Solving the Ambiguity around the Transferability of Shares under the Company Law of India

The capital of a company is the most important driving force behind a company i.e. money invested in it.[1] The capital of a company is raised primarily by virtue of shares, which is a testament to the fact that a person owns certain funds in a company. Shares are considered to be movable property[2] and therefore their transfer is valid too. The Companies Act prohibits any kind of restriction on this transfer of shares and deems it to be free. However, many a time, a question arises when a restriction is placed by a private shareholder on the same, what the course of action would entail.

The transferability of shares even though is mandated to be free as per the Act, restrictions have been permitted for private companies.[3] On the other hand, it is completely prohibited in case of a public company.[4] However, there does exist ambiguity with respect to restrictions placed by the shareholders themselves in form of pre-exemption or right of first refusal agreements. On the face of it, these agreements seek to restrict the transferability however that is not the case.

First, the Hon’ble High Court of Bombay, in the case of Messer Holdings v. Shyam Madanmohan Ruia, [5] upon discussing the legislative history of the provisions on transferability of shares, held that the intention behind the free transferability clause was to place a check on the powers of the Board of Directors for arbitrary refusal. Therefore, the intention of the drafters was never to restrict the shareholders from entering into private agreements. Also, these agreements are not per se prohibited in the Act, in fact the Act allows for the legal enforcement for these agreements.[6] A confusion which generally persists in the air is in relation to a conflicting judgment of the Apex Court,[7] which laid down that there can be no restrictions even in form of an agreement by the shareholders. The fallacy with adopting the above reasoning lies in the ignorance of rules of interpretation, wherein the factual matrix and subject matter deserve attention. The Apex Court in the aforementioned case was dealing with a private company rather than a public one and was interpreting Section 82 of the then Act, dealing with powers of the board of directors. Therefore, the judgment stands on a different footing than the situation of a public company’s transferability.

Additionally, it is a usual practice that the parties to such an agreement breach it and claim the right of free transferability. This also is invalid, as the shareholder waives his right when he enters into the agreement with his free consent and the Act does not prohibit this waiver, as against the ones it does.[8] Also, since this waiver is not against public policy it is completely valid in law. [9]

In conclusion, the Hon’ble Courts faced with similar situations have had judgments in favour of the agreements. No doubt that there does exist contrary opinion but there exists a difference in the subject matter. Hence, it would be just to assume  the validity of such agreements.

 

 

[1] Bryan A Garner, Black’s Law Dictionary, 221, (8th e.d., 2004).

[2] Sec. 44, Companies Act, 2013 (India).

[3] Id at sec.2(68)(i).

[4] Id at sec.58(2).

[5]  Messer Holdings v. Shyam Madanmohan Ruia, [2010] 159 Comp. Cas. 29 (Bom) (India).

[6] Supra note at sec.58, proviso.

[7] V.B. Rangaraj v. V.B. Gopalakrishnan, (1992) 1 S.C.C. 160 (India).

[8] For instance, section 73(4), 69 (6), 309 (5B) and 603 (2) of the Companies Act, 2013 provide for specific prohibition of waiver of certain rights.

[9] Halsbury’s Laws of England. (Hailsham Edition) Article 738p. 584.

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About Swapnil Tripathi

Swapnil Tripathi | Student

Student, National Law University, Jodhpur (India).

Corporate Law Referencer

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