The Enforceability of Contractual Restrictions on the Transfer of Shares

Abstract

This paper analyzes the judicial trends regarding the enforceability of clauses in shareholders’ agreements that restrict the transfer of shares in Indian companies. The authors argue that neither VB Rangaraj’s case nor section 111A(2) of the Companies Act, correctly interpreted, supports the view that contractual restrictions on the transfer of shares are unenforceable qua the shareholders. As to the former, they argue that VB Rangaraj was wrongly decided because it misinterpreted section 82 of the Companies Act, and relied on two English judgments that in fact dealt with the power of the board of directors to refuse registration, and not with the ability of private parties to create contractual restrictions. As to the latter, they argue that a close analysis of the legislative history and contemporaneous interpretation of section 22A of the Securities Contract (Regulation) Act, 1956 (the precursor to section 111A(2)) demonstrates conclusively that Parliament simply regulated the power of the board of directors to refuse registration and never intended to invalidate contractual restrictions.

The doubtful provenance of these two propositions has led to a sharp divergence of opinion across the High Courts, which the authors suggest is best resolved by the Supreme Court clearly emphasising that section 111A(2) is in reality irrelevant to the validity of contractual restrictions. The Court has an opportunity to do so in deciding the appeal challenging Messer Holdings, and the authors argue that the best course is for the Court to overrule VB Rangaraj and Messer Holdings insofar as it relies on VB Rangaraj, and affirm Messer Holdings insofar as section 111A(2) is concerned.

Keywords: Indian companies, shares, transfer restrictions, enforceability, shareholders agreements, articles of association

JEL Classification: K22