Bombay High Court on Share Transfer Restrictions

The question of
whether transfer restrictions imposed by agreement on shares of a listed company
are enforceable has been a vexed one. Numerous decisions of the Supreme Court
as well as High Courts had expressed somewhat different views on the nuances of
the issue. However, some stability was brought about in 2010 by a decision of a
division bench of the Bombay High Court in Messer Holdings v. Shyam Madanmohan
, which effectively ruled that restrictions expressed in an
agreement between shareholders are not violative of the Companies Act, 1956 (the
“1956 Act”) and that they can be enforced inter
among shareholders. In doing so, the Court diverged from the ruling of a
single judge in Western
Maharashtra Development Corpn. Ltd. v. Bajaj Auto Limited
, which had
held such transfer restrictions to be unenforceable.
Both the decisions
have been the subject-matter of appeals. While the Messer Holdings decision was appealed to the Supreme Court, where hearings
are underway
, the Bajaj Auto decision
was appealed to a division bench of the Bombay High Court. By way of a
judgement dated May 8, 2015, the division bench of the Bombay High Court in Bajaj Auto Ltd. v. Western
Maharashtra Development Corporation Ltd.
pronounced its judgment by overturning
the judgment of the single judge and essentially concurring with the division
bench in Messer Holdings. It is this
decision that is the subject matter of the post. The relevance of this decision
is that it further establishes the prominence of Messer Holdings and adds some robustness to the enforceability of
share transfer restrictions in agreements as between shareholders.
The brief facts
are that Bajaj Auto Ltd. and Western Maharashtra Development Corporation Ltd. (“WMDC”)
had set up a joint venture in the form of Maharashtra Scooters Ltd., in which
Bajaj Auto held 24%, WMDC 27% and the public 49%. The dispute arose out of a
share transfer restriction contained in clause 7 of a Protocol Agreement
between Bajaj Auto and WMDC, which is in the nature of a right of first
refusal. A dispute related to the price at which Bajaj Auto could exercise the
right to acquire WMDC’s stake. The matter resulted in arbitration for
determination of the price, wherein an award was issued. The single judge set
aside the arbitration award on the ground that clause 7 was in violation of
section 111A of the 1956 Act, which provided for free transferability of shares
in a public company. It is against this order that Bajaj Auto preferred an
appeal. The division bench allowed the appeal.
A large part of
the division bench’s reasoning resonates with Messer Holdings, which explores the historical origins of section
111A that substituted section 22A of the Securities Contracts (Regulation) Act,
1956 (SCRA). Given the similarity of reasoning with Messer Holding, I do not propose to discuss the division bench
judgment in detail. However, some key
excerpts are set out below:
24. On a reading of section
 as it stood then,
it is clear that the provisions therein applied only to public companies whose
shares were listed on the recognised Stock Exchanges. The provision in section
 that securities
of public companies shall be freely transferable, was made only as the basis
for the consequential provisions in sections
to (9) to provide for free transferability by restricting the
entitlement of public companies (through their Board of Directors) to refuse
registration of transfers only in four stipulated circumstances [section
 sub-section (3)].
This is also borne out by the statement of objects and reasons discussed above.
In other words, section
 provided for
free transferability and the actual steps taken to provide for the same were
set out in sections
 to (9).
25. The wordings of section
 as well as the
objects and reasons discussed above make it clear that section
 was introduced to
ensure that the Board of Directors of public companies exercising powers under
its Articles of Association, do not place an undue burden on small investors by
refusing to transfer shares without assigning any reason. In light of the
language of section 22A as well as the statement of objects
and reasons, we do not read section 22A(2) to mean that it would affect the right
of individual shareholders to deal with their own shares on such terms and
conditions as they deem fit or to enter into any consensual arrangement /
agreement regarding their own shares by way of sale, pledge, pre-emption or
26. Once the context in which section
 had been inserted
is understood, 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
as contemplated under section
. The purpose of the said provision, as we understand it, was
to ensure that the Board of Directors of the company cannot refuse transfer of
shares except on the grounds specified in the said section. This does not mean
that if an individual shareholder enters into a separate agreement with another
shareholder to deal with his specified shares in a particular manner, the same
would violate the concept of free transferability as envisaged under section
27. We have come to this conclusion because we find that
shares of a company are movable property and the right of the shareholder to
deal with his shares and / or to enter into contracts in relation thereto
(either by way of sale, pledge, pre-emption etc.), is nothing but a shareholder
exercising his property rights. Such contracts voluntarily entered into by a
shareholder for his own shares giving rights of pre-emption to a third party /
another shareholder, cannot constitute a restriction on free transferability as
contemplated under section
. In fact, such contracts (either by way of sale, pledge or
pre-emption) are entered into by a shareholder in exercise of his right to
freely deal with and / or transfer his own shares.
Furthermore, the
court concluded that even through the terms of the Protocol Agreement were incorporated
into the articles of association of the company, that would not alter the
enforceability of the agreement inter se
between the parties.
An extended contribution
of the division bench judgment is its analysis of the factual situation in the context
of the new legislation, i.e. Companies Act, 2013 (the “2013 Act”). Although the
case itself was decided under the 1956 Act, the court expressed its views on the
2013 Act (which can at best be considered obiter
). It examined section 58(2) of the 2013, which “specifically provides
that without prejudice to sub-section (1), the securities or other interest of
any member in a public company shall be freely transferable. However, the
proviso to the said section stipulates that any contract or arrangement between
two or more persons in respect of transfer of securities shall be enforceable
as a contract”. After briefly considering the parliamentary process behind the
enactment of this provision, the Court appears to suggest that the new provisions
will resolve the matter:
40. On reading section 58 …, we are of the view that section 58 merely clarifies and codifies the existing legal
position regarding such pre-emption agreements. In other words, 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.
However, in an
earlier paper, Niranjan and I find (on pages 29 to 32) that section 58 may not have
resolved the matter entirely, and that some open issues remain.
In all, the recent
decision of the Bombay High Court further entrenches the Messer Holdings position and enhances the enforceability of
transfer restrictions in public companies. Although this judgment relates to
the 1956 Act, some observations have been made regarding the position under the
2013 Act as well. However, the limitations of this approach are that this and
the Messer Holdings are both Bombay
High Court decisions, without other High Court having expressly concurring with
this view. In fact, other High Courts such as Gujarat High Court (
Mafatlal Industries Ltd. v. Gujarat Gas Co. Ltd., [1999] 97 Comp. Cas. 301) and Delhi High Court (Smt.
Pushpa Katoch v. Manu Maharani Hotels Ltd.,
[2006] 131 Comp. Cas. 42) have
adopted a different view. Moreover, since Messer
is on appeal (and the present judgment might very well be appealed
against as well), the true resolution of the issue will have to await a
pronouncement from the Supreme Court.
[I would like to
thank Nikhil Suresh Pareek for bringing the judgment discussed in this post to
our attention]

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.


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