Course correction on free transferability of shares

Two recent judgments – Messer Holdings Limited v Shyam Madanmohan Ruia and Western Maharashtra Development Corporation Limited v Bajaj Auto Limited – have sought to bring clarity, albeit in their own respective ways, on transferability of shares. They focus on the right of the shareholder to deal with shares in a public company and their ability to enter into right of first offer and first refusal agreements.

While the Western Maharashtra judgment delivered in February by Bombay High Court sort of pulverized the world of M&A deals, the judgment delivered in Messer Holdings on 1 September by the same court has, to a great extent, provided the necessary course correction.

Unexpected move

The Western Maharashtra judgment threw up more questions than answers and caused confusion among stakeholders. In it the judge held that the right of pre-emption, i.e. the right of first offer and first refusal, for shareholders of a public company creates a restriction on free transferability of shares of a public company. This violates section 111A of the Companies Act, 1956, which mandates that the shares of a public company are to be freely transferable. Accordingly the judgment held “the effect of a clause of pre-emption is to impose a restriction on the free transferability of the shares by subjecting the norms of transferability laid down in section 111A to a pre-emptive right created by the agreement between the parties. This is impermissible.”

Amit Kumar is a partner, Arvind Sharma is principal associate and Ambarish Mohanty is an associate at Amarchand Mangaldas & Suresh A Shroff Co. The views expressed are those of the authors and do not reflect the official policy or position of Amarchand Mangaldas.