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Case studies on A public limited company restricting the tr

Yogesh Bhatt (Company Secretary) (475 Points)

07 July 2010  

Companies Act, 1961 – A public limited company restricting the transfer of shares by a shareholder

 

WESTERN MAHARASHTRA DEVELOPMENT CORPN. LTD. V. BAJAJ AUTO LTD [2010 154 COMP CAS 593 (B OM) CHANDRACHUD D. Y.DR.J [DECIDED ON 15.02.2010]

 

Issue at large: Facts of the case are complicated involving arbitration and preemption rights. However, the crucial issue is whether a public limited company restricting the transfer of shares by a shareholder by way of providing pre emptive right is valid – examined and settled by the court.

 

Decision: Pre emptive rights with respect to transfer of shares are illegal for a public company.

 

Reason: The Companies Act, 1956, makes a clear distinction in regard to the transferability of shares relating to a private and public companies. By definition, a private company is a company which restricts the right to transfer its shares. Consequently, upon a refusal of a private company to transfer its shares, a remedy is provided in the Act. In the case of a public company, the Act provides that the shares or debentures and any interest therein of a company shall be freely transferable. Free transferability of shares is the norm in the case of shares in a public company.

 

The provision contained in the law for the free transferability of shares in a public company is founded on the principle that members of the public must have the freedom to purchase and, every shareholder the freedom to transfer. The incorporation of a company in the public, as distinguished from private realm leads to specific consequences and the imposition of obligations envisaged in law. Those who promote and manage public companies assume those obligations. Corresponding to those obligations are rights, which the law recognizes as inherent in the members of the public who subscribe to shares. The principle of free transferability must be given a broad dimension in order to fulfill the object 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 into the Companies Act, 1956. That is a binding precept which governs the discourse on transferability of shares.

 

The word transferable is of the widest possible import and Parliament by using the expression freely transferable has reinforced the legislative intent of allowing transfers of shares of public companies in a free and efficient domain. The effect of a clause of pre-emption is to impose a restriction on the free transferability of the shares by subjecting the norms of transferability laid down in Section111A to a pre emptive right created by the agreement between the parties. This is impermissible. Section 9 of the Companies Act, 1956 gives overriding force and effect to the provisions of the Act, notwithstanding anything to the contrary contained in the memorandum or articles of a company or in any agreement executed by it or for that matter in any resolution of the company in general meeting or of its board of directors. A provision contained in the memorandum, articles, agreement or resolution is, to the extent to which it is repugnant to the provisions of the Act, regarded as void.

 

The provisions of Section 111A cannot be read as being subject to a contract to the contrary. A restriction to that effect cannot be read into the provision of Section 111A :

firstly because, such a restriction is not mentioned in the statutory provision;

 

secondly, the word transferable is of the widest import;

 

and thirdly, the context in which the provision has been introduced, is susceptible to the inference that it should be given a wide meaning. Where the language of the statute is plain, neither the consequence nor the conduct of the parties would be of relevance.

 

Regards.


 1 Replies

vivek (CS) (751 Points)
Replied 07 July 2010

Thanks for sharing.



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