IT IS NOT THE END OF SHARE TRANSFER RESTRICTIONS IN PUBLIC COMPANIES

Smt. Pushpa Katoch Vs. Manu Maharani Hotels Ltd. and Ors. [2006] 131 Comp Cas 42 (Delhi), 121(2005)DLT333, 2005 (83) DRJ 246


The Delhi High Court also held that by virtue of the provisions of Section 111A, the right of a shareholder to transfer his/her shares could not be fettered. Mr. Justice A.K. Sikri held thus:

The CLB further rightly mentioned that as per the provisions of Section 111A of the Act, there could not be any fetters on the right of a shareholder to transfer his/her shares. It may be noted that the Legislature has made different provisions for transfer of shares in case of private limited company and public limited company. Section 111, which deals with "Power to refuse registration and appeal against refusal", relates to the private limited companies. On the other hand, provisions of Section 111A dealing with "Rectification of register on transfer" are attracted in the case of public limited companies. While restrictions can be stipulated in the Articles of Association so far as transfer of shares of a private limited company is concerned, sub¬-section (2) of Section 111A of the Act specifically provides that the shares or debentures and any interest therein of a company shall be freely transferable. Proviso to this sub-section further stipulates that if a company, without sufficient cause, refuses to transfer the shares within two months, the transferee may file an appeal to the Company Law Board and "it shall direct company to register the transfer of shares". Since the respondent No. 1 company is a public limited company, the CLB rightly opined that there could be no fetters on the right of a shareholder to transfer his/her shares. We have already noted that there is no such provision giving pre¬emptory right to other promoters in the Articles of Association. Even if there was such a provision in the Articles of Association, it would have been ultra vires the provisions of the Act, as no company can provide in the Articles of Association any matter which offends the specific provision of an act (see Re. Denver Hotel Co., 1893(1) Chancery Division 495). No doubt, the four sisters promoted the company and their intention was to make the family property as a hotel and run the same. No doubt, in the Board meeting held on 16th March 1994 and the Memorandum of Family Agreement it was recorded that any promoter wanting to sell the shares would first offer the same to other promoters. However, at the same time, while incorporating this company, the promoters decided to have a public company limited by shares rather than a private company. They should have understood the implication and consequences of getting a public company incorporated. If they wanted such an arrangement, as recorded in the minutes of the meeting dated 16th March 1994 and the Memorandum of Family Settlement, they should have been wise enough to incorporate a private company and further to provide such a clause in the Articles of Association. After incorporating a public company, it was too late in the day to think of such an arrangement and recording the same in the Board meeting or the family settlement, which could not have any legal basis.

A Special Leave Petition against the judgment of the Delhi High Court was dismissed by the Supreme Court on 7th April 2006. I am in respectful agreement with the view of the Delhi High Court which reflects the correct position in law.

The above decision of Justice A K Sikri was quoted with approval by the Bombay High Court in Western Maharashtra Development Corpn. Ltd. v Bajaj Auto Limited [2010] 154 Comp Cas 593 (Bom). Setting aside an Arbitral Award, the Bombay High Court held that “the Arbitrator has ignored the express and specific provisions of the Companies Act, 1956; lost sight of the very concept of free transferability of the shares of a Public Limited Company and failed to apply the provisions of Section 9 under which overriding force is given to the Act notwithstanding anything to the contrary contained in the Memorandum, Articles or agreement. In the said case, the Bombay High Court held that the position in law of a Public Company is materially different. By the provisions of the Companies' Act, 1956, restrictions on the transferability of shares which are contemplated by the definition of a "private company" under Section 3(1)(iii) are expressly made impermissible in the case of a public company by the provisions of Section 111A. The High Court held that the submission that Section 111A would not interdict "an agreement between particular shareholders relating to the transfer of specified shares" is cannot be accepted. Elaborating further the Bombay High Court held as follows:

“In essence, the submission of the Respondent is that the provisions of Section 111A should 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 and unambiguous, neither the consequence nor the conduct of parties would be of relevance.”

Clause 6 of the Companies Bill, 2009 contains provisions relating to articles of association [regulations] of a company. This clause allows incorporating entrenchment rights in the articles of association of any company including a public company. There is no provision similar to Section 111A that states shares of a public company are freely transferable. Therefore if restrictions relating to transfer of shares are incorporated in the Articles of a public company the decision of the Delhi and Bombay High Court in the above cases would get nullified!
 
Investors acquiring stake in public companies have no reason to worry if the bill becomes an enactment at the earliest!