Introduction
1. The concept of free transferability of shares in a public company under section 111A of the Companies Act, 1956 is perhaps the most significant unresolved controversy in contemporary Indian corporate law. Time and again the question has arisen as to whether the preemptive right (preemptive rights) in the shareholders’ agreement and the joint venture agreement constitute a restriction on the free transferability of the shares. The right of first refusal is a device commonly used in the corporate world. Under the right of first refusal, a second party planning to leave the company is required to give the first party (promoter) the opportunity to purchase the shares before the shares can be sold to a third party that is an outside party. This is basically to prevent an easy entry of a third party into the company by buying shares from the party that wishes to leave the company. Many companies, both unlisted and publicly traded, have these types of agreements with large shareholders.
Right of first refusal if you violate section 111A
2. In the recent judgment of a Chamber of the Bombay High Court in the case of Messer Holdings Ltd. v. Shyam Madanmohan Ruia decided on September 1, 2010 and reported in [2010] 98 CLA 325 has ruled that the restriction on the transfer of shares with the “preemptive right” clause in the agreement does not violate the provisions of section 111A. In paragraph 55, Khanwilkar, J, stated the following:
‘[T]The term “freely transferable” in section 111A does not mean that the shareholder cannot enter into a consensual arrangement/arrangement with the third party (proposed transferee) in relation to his or her specific shares. If the company even wants to prohibit this right of the shareholders, it may have to establish an express condition in the bylaws or in the Law and Regulations, as the case may be, to that effect. The statutory provision obtained in the form of section 111A of the Companies Act does not expressly restrict or eliminate the right of shareholders to enter into consensual arrangements/arrangements in respect of shares owned by them.
This is a reversal of a previous ruling by the single judge in the case of Western Maharashtra Development Corporation v. Bajaj Auto Ltd. [2010] CLA 131 (Bom.) decided on February 15, 2010 holding that section 111A mandates that there can be no restriction on the transferability of shares in a public company. Consequently, an agreement that grants a preferential subscription right with respect to said shares has been considered manifestly illegal. Judge DY Chandrachud in that case held the following:
‘The principle of free transferability must receive a broad dimension to comply with the purpose of the law. Imposing restrictions on the principle of free transferability is a legislative function, simply because the postulate of free transferability was enunciated as a matter of legislative policy when Parliament introduced section 111A. This is a binding precept that governs the discourse on the transferability of shares. The word ‘transferable’ has the widest possible meaning and Parliament, by using the term ‘freely transferable’, has reinforced the legislative intent to allow the transfer of shares in public companies in a free and efficient domain. The effect of a preemptive clause is to impose a restriction on the free transferability of shares by subjecting the transferability rules set forth in Section 111A to a preemptive right created by agreement between the parties. This is inadmissible.
This judgment in the Western Maharashtra case (supra) had indeed put Corporate India in a bind, with many companies facing the prospect of having to rework their equity deals with outside investors. However, the recent failure of Messer Holdings Ltd. (supra) has been a great relief for both the companies and the private equity funds that invest in these firms. The ruling also suggests that it is not mandatory for the company to be a party to such an agreement related to the restrictions on the transfer of shares and that it is not necessary to incorporate restrictions on the transfer of shares in the company’s bylaws.
Section 111A does not apply to a private business
3. The restriction of the transferability of the shares of a private company must be contrasted with the cases of public companies in which the law provides for free transferability. The free transferability of shares is the norm in the case of shares of a public company. As far as private companies are concerned, the statutes restrict the rights of shareholders to transfer shares and prohibit the invitation to the public to subscribe to shares or debentures of the company. In the case of VB Rangaraj v. VB Gopalakrishnan [1991] 6 CLA 211, the Supreme Court has stated that the transfer of shares in the case of a private company is regulated by the company’s bylaws and that any restrictions not specified in the bylaws are not binding on either the company or the shareholders. shareholders. . Regarding the public company in the case of Pushpa Katoch v. Manu Maharani Hotels Ltd.
[2005] 69 CLA 151 (Del.) ruled that even if the right of first refusal has been incorporated in the bylaws, a shareholder cannot be restricted from transferring the shares since section 111A that applies to public companies establishes the free transfer of actions.
Freely transferable concept as held in Messers Holdings Ltd. cash
4. The question before Messer Holdings Ltd. (supra) was whether the preferential subscription right can be said to violate the free transferability of shares provided for in Article 111A. Reference may be made in this context to the provisions of subsection (2) of section 111A beginning with the expression “subject to the provisions of this section, the shares or debentures and any interest therein of a company shall be freely transferable.” . In other words, it is a provision that reaffirms that the shares or debentures and any interest in them of a company will be freely transferable subject, however, to the provisions of the other part of section 111A. The provision of subsection (2) reinforces the position that section 111A is to regulate the powers of the company’s board of directors with respect to the transfer of shares or debentures and any interest therein of a company. The Board of Directors cannot refuse to register the transfer of shares unless there is sufficient cause to do so.
4.1 The concept of free transferability of the shares of a public company is not affected in any way if the shareholder expresses his/her willingness to sell the shares owned by him/her to a third party with preferential subscription rights at the prevailing market price at the time relevant. As long as the member agrees to pay the prevailing market price and complies with other provisions of the Act, the Rules and the statutes, there can be no violation. In the interests of free transfer, both the seller and the buyer must accept the conditions of sale. The freedom of purchase cannot mean the shareholder’s obligation to sell his shares. The shareholder is free to transfer his shares under the terms defined by him, such as the right of preference, as long as the terms are consistent with other regulations, including the repurchase of the shares at the prevailing market price when said offer is made.
The fact that the shares of a public company can be subscribed and that there is no prohibition on inviting the public to subscribe to shares, unlike the case of a private company, does not reduce the right of the shareholder of a public company to reach consensual agreements . agreement that is otherwise in compliance with existing regulations and applicable laws.
conclusion
5. While the recent ruling by Messers Holdings (supra) offers strategic investors much-needed breathing space, legal experts believe that some companies are likely to knock on the doors of the Supreme Court for clarity, as it has a great impact on several joint ventures. India-wide corporate deal. Some experts believe that the share transfer restriction should be present in all agreements. The debate over the enforceability of the terms of shareholder agreements governing corporations is definitely not over yet.