There is free transferablility of shares in this company
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Restrictions on a shareholder’s ability to sell his stake in a company usually find its way through most Shareholders Agreements. Be it through a right of first refusal, tag along or restrictions of a more absolute nature such as a lock”in or ban on selling shares to any competitor etc. As regards the enforceability of such restrictions, the position has been settled in the case of private companies by the Supreme Court of the land holding that such restrictions and all others imposed under a Shareholders Agreement are to be incorporated into the charter documents of a company (i.e., Memorandum and Articles of Association) for them to be enforceable. However, the law is not as clearly established in the case of public companies.
In essence, private companies possess certain characteristics, significant of which is the unfettered right to restrict share transfers. Section 3(iii) of the Companies Act defines private company as a company, which by its articles-
“(a) restricts the right to transfer its shares, if any;
While public company is a company which is not a private company [1] .
And moreover, the shares of a public company are freely transferable. Such a characteristic is not brought out by inference alone. The Companies Act, 1956 (“Act”), the principal legislation regulating all companies in India, specifically provides that the shares of a public company are freely transferable [2] . Earlier share transfer in public companies was governed by s.111 of the Act whereby the power of the Board of Directors to refuse registration of transfer must be exercised in the interest of the company and the general body of the shareholders [3] . But after the amendment of s. 111 by the Depositories Act, 1996. Sub-section (14) was added by the amendment to s. 111 which excluded public companies from its purview. Section 111A was inserted by s. 30 of the Depositories Act, 1996. This section applies to public companies only. This section lays down that “subject to the provisions of this section, the shares or debentures and any interest therein of a company shall be freely transferable”.
But the question has been raised in several cases in various High Courts as to whether there can be any restrictions on the transfer of shares and whether the Board of Directors have the power to refuse the transfer of shares.
THE POWER OF THE BOARD OF DIRECTORS TO REFUSE TO REGISTER THE TRANSFER OF SHARES
The Board of Director’s power to refuse the transfer of shares as incorporated in the articles of association is a legally valid power validated by s. 82 of the Act that shares shall be transferred in the manner provided in the Articles of Association [4] . Hence, subject to the restrictions, if any, which may have been imposed by the Articles a shareholder has an absolute right to dispose off his shares or debentures [5] . In this regard, the Supreme Court of India in VB Rangaraj v VB Gopalakrishnan [6] held: “The only restriction on the transfer of the shares of a company is as laid down in its Articles, if any.”
In an earlier judgment [7] , the High Court while relying on earlier precedents held that since the pre-emptive rights over share transfers of a public company were not incorporated in the Articles they are not enforceable. Hence, the transfer can be enforced only for the reasons stated in the Articles of Association [8] .
But a contrary stand has been taken in Western Maharashtra Development Corpn. Ltd. v. Bajaj Auto Ltd [9] , by virtue of which any restriction on the transferability of shares in a public company, as in the respondent company is “patently illegal”. Hon’ble Justice D.Y. Chandrachud of Bombay High Court, in his judgment pointed out that right of free transferability of shares as provided in s. 111A(2) of the Act is an unfettered right. The Court ruled thus:-
“53. 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 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.”
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