his shares5 then A must irst oer his shares to . nly i reuses to -urchase A?s shares5 or i A can o"tain a hi%her -rice or his shares rom a third -arty than that oered "y 5 can A sell his share to a third -arty. n the other hand5 i there is a /or in aour o 5 then A is irst re=uired to oer his share to third -arties and o"tain a -rice rom them or this. A is then re=uired to a--roach with the -rice oered "y third -arties. can match or "etter the -rice oered "y third -arties5 A must sell his share to . Contractual ri%ht under which a -arty has the irst o--ortunity to "uy an asset "eore it is oered to a third -arty. Com-are with ri%ht o irst reusal. Also called -reem-tie ri%ht or ri%ht o -reem-tion.
Ty-ically in the /i%ht o irst reusal (/F/)5 at least three -arties are im-licated G the owner and ri%ht holder who hae contracted or the %rant o the ri%ht and one or more -otential third+-arty "uyers5 should "e to whom the com-any wishes to oer B sell the shares. # n "rie5 the ri%ht o irst reusal is a$in in conce-t to a call o-tion. The /F/ can coer almost any sort o assets and is commonly em-loyed in a ariety o contractual settin%s. t is ound5 amon% others5 in real estate sale5 lease contracts5 -ersonal -ro-erty5 a -atient license5 a screen-lay5 in a%reements amon% shareholders o a closely held com-any or in an interest in a "usiness. t mi%ht also coer "usiness transactions that are not strictly assets5 such as the ri%ht to enter into a ;oin enture5 a distri"ution a%reement or mana%ement a%reement. For instance5 in the entertainment industry5 a ri%ht o irst reusal on a conce-t or a screen-lay would %ie # 2nforceability of provisions not formin! part of the company documents3 ,n analysis in the law5 S, 7 Cor-orate !aw :ee$ly ssue5 Se-tem"er ##5 #009 *a%e o 30
the holder the ri%ht5 assumin%ly5 to ma$e that moie irst. nly i the holder turns it down may the owner then sho- it around to other -arties. Ta$in% the a"oe into consideration5 it may "e noted that the aorementioned ri%ht is ramed so as to enorce the interests o the inestors and the -romotersB current shareholders in a -articular enture. Considerin% the same5 it would "e a utile e>ercise i the enorcea"ility o the said ri%ht is not $nown to the -arties to such a%reements.
PRE1EMPTIE R IGHT
As com-ared to /F/5 there is an almost similar ri%ht which is $nown as a -re+em-tie ri%ht. t may not "e easy -ro-osition to dierentiate "etween the /F/ and the -re+em-tie ri%hts5 as the two seem to "e similar5 i not identical. Contrary to a ri%ht o irst reusal5 a -re+ em-tie ri%ht a--ears to "e similar to & r.$# o* *r%# o**"r . A /i%ht o irst oer is a close cousin to the ri%ht o the irst reusal. U(!"r #$" r.$# o* *r%# o**"r ,"*or" &( o("r 5&( %"'' prop"r#6 %+,7"5# #o & r.$# o* *r%# o**"r #$" r.$# $o'!"r )+%# ," .v"( #$" 5$&(5" #o )&8" &( o**"r *or #$" prop"r#69 T$" o("r 5&( #$"( "#$"r &55"p# #$" o**"r or #$" o("r 5&( %"'' #$" prop"r#6 #o & #$r! p&r#6 ,+# o('6 &# & pr5" &,ov" #$" o(" o**"r"! ,6 #$" r.$# $o'!"r9 For this ri%ht to "e eectie and enorcea"le5 in the case o -riate com-any5
the same may "e inserted in the Articles o Association o the Com-any. As -er the said ri%ht5 the ri%ht to transer shares to non+mem"ers is restricted. Further5 it is worthwhile to note that a -riate a%reement "etween two or more shareholders in which they im-ose restrictions u-on each other as to their ri%ht o transer does not "ind the com-any and5 conse=uently5 the same is li$ely to "e a su";ect matter o a ciil suit "etween the -arties to the a%reement and the -arty committin% "reach may hae to answer in terms o dama%es to the other. To "ind the com-any5 the a%reement has to include the com-any as one o the -arties5 and it has to "e a su";ect matter in the Articles o Association.&
& *upra note 1 *a%e ; o 30
BACKGROUND
The discussion on this su";ect "e%an in the year 133# when the Su-reme Court in the case o V.B.Rangaraj v. V.B.Gopalakrishnan 4 held that in case o a -riate limited com-any transer
restrictions5 i any5 a%reed "y the shareholders unless em"odied into the articles o association would not "e alid and "indin%. n the other hand5 the elhi 4i%h Court and the Com-any !aw oard held that in case o listed shares there cannot "e any restrictions namely ri%hts o irst reusal or any such ri%hts. This was "ecause Section 111A (#) o the Com-anies Act 1365 -roides that the shares and de"entures and any interest therein o a com-any shall "e reely transera"le. 2ustice Chandrachud o the om"ay 4i%h Court also too$ the same iew in #010 in the case o Western Maharashtra Development Corporation v. Bajaj Auto Ltd and o"sered that @the -rinci-le o ree transera"ility must "e %ien a "road dimension in order to ulil the o";ect o the law. m-osin% restrictions on the -rinci-le o ree transera"ility is a le%islatie unction5 sim-ly "ecause the -ostulate o ree transera"ility was enunciated as a matter o le%islatie -olicy when *arliament introduced Section 111A into the Com-anies Act5 136. That is a "indin% -rece-t which %oerns the discourse on transera"ility o shares. The word @transera"le is o the widest -ossi"le im-ort and *arliament "y usin% the e>-ression @reely transera"le5 has reinorced the le%islatie intent o allowin% transers o shares o -u"lic com-anies in a ree and eicient domain. The eect o a clause o -re+em-tion is to im-ose a restriction on the ree transera"ility o the shares "y su";ectin% the norms o transera"ility laid down in Section 111A to a -re+em-tie ri%ht created "y the a%reement "etween the -arties. This is im-ermissi"le. This inter-retation was causin% lot o hardshi- on the *, inestors B Strate%ic *artners in ne%otiatin% the ri%ht o irst reusal or ta% B dra% ri%hts with the *romoters5 which are ty-ically e>it o-tions ne%otiated to -rotect their commercial interest. Huestion thereore was
' 4 5 an!araj v. 4 5 6opala&rishnan5 I1331J 6 C!A #11 Section 111A (#) o Com-anies Act5 136D Su";ect to the -roisions o this section5 the shares or de"entures and any interest therein o a com-any shall "e reely transera"le. 6 (#010) 1' Com-Cas 3& (om) *a%e < o 30
