Restrictions on transfer of shares vis-à-vis Articles of Ass

Suresh Savaliya, ACs, LL.m, LL.b.  Mumbai

Parting and partnering business is a long lasting history of the world in one or an other shape. Strategic way to do business, to develop business, and widen business horizons and consensus on terms in this respect by two or more parties is “Joint venture” and preferred shape to regulate and protect the ventures is corporate form, called “Joint venture company” (JVC). In JVC parties agreeing to shoulders requirement to achieve mutual objects, mainly by way of capital contributions intending for long term relations between equity partners witnessed by statutes and therefore regulations, protections and security of rights and objects in legal sense do matters.  

To maintain healthy economics and business environment of a nation, it is very much important to protect and encourage for joint ventures in terms of knowledge sharing, partnering research works, managing cross boundaries barriers, geographic benefits, strategic financial alliance, cost effective productions, distributions, storage, result oriented marketing and to develop business relationships guarding futures of organization.      

Any joint venture and shareholders’ agreement in reference to JVC registered under the Companies Act, 1956 is regulated by Companies Act, 1956, relevant joint venture and business agreements. By way of joint ventures agreement parties align their minds on mutual rights and obligations and at this juncture professional’s role is crucial to check and set such intentions and terms in a way that legally enforceable. Among others, one important matter is “restrictions on share transfers”, Subscribe further shares, Right of first refusal, Tag along rights, and Pooling voting rights. The whole joint effort becomes futile exercise, if any term of joint venture would not be legally enforceable in business sense and in case of any dispute. At this point of time Articles of Association of a company and Companies Act becomes crucial spot.

Generally, for joint adventures, a private limited company is suitable shape to regulate the relationship between entrepreneurs smoothly. However sometime, because of some limitations of private limited company, it is intended to shape joint ventures in form of public limited company. 

This article seeks to explain validity of the restrictions on transfer of shares in a public limited company registered under the Companies Act, 1956. 

In this respect, discussion on the following questions will enlighten and helpful to clear dilemma.  

1.           Whether ‘restrictions on transfer of shares’ can be inserted in Articles of Association of a “Public Limited Company”, reflecting the provisions of Shareholders’ agreement?

2.           Whether inclusion of “share transfer restrictions” in the Articles of Association of a public limited company is legally valid in terms of Section 111A (2) of the Companies Act, 1956?

3.           Because of any restriction on transfer of shares contained in AoA, can the public company be considered as “private company” by virtue of the restrictions and is it required to convert the public company in to private company by following prescribed procedures of the Act?

In case of private company, AoA can contain any restrictions on transfer of shares as agreed between shareholders or some of them and the Company. There is no dispute for private company, since restriction on share transfer is one of the major defining criteria of a private limited company under the provisions of section 3 of the Companies Act, 1956 (the Act) and Section 111A  is not applicable to private limited company.  

However in case of public company, regarding restriction on share transfer, the standing is not straight and could be requiring to view further the provisions of the Companies Act, 1956 in reference to the spirit and scheme of the Act.

Section 111A of the Companies Act, 1956 titled as “Rectification of register on transfer”, read a follow;

“Sub-Section (1) : in this section, unless the context otherwise requires, “company” means a company other than a company referred to in sub section (14) of section 111 of this Act.”

“Sub-Section (2): Subject to the provisions of this section, the shares or debentures and any interest therein shall be freely transferable.

Provided that if a company without sufficient cause being shown refuse to register transfer of shares within two months from the date on which the instrument of transfer of shares or the intimation of transfer, as the case may be, is delivered to the company, the transferee may appeal to the Company Law Board, and it shall direct such company to register the transfer of shares.”

As clarified by Sub-section (1) of 111A referring section 111 (14), Section 111A of the Act is applicable to public company.

At this spot, it is important to heed that in the proviso to sub section (2), why the legislature uses the word “without sufficient cause being shown refuses to register”? In reference to the said words, on which ground and base it can be decided that whether the reasons for refusal is sufficient or not for the share transfer like commercial transaction? None other than Articles of Association (AoA) could be the right answer and might be the intention of the legislature,  which gain support from the section 82 of the Act, which read as follow;

“Nature of shares or debentures – The shares or debentures or other interest of any members in a company shall be movable property, transferable in the manner provided by the articles of the Company”.

Section 82 is by content it self apparently recognize Articles of Association as a document to regulate transfer of shares in a company. Here, it is pertinent to underline that Section 111A neither exclude section 82 nor containing any intention of the legislature indicating overriding effect.

