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nforceailit of Contractual Restrictions on
Transfer of hares
Rishah hroff on August 16, 2016
POTD IN CORPORAT LAW, CURITI LAW
The question of the enforceailit of contractual restrictions on transfer of shares of Indian
pulic limited companies (Companies) has een the suject matter of various decisions
Indian courts. The Indian legislature has also examined this aspect, which has resulted in a
change in the relevant legislation. Through this post, we examine the position as it stands
toda.
The deate on the enforceailit of shareholder agreements and joint venture agreements
governing Companies garnered significant attention in earl 2010 when a single judge of
the oma High Court (oma HC) set aside an aritral award in a 2010 decision in
Western Maharashtra Development Corporation Ltd. v. ajaj Auto Ltd. The judgment
indicated that the shares of a Compan could not e fettered, were freel transferale and
as such, an restriction on free transferailit would e a violation of section 111A of the
erstwhile Companies Act, 1956 (1956 Act).
Interestingl after the judgment in ajaj Auto, a division ench of the oma HC in
Messer Holdings Limited v. ham Madanmohan Ruia in 2010 reconsidered this question
and pronounced a judgement that was different from the ruling in the ajaj Auto: it was
held that a private arrangement etween shareholders of a Compan on a voluntar asis,
relating to share transfer restrictions (in this case a right of first refusal), would not e
violative of ection 111A of the 1956 Act and as such, would e enforceale etween the
shareholders. The judgement further stated that it was not mandator for a Compan to e
a part to such an arrangement and further that that it was not essential to incorporate
share transfer restrictions in the elaws of the Compan. The division ench in Messer
Holdings also stated that a restriction on the transfer of shares is “enforceale unless
arred” the elaws of a compan. Messer Holdings appealed against this decision
efore India’s apex court (Appeal).
At the same time, following the division ench decision in the Messer Holdings, an appeal
was filed in the ajaj Auto case efore a division ench of the oma HC (ajaj Auto
Appeal). The division ench of the oma HC pronounced its judgment in the ajaj Auto
Appeal in Ma 2015 where it overturned the judgment of the single judge in this case
and agreed with the decision of the division ench in Messer Holdings. The division ench
in ajaj Auto Appeal also held that even if the terms of a private arrangement etween
shareholders were not permissile under the elaws of a Compan, it would not in an
wa destro the enforceailit of the agreement etween the shareholders.
“ Foreign investors have shown strong preference for roust
contractual rights and certaint over the enforcement of such
rights
The upreme Court delivered its decision on the Appeal in April 2016. The parties, this
time, had entered into a settlement agreement and there was no surviving dispute.
Accordingl, the Appeal was dismissed. The upreme Court also made it clear that it was
not deciding on the existence or otherwise of an right or its transferailit in the shares in
question. Whilst the Appeal was a welcome opportunit for the upreme Court to finall
decide this question which has een the suject matter of much judicial deate Indian
courts, it was not to e so.
As India looks to attract more foreign investment, foreign investors will want roust
contractual rights and certaint over the enforcement of such rights. There has een a fair
amount of confusion on the suject matter, given the divergent opinions of the single judge
of the Gujarat High Court in Mafatlal Industries Ltd. v. Gujarat Gas Co. Ltd. in 1997 and the
Delhi High Court in mt. Pushpa Katoch v. Manu Maharani Hotels Ltd. in 2005 (where the
courts adopted the view that there cannot e an fetters, contractuall or otherwise, on the
right of a shareholder to transfer shares in a compan), which were later differed the
division ench decisions of the oma HC in Messer Holdings in 2010. The Appeal was
also a welcome opportunit to finall decide on the differing views of various High Courts.
However, in light of the outcome of the Appeal, this was not to e so. It would e prudent
to assume that status-quo continues and the division ench decisions of the oma HC in
Messer Holdings and the ajaj Auto Appeal continue to hold good, at least for the time
eing and would have a persuasive value over the single judge decisions of the Gujarat
and Delhi High Courts.
As things stand, foreign investors looking to make investments into companies in India can,
despite the requirement of free transferailit of shares, potentiall still enter into valid
private arrangements vis-a-vis other shareholders to restrict the transfer of shares,
irrespective of whether such restrictions are incorporated in the elaws of the Compan.
However, it would also e prudent to note that this position might change, as and when the
issue of contractual restrictions on the transfer of shares comes up efore the upreme
Court again.
Rishah hroff
Co-Head and Partner in the Private Client Practice at the Mumai office of
Cril Amarchand Mangaldas. Rishah specialises in famil constitutions
and settlements, trusts, wills and succession planning. He can e
reached at rishah.shroff@crilshroff.com
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