whether in a listed com-any one can alidly oer ri%ht o irst reusal or ta%Bdra% alon% ri%hts that would ultimately "e le%ally enorcea"le The aoresaid decisions came u- or consideration "eore the iision "ench o the om"ay 4i%h Court in case o Messer !oldings Limited v. "h#am Madanmohan Ruia and $rs % . The ;ud%ment is interestin% as it comes in the wa$e o the om"ay 4i%h Court ;ud%ment in a;a; Auto case9E it chan%ed the way to ne%otiate restriction on transer o shares in a -u"lic com-any. That ;ud%ment had ruled that any -re+em-tie ri%hts oer shares in -u"lic limited com-anies were ille%al in iew o the -rinci-le o @ree transera"ility enshrined in Section 111A o the Com-anies Act5 136. The de"ate on enorcea"ili ty o terms o shareholder a%reements %oernin% -u"lic limited com-anies is deinitely not oer yet. The Court with res-ect re;ected the earlier inter-retation %ien to the words @ree transera"le used in section 111A "y the sin%le 2ud%e in the a;a; Auto case3. The iision "ench or the irst time e>amined the true intent o section 111A5 the reason or its insertion in the Com-anies Act5 136 and o"sered that earlier when the shares were in -hysical orm5 "oard o directors used ar"itrary -owers to re;ect transer o shares leadin% to lot o com-laints "y the transerees. That situation was -artially remedied "y insertion o section ##A o the Securities Contract /e%ulation Act5 which laid down only our %rounds on which any "oard could re;ect transers. :ith the introduction o the conce-t o dematerialiLed shares throu%h the e-ositories Act5 13365 section ##A %ot deleted and section 111A was introduced in the Com-anies Act to deal with rectiication o re%ister. T$" Co+r# o,%"rv"! #$&# #$" $o'" p+rpo%" o* %"5#o( ===A % #o r".+'&#" #$" r.$# o* #$" ,o&r! o* !r"5#or% #o r"*+%" #r&(%*"r o* %$&r"%9 nder Section 111+A5 the Com-any !aw oard has "een em-owered to
direct any de-ository or com-any to rectiy its re%ister or records on an a--lication made to it "y a de-ository5 com-any5 -artici-ant or inestor or S,.10
7esser +oldin!s Ltd. v. *hyam 7adanmohan uia I#010J 39 C!A &# 9 8estern 7aharashtra 9evelopment Corporation v. 5ajaj ,uto Ltd. 5 (#010) 1' Com-Cas 3& (om) 3 Ibid. 10 A /amaiya5 6uide to the Companies ,ct 5 1th edn.5 #0105 *art 15 !e>is 8e>is utterworths5 :adhwa5 8a%-ur *a%e > o 30
JUDICIAL PRECEDENTS
HIGH COURTS
VIEW
&9 J+!.)"(#% ( *&vo+r o* ROFR%
i.
Ma&atlal 'ndustries Ltd. v. Gujarat Gas Co. Ltd 9
clude the ri%ht o a shareholder to im-ose restrictions on himsel in the matter o transer o shares to another -erson. This ar%ument was re;ected "y the then 2ud%e Mr. Shah who -ointed out that ratio laid down in the case o V /an%ara;an "y the A-e> Court is hain% much %reater orce and can "e a--lied to -u"lic com-any also. This decision had chan%ed the whole scenario or -u"lic com-any.11 ii.
Messer !oldings Limited v. "h#am Madanmohan Ruia
om"ay 4i%h Court has also acce-ted the le%ality o /F/s in #010. This case u-held the alidity o such -re+em-tie ri%hts includin% /F/ and o-ined that such ri%hts do not iolate the -roisions o Section 111+A. t also o"sered that a shareholder has reedom to transer his shares on terms deined "y him5 includin% /F/ and su";ect to com-liance with e>istin% laws5 such arran%ements do not restrict ree transera"ility o shares. t was also held "y the 11 7afatlal Industries Ltd. v. 6ujarat 6as Co. Ltd .5 1333 (3) Com-Cas &01
4on?"le Court that -re+em-tie ri%hts arise out o a -riate contract "etween shareholders with a third -arty and these need not "e em"odied in the articles o association o the com-any since the com-any is not a -arty to such arran%ements .1# ,9 J+!.)"(#% (o# ( *&vo+r o* ROFR% 9
(ushpa )ato*h v. Manu Maharani !otels Limited
elhi 4i%h Court has held that there could not "e any etters on the ri%ht o a shareholder to transer hisBher shares in a -u"lic com-any. t was s-eciically held that -re+em-tie ri%hts are unenorcea"le een i incor-orated in the articles o association5 since such ri%hts would "e ultra ires to Section 111+A.1& 9
Western Maharashtra Development Corporation Ltd. v. Bajaj Auto Ltd
om"ay 4i%h Court relied on *ush-a Katoch and held /F/s to "e -atently ille%al. t held that -re+em-tie ri%hts %o a%ainst the s-irit o Section 111+A5 and thereore are not le%ally tena"le. Sin%le 2ud%e o the om"ay 4i%h Court held that the -rinci-le o ree transera"ility must "e %ien a "road dimension in order to ulil the o";ect o the law. The word @transera"le is o the widest -ossi"le im-ort and *arliament "y usin% the e>-ression @reely transera"le5 has reinorced the le%islatie intent o allowin% transers o shares o -u"lic com-anies in a ree and eicient domain. The Court urther held that the A%reement and -roision in Articles o Association restrictin% the transer shares is iolatie o section 111A read with section 3 o the Com-anies Act and thereore it is oid and accordin%ly the award is contrary to su"stantie -roisions o law and is -atently ille%al.1'
SUPREME COURTS
VIEW
a) 9B9 R&(.&r&7 v9 9B9 Gop&'&8r%$(&( =/ 1# *upra note 1& :ushpa ;atoch v. 7anu 7aharani +otels Limited 5 #006 (1&1) Com-Cas '# el 1' 8estern 7aharashtra 9evelopment Corporation Ltd. v. 5ajaj ,uto Ltd 5 (#010) 1' ComCas 3& (om) 1 A/ 133# SC '& *a%e == o 30
