Dr. V.K.

Unni
Professor
IIM Calcutta
E-mail: unniv@iimcal.ac.in

VK Unni IIM-C
 The right of shareholders to enter into consensual
agreements in case of shares of public companies is a
matter of debate in recent times
 Promoters, PE Investors, Technical or Financial
Collaborators are always curious to know whether they
can have Share Transfer Restrictions (STR) like Right of
First Refusal (ROFR) / ROFO/ tag-along/drag-along
clauses etc in the Shareholders’ Agreement or Joint
Venture Agreement
 Such provisions will also be reflected in the Articles of the
Company to make it binding on the company

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 The debate on STR began in the year 1991 when the Supreme Court
held that in case of a private limited company, transfer restrictions,
should be embodied into the company’s Articles to make it valid and
binding
 However the abovesaid decision only concerned private companies
and it was not applicable to public companies
 However dealing with public and listed companies there were
decisions from some High Courts which held that STR on listed
shares would be invalid
 Court held so because under section 111A of the Companies Act
1956 the shares and debentures and any interest therein of a public
company shall be freely transferable’
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 In the February 2010 case of Western Maharashtra Development
Corporation vs. Bajaj Auto Ltd, the Bombay High Court (Single
Bench) held that any restrictions on share transfer like ROFR
in case of listed shares will not be valid in law and thus illegal
 There was an Agreement between Western Maharashtra Dev.
Corp. and Bajaj Auto pursuant to which a public company
was incorporated which was listed on BSE and NSE
 Agreement provided for ROFR at a price consented
between the parties or as may be decided by the
Arbitrator and this was made part of the company’s
Articles

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 Western offered its shares to Bajaj Auto in terms of
agreement but there was a dispute with respect to the
price
 Western challenged jurisdiction of Arbitrator on the
ground that agreement was void as it violates Section 111
A of the Act
 The dispute reached the Bombay High Court which held
that the ROFR was impermissible as it contained
restrictions on the free transferability of the shares.
 It held that even if the Company’s Articles provided for
such restrictions it would have been violative of the
Companies Act VK Unni IIM-C
 This interpretation resulted in creating uncertainty in
the minds of PE investors/ Strategic Partners while
negotiating ROFR or tag/drag rights with the
Promoters/other partners
 The main question to be answered is whether in a
listed company one can validly offer ROFR/ROFO/
tag along/drag along rights that would ultimately be
legally enforceable

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 In September 2010 the Division Bench of the
Bombay High Court decided about this issue in
the case of Messers Holdings v S.S. Ruia
 Ruias and Hoechst Group signed a Share
Purchase Agreement (SPA) for transfer of Ruia’s
shares in Bombay Oxygen which was listed in
BSE
 SPA provided for ROFR, however, Hoechst
group could transfer it to any of its subsidiary in
which it had more than 51% shares
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 Hoechst transferred its shares in Bombay Oxygen to an
entity in which it had only 49% shares and this
essentially violated the SPA
 Ruias filed a case asking for specific performance and
interim injunction
 Hoechst argued that such ROFRs are violative of Sec
111A of the Company Law and thus unenforceable
 Ruia argued that the decision in Western Maharashtra
decision is not correct because any agreement between
particular shareholders relating to transfer of specified
shares is not a restriction on transfer of shares

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Court noted that the following
 Earlier when the shares were in physical form, board of
directors used arbitrary powers to reject transfer of shares
leading to lot of complaints by the transferees
 Thus the whole purpose of section 111A is to regulate the
right of the board of directors to refuse transfer of shares
 It was never intended to take away the right of shareholder
to deal with their shares
 Section 111A is not a law dealing with the right of the
shareholders to enter into consensual arrangement between
the shareholders to which the company is not a party

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 Thus the expression ‘freely transferable’ in section 111A does
not mean that the shareholder cannot enter into consensual
arrangement/ agreement with the third party
 The latest judgment on section 111A delivered by the Division
Bench of the Bombay High Court allows parties to negotiate
ROFR
 This can be done even in listed shares and protect their
commercial interest and make them legally enforceable
 ROFR or any such STRs are private consensual arrangement/
agreement to which the company is not a party

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 Furthermore ROFR/STR clauses need not be
included in the Company’s Articles as it
(ROFR/STR) is just a private agreement between
two shareholders to which the company is not a
party at all
 The Messers decision has no impact on the shares
offered to public shareholders which are
absolutely free from any restrictions
 This is because public shareholders are not at all
concerned with any such agreement between
certain set of shareholders like promoters/ PE
investors or Strategic partners

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 The position relating to transferability of shares of a public
company has been addressed now under Companies Act 2013.
 As per the new Act any contract or arrangement between two or
more persons in the context of a public limited company with
regard to transfer of securities shall be enforceable as contract.
 This incorporates the Bombay High Court verdict in Messers
Holdings.
 Now it is well established that even though shares of a public
company are freely transferable and STRs are enforceable as
contract, for which action may be brought by the aggrieved party
for injunction or damages

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 Dr. V.K. Unni
Professor
IIM Calcutta
E-mail: unniv@iimcal.ac.in

VK Unni IIM-C