In this reference further, the Supreme Court in the case of V.B.Rangaraj V. V.B.Gopalkrishnan, AIR 1992 held that the Shares are transferable like any other movable property. The only restriction on the transfer of the shares of a company is as laid down in its Articles, if any. A restriction which is not specified in the articles is, therefore not binding either on the company or on the shareholders.

The whole purpose of the section 111A is to provide free transferability of shares in public limited company and thereby providing a right to shareholders for transfer of their shares as they thinks fit. The spirit of the section is providing right to shareholders rather than to regulate the affair of the Company regarding share transfer and that is why section 82 providing sufficient space for members to regulate their mutual rights as agreed upon between them and laid in Articles.  

Now, if the Act providing any right to members, the crux question comes is whether the right can be waived or can be regulated by mutual agreement? In another way, whether legally there can be “waiver” of legal rights as in the instant case, shareholders / members of a public company or any of them can waive or regulate their right of free transferability of shares, coming from section 111A(2) of the Act?

The Supreme court in Basheshar Nath Vs. CIT (1959) 35 ITR 190, has held as follows:

“…. to constitute ‘waiver’, there must be an intentional relinquishment of  a known right or the voluntary relinquishment or abandonment of a known existing legal right, or conduct such as warrants an inference of t relinquishment of a known right or privilege. Waiver differs from estoppel in the sense that it is contractual and is an agreement to release or not to assert a right,…..”

In Halsbury’s Laws of England, inter alia, it is said that person for whose benefit statutory duties have been imposed may waive their rights unless to do so would be contrary to public policy or to the provisions or policy or to the provisions of the Act imposing the duties. Waiver of this kind may be implied from acquiescence. In some cases, and in particular where an act bard a legal remedy without extinguishing a right, the courts treat mere failure to plead the Act as acquiescence. A statutory right, which is grated as a privilege may be waived either altogether or in a particular case.

Except in case of stock exchange listed company, it can be inferred that “waiving of right of free transferability of shares in a public company” is not violating any public policy and not affecting any public interest.

Now, another important question arises is whether such a waiver of the statutory right is void because of the provision of Section 9 of the Act, which read as follows:

“Act to override memorandum, articles, etc., save as otherwise expressly provided in the act. – (a) the provisions of this act shall have effect notwithstanding anything to the contrary contained in the memorandum or articles of a company, or in any agreement executed by it, or in any resolution passed by the company in general meeting or by its Board of directors, whether the same be registered, executed or passed, as the case may be, before or after the commencement of this act; and

(b) Any provision contained in the memorandum, articles, agreement or resolution aforesaid shall to the extent to which it is repugnant to the provisions of this act, become or be void, as the case may be.”

In this reference it is very important to note the following provisions of the Act.

Section 73 (4) provides that any condition purporting to require or bind any applicant for shares or debentures to waive compliance with any of the requirements of this section shall be void.

Section 69 (6) of the Companies Act, 1956 which corresponds to section 57 of the England Companies Act, 1985.

Section 69 (6) of the Act provides that “any condition purporting to require or bind any applicant for shares to waive compliance with any requirement of this section shall be void.”

Section 309 (5B) provides that a company shall not waive the recovery of any sum refundable to it under sub-section (5A).

S. 603 (2) Any condition requiring or binding an applicant for shares or debentures to waive compliance with any requirement imposed by virtue of clause (a) or (b) of sub-section (1), or purporting to affect him with notice of any contract, document or matter not specifically referred to in the prospectus, shall be void.

Some provisions of the Companies Act, 1956 as referred above, indicate that wherever there is an intention of the Act to prohibit waiver of rights, it has expressly stated so.

Since there is no specific prohibition against waiver of right to transfer of shares flowing from section 111A (2) of the Act, it can be held that shareholders of public company or any of them can legally waive or regulates their right of free transferability of shares and to that extent it will not be hit by section 9 of the Act.

Considering the above discussion, it can be said that under the spirit of the Act and court decisions as referred above, a public company by it’s articles can restrict and regulate transfer of shares and the article may reflect voluntary waiver of right to transfer of shares or agreeing on specific way to transfer of shares by shareholder through shareholders agreement.

Regarding the status of a public company AoA of which contained restriction on transfer of shares, there is no ground to say that it becomes private company by virtue of the restrictions contained in AoA. Such public company remain public company in the absence of provisions in the articles corresponding to sub clauses (b), (c), (d) of section 3 (1) (iii) of the Companies Act. Just because of restrictions on transfer of shares contained in AoA of public company, such public company can not be constituted as private company under the scheme of the Act.