n this Case shareholders o a -riate limited com-any were two "ranch o amily and it was a%reed orally in 1315 it means in "ac$dro- o nde-endence and -artition5 that the -ro-ortion o the shareholdin% o res-ectie "ranches would not chan%e5 and urther a%reed that or this -ur-ose5 any mem"er o a "ranch want to sell his shares must irst oer the share to his own "ranch. The cru> in this case is the oral a%reement a"out restriction was not incor-orate in Articles. /eerrin% its own earlier releant decision in Kalin%a Tu"es5 the Su-reme Court held that the shares are @reely transera"le and that a -riate a%reement im-osin% restriction on transer o shares which is not sti-ulated in Articles o association is neither "indin% to the Com-any nor to shareholders. t means such $ind o a%reement is oid in toto. ne thin% ery clearly esta"lished in this case is any restriction on share transer must "e incor-orated in the Articles o the Com-any otherwise it will not hae any eect and a%%rieed shareholder can not hae any le%al remedy a%ainst iolation o such restrictie -roisions o a%reement or understandin%. The Su-reme Court held that a restriction on the transer o shares contrary to the articles o association o a -riate com-any was not "indin% on the -riate com-any or its shareholders. Althou%h this ;ud%ment was in relation to a -riate com-any5 its reasonin% has also "een a--lied to -u"lic com-anies. Thereore5 i restrictions on transer o shares are to "e enorcea"le5 -roisions in the articles o association o a com-any are needed. The Court had ta$en the iew that -roisions o the S4A im-osin% restrictions een when consistent with com-any law are to "e authoriLed only when they are incor-orated in the articles o association. ") o!&*o(" I(#"r(&#o(&' Ho'!(.% B99 v9 U(o( O* I(!& &(! &(o#$"r = The Court has ta$en a iew that reedom o contract can "e restricted "y law only in cases where it is or some %ood o the community. The Com-anies Act5 1365 or the other le%islations do not e>-licitly or im-liedly or"id shareholders o a com-any to enter into a%reements as to how they should e>ercise otin% ri%hts attached to their shares. n this case the Su-reme Court did not su"scri"e with the iew ta$en in the /an%ara; case (as stated a"oe) and stated that S4A is a -riate contract "etween the shareholders com-ared to the articles o association o the com-any5 which is a -u"lic document. S4A is essentially a
16 #01# (1) 2 &&' *a%e =2 o 30
contract "etween some or all other shareholders in a com-any5 the -ur-ose o which is to coner ri%hts and im-ose o"li%ations oer and a"oe those -roided "y the com-any law. Further5 the Court stated that the -roisions o the S4A incor-oratin% /F/s need not necessarily "e authoriLed "y the articles o association o the concerned com-any. Accordin%ly5 the Court has im-lied that in the eent the articles o association o a com-any are silent with re%ards the -roision o /F/?s5 they can "e le%ally enorcea"le5 su";ect to the same "ein% incor-orated in the S4A.
CURRENT POSITION IN INDIA
/ecently on the cto"er &5 #01& a 8otiication 1 was issued "y S, (Securities ,>chan%e oard o ndia)5 which said that /i%ht o First /eusal was le%ally allowed and alid in the Shareholders A%reement. t also allowed ta% alon% and dra% alon% ri%hts. Throu%h this5 S, has rescinded its -reious notiication o March 15 #000 that -rohi"ited contracts other than s-ot deliery contracts or those entered into throu%h the stoc$ e>chan%e mechanism. Accordin%ly5 S, now -ermits arious ty-es o -re+em-tion ri%hts and -ut and call o-tions5 "ut su";ect to certain conditions. The new -osition is as ollowsD 1. S-ot deliery contracts are -ermitted5 consistent with the -reious -ositionE #. Sale and -urchase contracts on securities are -ermitted so lon% as they are in accordance with securities re%ulations and stoc$ e>chan%e re%ulations and "y+laws. These would include transactions5 includin% in deriaties5 which are carried out throu%h the stoc$ e>chan%e. &. Contracts or -re+em-tion includin% ri%ht o irst reusal (/F/) or ta%+alon% or dra%+ alon% ri%hts contained in shareholders a%reements or articles o association are allowed. 8ote that this is only an inclusie -roision and is not e>haustie o all the ty-es o -roisions in the a%reements or articles that can "e enorced. This ena"les inestors to e>ercise their e>it ri%hts in com-anies throu%h the a"oe mechanisms that are %enerally reco%niLed. 8o conditions are attached or the e>ercise o these ri%hts. 1 The traordinary5 *art 5 S, 8otiication (Mum"ai)5 &rd cto"er5 #01& *a%e =3 o 30
'. *ut and call o-tions contained in shareholders a%reements or articles o association are treated somewhat dierently rom -re+em-tion ri%hts discussed in item & a"oe. The reason is that the e>ercise o o-tions is su";ect to certain conditionsD a) The underlyin% securities that are the su";ect matter o the o-tions must hae "een held "y the releant -arty or a minimum -eriod o 1 year rom the date o enterin% into the o-tion contract. This seems to "e to ensure that o-tions are not short+term in nature and are -ermitted only when the holdin% o the securities is or a considera"le -eriod o time. The %enesis or the erstwhile -rohi"ition on o-tions was to -reent s-eculation in securities5 and this a--roach is im-osin% a minimum 1+year term on the o-tions is consistent with that -hiloso-hy. ") The -ricin% o the o-tions and the e>ercise is to com-ly with a--lica"le laws. More s-eciically5 the notiication states that all contracts -ermitted throu%h it must com-ly with the -roisions o the Forei%n ,>chan%e Mana%ement Act5 1333. This a--lies when o-tions and -re+em-tion ri%hts are %ranted "y or in aour o a non+resident inestor. :here the e>ercise o the o-tion or -re+em-tion results in a transer o securities "etween a resident and a non+resident inestor5 then the idea is that the releant -ricin% norms im-osed "y the /esere an$ o ndia (/) must "e com-lied with. This is si%niicant or orei%n inestors to ta$e into account. Merely "ecause S, has now conditionally -ermitted o-tions5 it does not mean that -arties hae com-lete reedom in e>ercisin% the o-tions. The -ricin% is still re%ulated "y the releant / norms5 and hence the commercial understandin% "etween the -arties re%ardin% the e>ercise -rice will "e su";ect to these re%ulatory constraints. c) The new -ermissi"le re%ime a--lies only to -hysically+settled o-tions where there is an actual deliery o the underlyin% securities. t does not coer cash+settled o-tions5 which are essentially contracts or dierences. This is understanda"le %ien the -hiloso-hy o the le%al re%ime to cur" s-eculation. Moreoer5 inestment a%reements (where inestors see$ e>it ri%hts) usually relate to an actual sale or -urchase o securities rather than a contract or dierences5 and hence this should not -ose diiculties or customary inestment transactions. . This new -ermissi"le le%al re%ime a--lies only -ros-ectiely5 and does not @aect or alidate any contract which has "een entered into -rior to the date o the notiication. 4ence5 -ast contracts with -re+em-tion ri%hts or -ut and call o-tions will not "e @%randathered. ne -ossi"ility to oercome this restriction would "e or -arties to e>istin% contracts to re+e>ecute them as o a uture date. *a%e =4 o 30
