23 June 2015

Share transfers – Pre-emption agreement when does not violate ‘free transferability’

Division Bench of the Bombay High Court has reversed the Order of the Single Bench holding that the pre-emption right as recognised by certain clause of the Protocol Agreement which was incorporated in the Articles of Association of the company, was contrary to the provisions of the Companies Act and hence was unenforceable. The impugned order had held that Protocol Agreement entered into between the parties and which gave the right of first refusal to the appellant to purchase the shareholding of the respondent in the public company jointly promoted by the two, was in the nature of a restriction on free transferability of the shares and was therefore contrary to Section 111A of the Companies Act, 1956.
The two Judge Bench in this regard held that words “freely transferable” appearing in sub-section (2) of Section 111A cannot be construed to mean that it also intends to take away the right of shareholders to enter into consensual agreements/arrangements with the purchaser in
relation to their specific shares. It was noted that if the legislature intended to take away such right, it would have made an express provision in that regard. The court in this case of Bajaj Auto Ltd. v. Western Maharashtra Development Corporation Ltd. also took note of Section 22A(2) of the Securities Contracts (Regulation) Act, 1956, provisions which were present before the insertion of Section 111A of the Companies Act, and found that it cannot be said that two individual shareholders entering into a consensual agreement to deal with their shares in a particular manner, either in presenti or at a future date, would impinge or violate the concept of free transferability. It was noted that shares were movable property and that the share holder is exercising it property rights when its deals in a particular way.
Further, the court rejected the plea that as the price of the shares was to be determined by the process of arbitration according to the agreement, same violated the provisions of the Companies Act. Noting that the agreement did not in any way affect the rights and/or liabilities of the other members of the company, and was limited to the appellant and the respondent, it was held that merely because the Protocol Agreement was incorporated into the Articles of the company, it does not mean that the Protocol Agreement was invalid.
Proviso to the Section 58(2) of the Companies Act, 2013 stipulating that any contract or arrangement between two or more persons in respect of transfer of securities shall be enforceable as a contract, and a SEBI Notification, were also noted by the Court in this regard. It was observed that what was implicit in the provisions of Section 111A of the Companies Act, 1956 has now been made explicit in Section 58 of the Companies Act, 2013.


Browse articles