Analysing restrictions on the transfer of shares

The issue of restriction on the transfer of shares of a company incorporated under the Companies Act, 1956, has been an area of concern for some time. While the law is fortified under the act, which has specific provisions dealing with the transfer of shares, there have been several judicial pronouncements arising out of disputes between various persons in this regard.

Section 82 of the act provides that shares of a company incorporated under the act will be movable property, transferable in the manner set out in the company’s articles of association. Thus, a restriction on transferability not contained in the articles of a company would not be enforceable in law.

The case of VB Rangaraj v VB Gopalakrishnan involved a family consisting of two brothers, who held 25 shares each in a company. In accordance with an oral agreement (and not incorporated into the articles of association of the company) between the brothers, each of the family’s branches would always hold an equal number of shares. The agreement stated that if any member in either branch wished to sell their shares, he would give the first option of purchase to the members of his respective branch and only if the offer was rejected, would the shares be sold to others.

Harry Chawla is a partner and Chandrasekhar Tampi is a Principal Associate at Amarchand & Mangaldas & Suresh A Shroff & Co.