6. Finally5 an e>-lanation to the notiication states that the contracts s-eciied in the notiication would "e alid without re%ard to anythin% contained in section 19A 19 o the Securities Contracts (/e%ulation) Act5 1365 which reers to e>chan%e traded contracts. n other words5 such -re+em-tion ri%hts and o-tion contracts would "e -ermissi"le een thou%h they are entered into on an oer+the+counter (TC) "asis and not traded on the stoc$ e>chan%e. erall5 S,?s notiication re-resents a momentous re%ulatory chan%e. Com-anies5 inestors and their adisors hae "een %ra--lin% with concerns re%ardin% the enorcea"ility o -re+em-tion ri%hts and o-tions or nearly two decades now. The oddity o the situation was the e>-ansie a--lication o S,?s -reious re%ime that a--lied not only to listed com-anies "ut also to unlisted -u"lic com-anies. Moreoer5 while s-eculation was the concern5 it seemed to encom-ass %enuine transactions as well5 ma$in% customary inestment transactions ineicient in terms o structurin% (-articularly o e>it o-tions). The current moe is welcome as it rectiies a -reiously am"ialent and restrictie le%al re%ime. This will au%ur well to inestors as well as com-anies re=uirin% ca-ital. There may ery well "e issues re%ardin% the s-eciics o the recent notiication and the conditions im-osed therein5 "ut the oerall deelo-ment is -ositie in nature. 13
PROISION UNDER THE COMPANIES ACT =>/
ne o the most controersial =uestions raised and still "ein% am"ialent isD Whether R$+R agreements, -ag along and Drag along rights are en&or*eale under la/ and in *omplian*e /ith se*tion 000A o& the Companies A*t, 0123
t is -ertinent to hi%hli%ht that this -oint is no lon%er /es nte%ra (untouched)5 "ut is coered "y the decision o the Su-reme Court in the cele"rated case o V.B.Rangaraj v. 19 Section 19AD 8otwithstandin% anythin% contained in any other law or the time "ein% in orce5 contracts in deriatie shall "e le%al and alid i such contracts are+ (a) traded on a reco%nised stoc$ e>chan%eE (") settled on the clearin% house o the reco%nised stoc$ e>chan%e5 in accordance with the rules and "ye+laws o such stoc$ e>chan%e. 13 *upra note 1 *a%e =/ o 30
V.B.Gopalakrishnan 5. n the said case5 the A-e> Court has held that a restriction which is
not s-eciied in the Articles o Association is not "indin% either on the Com-any or on the shareholders. The court urther held that the arran%ement (as in the said case) im-osed additional restrictions on the mem"er?s ri%ht o transer o his shares which were not sti-ulated in the articles and5 thereore5 were not "indin% either on the shareholders or on the com-any. t was also held that the shares are moa"le -ro-erty and transer thereo is re%ulated "y the articles o association o the Com-any. The Court held that een i the Articles o Association -roide or a /F/5 i the ri%ht is a restriction on the ree transera"ility o shares and not a mere -rocess5 then it is not li$ely to "e enorcea"le. !ater the 2udicial iew -oint decided in #010 in the case o Messer !oldings Limited v. "h#am Madanmohan Ruia and $rs. 05 A iision ench o the om"ay 4i%h Court had
ruled in this case that a -riate arran%ement "etween shareholders o a -u"lic limited com-any on a oluntary "asis relatin% to share transer restrictions (ri%ht o irst reusal) is not iolatie o Section 111A o the Com-anies Act5 136. The ;ud%ment also %oes on to su%%est that it is not mandatory or the Com-any to "e a -arty to such an a%reement relatin% to share transer restrictions and it is not necessary to incor-orate share transer restrictions in the articles o association o the Com-any. Shareholders can enter into a consensual a%reement in case o shares o -u"lic com-anies5 can also reely ne%otiate and enter into a%reement containin% the /F/ or what is commonly $nown as *re+em-tionB Ta% Alon%B ra% Alon% ri%hts een in the case o listed shares5 which was recently conirmed "y the iision "ench o A.M. Khanwil$ar and A.A. Sayed5 22. o the om"ay 4i%h Courts. These Share *urchase A%reement (S*A) are usually assent "etween the *romoters5 *, nestors5 Technical or Financial Colla"orators. The decision in the case o 7esser +oldin! -roided some relie to shareholders o a -u"lic com-any howeer not resoled issues and concerns o cor-orates and ;oint enture -arties. ut some =uestions yet to ind their stands. :ithout a com-any "ein% a -arty to the a%reement "etween the shareholders5 its terms cannot "e inserted in to Articles and een in case it is incor-orated in the Articles5 the alidity o restriction on share transer in a -u"lic com-any would not "e sustained and u-hold loo$in% the decisions deliered so ar. n such #0 *upra note ' #1 *upra note *a%e = o 30
circumstances5 since shareholders a%reement is not "idin% to a Com-any5 a shareholder cannot restrict the com-any rom transerrin% shares which is in iolation o the a%reement. nless and until the role o the com-any and such restrictions alidly ind the -lace in Articles5 Com-any !aw oard would not hae ;urisdiction or ciil "reach. Thereore remedy aaila"le or a%%rieed shareholder is to a--roach ciil court5 which is costly and len%thy and many times -arties reluctant to -reer it in ;oint enture "usiness##. An in+de-th analysis o the aorementioned case is re=uired as it is the most recent decision on the -oint in issue.
MESSER HOLDINGS LIMITED V . SH?AM MADANMOHAN R UIA AND ORS9
The acts in "rie5 om"ay >y%en !td is deendant no. # com-any was listed on S,. Messer holdin% was the ma;or shareholder o the Com-any. t entered into a%reement dated 2une #&5 133 where under the ce-t some situation as -roided in the a%reement. n this case5 the ar%uments were (a) the a%reement was oid "ecause o raud and misre-resentation (") the a%reement was oid "ecause it was in iolation o S, rules and re%ulation and (c) the a%reement was oid as it restrict ree transera"ility in term o section 111A o the Com-anies Act and recent decision o om"ay 4i%h Court in the case o a;a; Auto. Clause 6.1 o the S*A dated 2une #&5 133 "etween the -arties conerred a ri%ht o irst reusal on the /uias in res-ect o the shares o om"ay >y%en !td.5 unless the shares were to "e sold to a mem"er o the 4oechst %rou- o com-anies. The controllin% shareholders o om"ay >y%en !td5 a -u"lic listed com-any a%reed to diest a ma;ority o their shareholdin% to Messer
## Satya;it
issues5 we analyLe the issue -ertainin% to the le%ality o Clause 6.1 o the S*A and whether the same is iolatie o ree transera"ility o shares in a -u"lic com-any -roided "y Section 111 A o the Act. M<< relied on inter+alia the decision o the Sin%le ench in 5ajaj ,uto Ltd .#& where this Court held that -re+em-tie ri%hts on shares o a -u"lic com-any are contrary to the -roisions o Section 111A o the Act which re=uires that the shares o a -u"lic com-any should "e reely transera"le. The iision ench howeer5 oer rulin% the aoresaid ;ud%ment5 held that such -riate arran%ements are not in iolation o Section 111A o the Act in a -u"ic com-any in reliance o the ollowin%D Section 111A o the Com-anies Act5 1365 is -erha-s the most si%niicant unresoled controersy in contem-orary ndian Cor-orate !aw. Section 111A o the Com-anies writes that @Su";ect to the -roisions o this section5 the shares or de"entures and any interest therein o a com-any shall "e reely transera"le. The section s-ea$s a"out ree transera"ility o the shares and de"entures o the *u"lic !imited Com-any. -ressly restrict or ta$e away the ri%ht o shareholders to enter into consensual arran%ementBa%reement "y way o -led%e5 -re+em-tionBsale or otherwise. The e>-ression reely transera"le in Section 111A o the Act does not mean that the shareholder cannot enter into consensual arran%ementsBa%reement with the third -arty (-ro-osed transeree) in relation to his s-eciic shares. The conce-t o ree transera"ility o shares o a -u"lic com-any is not aected in any manner i the shareholder e>-resses his willin%ness to sell the shares held "y him to another -arty with ri%ht o irst -urchase (-re+ em-tion) at the -reailin% mar$et -rice at the releant time. So lon% as the mem"er a%rees to -ay such -reailin% mar$et -rice and a"ides "y other #& *upra note 9 *a%e =< o 30
sti-ulations in the Act5 /ules and Articles o Association there can "e no iolation. For the sa$e o ree transera"ility "oth the seller and -urchaser must a%ree to the terms o sale. Freedom to -urchase cannot mean an o"li%ation on the shareholder to sell his shares. /eliance was also -laced on Section 3 o the Com-anies Act5 136 which sti-ulates that -roisions o the Act shall hae the eect notwithstandin% anythin% to the contrary contained in the Memorandum or Articles o the Association. The decision in M.".Madhusoodhanan v. )erela )amaudi (vt. Ltd. 4 % &( &+#$or#6 o( #$" propo%#o( #$&# 5o(%"(%+&' &.r"")"(#% ,"#""( p&r#5+'&r %$&r"$o'!"r% r"'&#(. #o #$"r %p"5*5 %$&r"% !o (o# )po%" r"%#r5#o( o( #$" #r&(%*"r&,'#6 o* %$&r"%9 Further5
such consensual a%reements "etween -articular shareholders relatin% to their shares can "e enorced li$e any other a%reements. t was not re=uired to "e em"odied in the Articles o Association. The iision ench also relied on the distinction drawn "y the Su-reme Court in 7adhusoodhanan case rom the -ro-osition laid down in the case o 4.5 an!araj5 in that the ;ud%ment arried at "y the Su-reme Court was on account o the restriction "ein% a "lan$et restriction on all the shareholders -resent and uture and could not "e im-orted to a -riate a%reement "etween -articular shareholders. The eendant too relied on a ew ;ud%ments "ut it was also o"sered "y the !earned Sin%le 2ud%e that the dictum in the relied decisions were o no aail as the case on hand was in relation to a -u"lic com-any whereas the decisions in those res-ectie ;ud%ments are in concern with the *riate Com-any under which the transera"ility o shares in restricted. t is held that in case o -u"lic com-any5 Section 111A -roides that the shares or de"entures and any interest therein o the com-any shall "e reely transera"le. As aoresaid5 Section 111A is not a law dealin% with the ri%ht o the shareholders to enter into consensual arran%ementBa%reement "y way o -led%e5 -re+em-tionBsale or otherwise. that ri%ht is not coered "y Section 111A o the Act as has "een ound "y us5 then consensual arran%ementBa%reement "etween shareholder and third -arty or shareholders inter se to which com-any is not a -arty5 Section 3 o the Act will not come into -lay at all. Thus5 the e>-ression @reely transera"le in Section 111A does not mean that the shareholder cannot enter into consensual arran%ementBa%reement with the third -arty (-ro-osed transeree) in relation to his s-eciic shares the com-any wants to een -rohi"it that ri%ht o the #' 7.*.7adhusoodhanan v. ;erela ;amaudi :vt. Ltd .5 (#00&) 11 Com-Cas 13 SC *a%e => o 30
shareholders5 may hae to -roide or an e>-ress condition in the Articles o Association or in the Act and /ules5 as the case may "e5 in that "ehal. The le%al -roision as o"tained in the orm o Section 111A o the Com-anies Act does not e>-ressly restrict or ta$e away the ri%ht o shareholders to enter into consensual arran%ementBa%reement in res-ect o shares held "y him.#
ANALYSIS
(a) This diision "ench has %one into the intent o 111A. The diision "ench has ri%htly held now that when shares are reely transera"le doesn?t mean that the shareholders lose the ri%ht to dis-ose o or deal with the shares in the manner in which they li$e. (") The ench has e>-lained the intent that the section 111A was neer incor-orated to ta$e away the ri%hts o the shareholders to dis-ose5 which is one o the ri%hts en;oyed "y any owner o any moa"le -ro-erty. /F/ and other such a%reements are im-ortant e>it -roisions or any inancial or strate%ic inestor. (c) This may not "e the last word "ecause this controersy may $noc$ the doors o the Su-reme court5 "ut certainly it?s a diision "ench ;ud%ment and is the only ;ud%ment in the case o a -u"lic com-anies o 111 (A) thereore in that sense it certainly it sets aside the controersy which was raised ri%ht rom the "e%innin% o /an%ara;an rom 133#.
PROISION UNDER THE COMPANIES ACT 20=3
8o ;ud%ments hae "een cited here5 as it has "een een ' months rom now5 when the act came into orce. This does not means we should or%et old Com-anies Act5 136 which will "e a--lica"le or some time and we hae to come "ac$ or to it in -racticeE or orensic or other historic -ur-ose. # Somase$har Sundaresan5 @ :ublic Company shares cannot be fettered at all 5 Aaila"le atD htt-DBBindiacor-law."lo%s-ot.inB#010B0#B-u"lic+com-any+shares+cannot+"e.html *a%e 20 o 30
ecuted "y or on "ehal o the transeror and transeree and s-eciyin% the name5 address and occu-ation has "een deliered to the com-any "y either -arty within a -eriod o si>ty days rom date o e>ecution5 alon% with the certiicate o security or the letter o allotment o securities. Free transera"ility o share is one essential condition or Com-any orm o "usiness5 su";ect to some restrictions under -riate com-anies. 8ew Act5 deals with su"stantially.#6 Section 6 o the new Act also tal$s a"out the conse=uences5 i the instrument o transer which has to "e stam-ed and si%ned %ets lost or not deliered to the -lace in that case5 the com-any may re%ister the transer on an indemnity "ond. n recei-t o intimation5 a com-any has -ower to re%ister transmission o any ri%ht to securities "y o-eration o law rom any -erson to whom such ri%ht has "een transmitted. :here an a--lication is made "y transeror alone and relates to -artly -aid shares5 the transer shall "e re%istered "y the com-any only ater %iin% notice o the a--lication to the transeree5 and transeree %ies no o";ection to the transer within two wee$s rom the recei-t o notice.# The transer o any security or other interest o a deceased -erson in a com-any made "y his le%al re-resentatie shall "e alid as i he had "een the holder at the time o the e>ecution o the instrument o transer. P"(&' prov%o( S"5#o( 44;
:here any deault is made under this section5 the com-any shall "e -unisha"le with ine which shall not "e less than twenty+ie thousand ru-ees "ut which may e>tend to ie la$h ru-ees and eery oicer o the com-any who is in deault shall "e -unisha"le with ine which
#6 Transer and Transmission o Securities (Com-anies Act5 #01&)5 Aaila"le atD htt-DBBaishm%hrana.meB#01&B10B01Btranser+and+transmission+o+securities+com-anies+act+ #01&B # S. Muralidharan5 8hen shareholders ,!reement is enforceable<5 8oem"er 15 #0105 Aaila"le atD htt-DBBwww.thehindu"usiness line.comB#006B09B0&BstoriesB#006090&00#1100.htm *a%e 2= o 30
shall not "e less than ten thousand ru-ees "ut which may e>tend to one la$h ru-ees lia"le under section '' o the Act. P+(%$)"(# *or p"r%o(&#o( o* %$&r"$o'!"r S"5#o( /;
any -erson deceitully -ersonates as an owner o any security or interest in a com-any5 or o any share warrant or cou-on issued in -ursuance o this Act5 and there"y o"tains or attem-ts to o"tain any such security or interest or any such share warrant or cou-on5 or receies or attem-ts to receie any money due to any such owner5 he shall "e -unisha"le with im-risonment or a term which shall not "e less than one year "ut which may e>tend to three years and with ine which shall not "e less than one la$h ru-ees "ut which may e>tend to ie la$h ru-ees. Sim-ly5 any -erson5 who deceitully re-resent himsel as holder o any security or interest in a com-any shall "e -unisha"le with im-risonment and with ine5 minimum ine "ein% one la$h ru-ees.
R ESTRICTIONS ON THE TRANSFERABILIT? OF SHARES IN PUBLIC AND PRIATE COMPANIES
n Messer !olding v. "h#am Madanmohan Ruia 5 The 2ud%e o"sere that @a situation inolin% a restriction o transera"ility o shares in a -riate com-any has to "e contrasted with cases inolin% -u"lic com-anies where the law -roides or ree transera"ility. t is thus held that ree transera"ility o shares is the norm in the case o shares in a -u"lic com-any. *riate limited com-any occu-ies a uni=ue -osition in the scheme o the com-any law. t en;oys seeral -riile%es and e>em-tions as o--osed to a -u"lic com-any. t is immune rom a num"er o restrictions5 controls and re%ulations5 which a -u"lic com-any is su";ected to. t has the character o close cor-oration?. The most ital -riile%e a -riate com-any en;oys is lesser %oernmental control and intererence. t is a "lend o -artnershi- and a limited lia"ility "ody cor-orate. t en;oys the "eneits and adanta%es o "oth.
*a%e 22 o 30
Section &(1) (iii) o the Com-anies Act5 136 deines -riate com-any? #95 and sti-ulates our in%redients that constitute a com-any as a -riate com-any. ne o the our in%redients o the deinition is that a -riate com-any5 "y its articles5 restricts the ri%ht to transer its shares. Any restrictions im-osed "y the articles are "indin% u-on the mem"ers o the com-any "y irtue o Section &6 #3 o the Act. To what e>tent and in what orm the ri%ht to transer can "e restricted has "een let to the discretion o these com-anies5 the Act does not -roides any direction in this re%ard. 4oweer5 conentionally5 certain common restrictie -roisions are ound in the articles o most -riate com-anies. Two chie ones o them areD one5 the directors are %ien a"solute and uncontrolled discretion in the matter o a--roal o transers or re%istration5 and second5 the mem"ers are %ien the ri%ht o -re+em-tion or -urchasin% the shares oered "y any mem"er. There is5 howeer5 nothin% to limit the restrictions which a com-any?s articles may -lace on the ri%ht o transerE "ut there cannot "e com-lete etter on the ri%ht. Althou%h -riate com-anies are ree to im-ose any restrictions5 howeer in character5 on the ri%hts o transer and -rescri"e any manner in which the shares can "e transerred5 yet the mandatory -roisions o Section 109 o the Act are as much a--lica"le to the transers o shares o -riate com-anies as they a--ly to -u"lic com-anies. Furthermore5 the articles layin% down the manner o transers are e=ually "indin% u-on the mem"ers and the com-any as well. t should "e noted that5 as held "y the Su-reme Court V. B. Rangaraj v. V. B. Gopalkrishnan 5 the articles o a -riate com-any may contain -roisions restrictin% the ri%ht to transer o shares5 "ut any restriction outside the articles (e.%.5 a -riate a%reement "etween the shareholders) is ino-eratie and unenorcea"le. The only restriction on the transer o shares o a com-any is as laid down in the articles. A restriction which is not s-eciied5 is not "indin% either on the com-any or on the shareholders. Thus5 an a%reement restrictin% the ri%ht to transer5 contrary to or inconsistent with the -roisions in the articles5 is not enorcea"le. #9 eined under Section #(69) o The Com-anies Act5 #01& #3 Section &6(1) o The Com-anies Act5 136 D ,ect o memorandum and articles as mentioned "elowD Su";ect to the -roisions o this Act5 the memorandum and articles shall5 when re%istered5 "ind the com-any and the mem"ers thereo to the same e>tent as i they res-ectiely had "een si%ned "y the com-any and " y each mem"er5 and contained coenants on its and his -art to o"sere all the -roisions o the memorandum and o the articles.
*a%e 23 o 30
THE R IGHT OF FIRST R EFUSAL STILL REMAINS A SIGNIFICANT UNRESOLED CONTROERS? IN INDIAN CORPORATE LAW
/F/s are le%ally enorcea"le as -er the latest diision "ench o the om"ay 4i%h Court. Accordin%ly Ta%B ra% and similar coenants can also "e considered as enorcea"le "etween the shareholders a%reein% or such coenants. As on date this is the inal erdict on /F/ as it is a iision ench decision. Oes it could %et challen%ed in the Su-reme Court5 "ut it is hi%hly unli$ely that it would %et reersed. And hence this should remain as a %ood law. The said ;ud%ment may -roide relie to the -riate e=uity inestors re%ardin% enorcea"ility o their ri%hts culminatin% rom the -riate arran%ements entered into "y them. ut this inter-retation "y the om"ay 4i%h Court mi%ht "e a "arrier to im-lement as it will "e ery diicult or the listed com-anies to raise ca-ital5 as they will hae to oer their shares to the e>istin% shareholders wheneer they wish to raise ca-ital5 they will hae to oer it to all the e>istin% share holders as such -roision will "e incor-orated in the article o association5 or instance5 a com-any hain% #00 share holders5 the com-any who is need o share ca-ital will hae to "eore raisin% the ca-ital5 as$ all the e>istin% #00 shareholders5 and only i they reuse can the com-any %o or the e>ternal sources or hel-. Thou%h the dratsmen hae enumerated a -roision re%ardin% this in the #01& act5 it would "e curious to see the a--lication o the same in the uture5 $ee-in% in iew the S, %uidelines &0 issued which said /F/ was le%ally allowed and alid in the Shareholders A%reement. Also allowed ta% alon% and dra% alon% ri%hts. Throu%h this5 S, has rescinded its -reious notiication o March 15 #000 that -rohi"ited contracts other than s-ot deliery contracts or those entered into throu%h the stoc$ e>chan%e mechanism. Ater all the said laws and decisions %ien "y the arious courts5 it is "elieed that these -roisions and -reerential clauses shall not "e allowed in the a%reements as the sti-ulates that -roisions o the Act shall hae the eect notwithstandin% anythin% to the contrary contained in the Memorandum or Articles o the Association&15 and "y a--lyin% these ri%hts &0 S, 8otiication on *re+,m-tion /i%hts5 *ut and Call -tions5 ssued on cto"er '5 #01& &1 Section 3 o the Com-anies Act5 136 *a%e 24 o 30
the Section 111A o the Com-anies Act5 136 (which mandates that there can "e no restriction whatsoeer on the transera"ility o shares in a -u"lic com-any) %ets iolated and should not "e a--lied at the cost o the statutory laws and or the sa$e o satisyin% the e>istin% shareholders.&# :hile the recent ;ud%ment o Messers 4oldin%s oers strate%ic inestors the much+needed re-riee5 le%al e>-erts "eliee that some cor-orates are li$ely to $noc$ on the doors o the Su-reme Court loo$in% or clarity since it has %reat im-act on arious ;oint enture a%reements across cor-orate ndia. A S-ecial !eae *etition&& challen%in% the ;ud%ment o the om"ay 4i%h Court in Messer 4oldin%s is -resently -endin% "eore the Su-reme Court. This is a welcome o--ortunity or the Court to em-hasiLe once and or all that there is nothin% in ndian or ,n%lish le%islation or case law that ma$es ineectie a -romise "y one contractin% -arty to another in relation to the dis-osition o his shares in a com-any5 whether -u"lic or -riate.
CONCLUSION
At this -oint it may "e interestin% to ta$e note o the act that The Com-anies Act5 1365 which is a--lica"le to shareholders o all ndian Com-anies5 The Forei%n ,>chan%e /e%ulation Act5 13& which encom-asses inestment made in ndian Com-anies "y -ersons resident outside ndia and non ndian -ersons resident in ndia and the -licitly or im-liedly or"id shareholders o a Com-any to enter into a%reements where"y they choose to use the otin% ri%hts attached to their shares in a "eittin% manner .&' As a result mutual ri%hts and o"li%ations outlined in a shareholder?s a%reement is alid under the e>istin% le%islations. &# Krishna atta5 /i%ht First /eusal5 Cor-orate !aw /e-orter *art '5 ecem"er &5 #01&5 -.'5 Aaila"le atD htt-DBBcor-oratelawre-orter.comB#01&B1#B0&Bri%ht+irst+reusal+contractual+ restriction+transer+sharesB && S!* (C) &&'#3+&&'&' o #010 &' Tony Khindria, Scope and Enforceability of Shareholders’ Agreements, International Business Law Journal, Vol. 2, 1995, pp. 261-271
*a%e 2/ o 30
t may then "e wisely ar%ued that as lon% as any -roision in the a%reement does not deeat the -ur-ose o an e>istin% statute5 the same must receie alid reco%nition under the law. n act5 the Su-reme Court itsel in the cele"rated case o Gherulal (arekh v. Mahadeo Das 62 has clearly ruled that the reedom o contract can "e restricted "y law only in cases where it is incontesta"ly or the esta"lished %ood o the community and courts cannot ino$e new heads o -u"lic -olicy.&6 The court also stated that thou%h sanctity o contract is o -aramount im-ortance5 yet courts may reliee -arties o their duties under the rule ounded on -u"lic -olicy which e>tend not only to harmul cases "ut also to harmul tendencies. sin% this ar%ument5 it would not "e ;ustiia"le or courts to stri$e down the alidity o shareholder a%reements only on the %round that they are inconsistent with the articles o the com-any5 een thou%h they conorm to the s-irit o law. -arties in the a%reement5 "y themseles a%ree to waie certain ri%hts and i the same is not deleterious or other -arties to the a%reement5 then reedom o contract should not "e rele%ated. n modern times5 shareholder?s a%reements hae assumed %reater im-ortance $ee-in% in mind the %rowin% olume o international commercial transactions entered into "y the ndian Com-anies. *arties si%n such a%reements with clarity o mind and awareness. n such circumstances5 it is indeed not air to allow -arties to eade their duties outlined in the a%reement at their own conenience sim-ly "ecause the law in ndia is still a%ue re%ardin% the same. The law needs to ta$e co%niLance o -ractical situations that arise in real lie and -rotect such a%reements alon% with the -arties a%ainst whom the "reachin% -arties ma$e use o the -rotection o law to %et away without ulillin% their share o duties. Commercially5 restrictions on transer o shares are common and oten orm the "asis o a -artnershi- or ;oint enture or inestment arran%ements. The Su-reme Court "y way o its latest Vodaone ;ud%ement has shown inclination towards enorcea"ility o /F/s -roisions incor-orated in the S4A. 4oweer5 whether the decision in /an%ara; case has "een truly oerruled or not is still de"ata"le since the -rinci-le o /F/ discussed in the ;ud%ement was not dealt as a -art o the /atio o the ;ud%ement. 4oweer5 /F/s are iewed as "onaide arran%ements o commercial nature entered "etween shareholders and in li%ht o the iew ta$en "y the Su-reme Court in the Vodaone ;ud%ement aorin% the enorcea"ility o /F/ & 133 SC/ Su--l. (#) '06 &6 *riyoma Ma;umdar5 @ 2nforceability of *hareholder ,!reements in India3 , Le!al :aradox< 5 2. Cor-. Aairs 7 Cor-. Crimes5 --. 10&+10 *a%e 2 o 30
-roision in the S4A5 notwithstandin% the same "ein% incor-orated in the articles o the associations5 seems li$e a chan%e in the mindset o the ndian 2udiciary. n li%ht o the reised deinitions under Com-anies Act5 #01& and the recent ;ud%ments5 the le%al -osition with res-ect to alidity o restrictions on transer o shares o a -u"lic com-any can "e summariLed as underD +
An a%reement "etween shareholders restrictin% the transer o shares in a -u"lic com-any does not iolate the le%al mandate o ree transera"ility o shares o a
+
-u"lic com-anyE /estrictions on transer o shares as aoresaid5 must not "e in iolation o the articles
+
o association o the -u"lic com-any or the %oernin% lawE Such a%reement restrictin% transer o shares5 can "e enorced as a contract amon%st
+
and a%ainst the shareholders who are -arty theretoE 4oweer5 such contractual restrictions on transer o shares o a -u"lic com-any are not enorcea"le a%ainst the com-any5 in case the com-any is not a -arty to the a%reement containin% such restrictions.
BIBLIOGRAPH?
ARTICLES
1. r.K./. Chandratre estrictions on transfer of shares in a private limited company5 Aaila"le atD htt-DBBwww."casonline.or%BarticlesBartin.as-'3 #. 4emant Shah Controversy on *ection , of the Companies ,ct /01 5 Aaila"le atD www.hed%e+s=uare.comBw-+contentBu-loadsB#01#B01Bresources'.-d &. 8itin *otdar5 $"s =ow 2nforceable< Aaila"le atD htt-DBBtheirm.moneycontrol.comBstoryP-a%e.-h-autonoQ'961'' '. *riyoma Ma;umdar5 @ 2nforceability of *hareholder ,!reements in India3 , Le!al :aradox< 5 2. Cor-. Aairs 7 Cor-. Crimes . /ai$umar.< *ection , of The Companies ,ct /01 5 Aaila"le atD htt-DBBwww.caclu"india.comB;udiciaryBsection+111a+o+the+com-anies+act+136+ transer+o+sharesG 1#0.as-.-T!&S%rVS *a%e 2; o 30
6. S. Muralidharan5 8hen shareholders ,!reement is enforceable<5 8oem"er 15 #0105 Aaila"le atD htt-DBBwww.thehindu"usiness line.comB#006B09B0&BstoriesB#006090&00#1100.htm . San;ay Mathur $" is not a estriction on free transferability under *ection ,5 Aaila"le atD htt-DBBeLinearticles.comB/i%ht+o+First+/eusal+s+8ot+a+/estriction+on+ Free+Transera"ility+nder+Section+111A7idQ303' 9. Satya;it
1. A /amaiya5 6uide to the Companies ,ct 5 1th edn.5 #0105 *art 15 !e>is 8e>is utterworths5 :adhwa5 8a%-ur #. Sethna 2ehan%ir5 The Indian Company Law5 11th edn.5 Vol. 15 #005 Modern !aw *u"lications CASES
1. 6herulal :are&h v. 7ahadeo 9as5 133 SC/ Su--l. (#) '06 #. 7.*.7adhusoodhanan v. ;erela ;amaudi pvt. Ltd .5 (#00&) 11 Com-Cas 13 SC &. 7afatlal Industries Ltd. v. 6ujarat 6as Co. Ltd.5 1333 (3) Com-Cas &01 nion $f India and another 5 #01# (1) 2 &&'
*a%e 2< o 30
9. 8estern 7aharashtra 9evelopment Corporation v. 5ajaj ,uto Ltd. 5 (#010) 1' Com-Cas 3& (om)
R EPORTS NOTIFICATIONS
1. A"hi;eet Swaru- 7 Vie$ Kumar A%%arwal5 2nforceability of :rovisions not formin! part of the Company 9ocuments5 S, 7 C/*/AT, !A:S5 The Cor-orate !aw :ee$ly5 Vol.965 Se-tem"er ##5 #009 #. aid . :al$er5 ethin&in! the i!ht of "irst efusal 5 th Stanord 2ournal o !aw5 13335 iscussion *a-er 8o. #615 The 4arard !aw School &. 2nforceability of provisions not formin! part of the company documents3 ,n analysis in the law5 S, 7 Cor-orate !aw :ee$ly ssue5 Se-tem"er ##5 #009 '. Krishna atta5 i!ht $f "irst efusal 5 Cor-orate !aw /e-orter *art '5 ecem"er &5 #01&5 -.'5 Aaila"le atD htt-DBBcor-oratelawre-orter.comB#01&B1#B0&Bri%ht+irst+reusal+ contractual+restriction+transer+sharesB . /e-ort on Com-anies Act5 #01&5 Aaila"le atD htt-DBBaishm%hrana.meBcom-anies+act+ #01&B 6. /e-ort on Com-anies ill5 Aaila"le atD htt-DBBwww.thehindu.comB"usinessBndustryBcom-anies+"ill+-assedBarticle00&.ece . S, 8otiication issued on cto"er &5 #01&5 Aaila"le atD htt-DBBindiacor-law."lo%s-ot.inB#01&B10Bse"i+notiication+on+-re+em-tion+ri%hts.html 9. S, 8otiication on *re+,m-tion /i%hts5 *ut and Call -tions5 ssued on cto"er '5 #01& 3. The traordinary5 *art 5 S, 8otiication (Mum"ai)5 &rd cto"er5 #01& 10. Transer and Transmission o Securities (Com-anies Act5 #01&)5 Aaila"le atD htt-DBBaishm%hrana.meB#01&B10B01Btranser+and+transmission+o+securities+com-anies+ act+#01&B STATUTES
1. The Com-anies Act5 136 #. The Com-anies Act5 #01& &. The e-ositories Act5 1336 *a%e 2> o 30
