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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  .
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  . 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  . 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  . 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  . In this regard, the Supreme Court of India in VB Rangaraj v VB Gopalakrishnan  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  , 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  .
But a contrary stand has been taken in Western Maharashtra Development Corpn. Ltd. v. Bajaj Auto Ltd  , 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.”
A similar view was adopted in Pushpa Katoch v. Manu Maharani Hotels Ltd. and Ors.  . In this case, four sisters had set up a hotel company and contractually agreed to offer their stake in the hotel to each other before selling their stake to any third party. While this family arrangement was recorded in writing and acknowledged by the board of the company, the said arrangement was not recorded in the Articles of the company. The court, noting the absence of any pre-emptive right of refusal simply held that even if such rights were included in the Articles they would be contrary to the Act. Therefore, the company in this case cannot override the principle of free transferability of shares of public company (specific provision of the Act) as embodied in s.111A (2) of the Act by incorporating any provision contrary to it in the Articles of Association of the company  . Section 9 of the Act clearly stipulates that the Act shall have effect notwithstanding anything contrary incorporated in the Articles of Association or any agreement. Further it states that in case there is a conflicting provision it shall be void to the extent it is in contrary to the Act. Hence, any provisions incorporated in the Articles of the respondent company contrary to the Act, putting fetters on the free transferability, would be hit by s. 9 of the Act  .
A similar view was also taken by the Company Law Board Arjun S Kalro v. Shree Madhu Industrial Estates Ltd.  In this case, the Articles required a selling shareholder to notify the board of directors before selling shares and to give the board the discretion to determine the terms of the sale with the intending purchaser (i.e., sale price etc). The CLB has held that even conferring the board with the discretion to finalize the sale is a restriction on a shareholder’s right to transfer shares and thus such provisions in the Articles are not enforceable.
Any such right or power contrary to the provisions of the Act, as mentioned earlier, under section 9 is void to the extent it is in contravention. It was held by the Company Law Board in the case of Kinetic Engg. Ltd. v. Sadhna Gadia  that if any provision of the articles or the memorandum is contrary to any provisions in the Companies Act or any other law, it will be invalid in toto. Hence, any provision in the articles which puts any restriction on free transferability of shares would amount to a negation of the provisions of law, and, therefore, cannot be binding  .
Hence, the question still remains to be answered by the Supreme Court of India whether there can be any fetters on the right of free transferability in case of public companies?
IF THE REFUSAL IS BONA FIDE AND IN THE INTEREST OF THE COMPANY
The object of any such provision in the articles of association is to arm the Directors with power to be exercised in special and exceptional cases where the transfer of shares may be found to be undesirable in the interests of the company. Even if it were the case that the majority of the shareholders would have welcomed the transferees, it was not a circumstance that affected the matter one way or the other. 
The internal discipline for a voluntary organization is a matter to be preserved by the organization itself by insisting upon strict adherence to the terms of that contract.  Moreover, the Andhra Pradesh High Court held that if the approval of transfer by the Board of Directors would put the company in breach of the contractual obligations under the Shareholders’ agreement and hence, the Board shall be justified to refuse the transfer  .
It is well settled that if a discretion as to registering transfers is given by the articles to the Directors, the Court will not exercise of such discretion unless it is proved that the Directors are not exercising it bona fide or are acting in other ways oppressively, capriciously or in some other way mala fide.  Where company gives reasons for its refusal to register transfer of shares, that reason alone will have to be examined as good or bad.  The power of refusal must be exercised in a bona fide manner and in the interest of the company and the general body of shareholders. 
Where Directors have given reason for rejecting transfer of shares Court will consider whether they are legitimate and whether the Directors have proceeded on right or wrong principle.  Where articles provide that Directors may refuse to register transfer of a share to a person of whom they do not approve, they are not bound to disclose their reasons for disapproving the transferee but if they do, Court can go into question whether they are good reasons. 
SUFFICIENT CAUSE FOR THE REFUSAL
The proviso to Sub-section (2) was not incorporated under s.111A initially. It was inserted through the Depositories Related Laws (Amedment) Act, 1997. Since the Depositories Act envisaged electronic mode of transfer, without involvement of the company concerned, rectification of register of members after registration of transfer under certain circumstances, was provided under Sub-section (3). Later, in view of the fact that still manual transfers are prevalent, with a view to ensure that registration of transfer of shares is not refused by companies indiscriminately; the proviso to Sub-section (2) was inserted later  which read-“Provided that if a company without sufficient cause refuses to register transfer of shares within two months from the date on which the instrument of transfer or the intimation of transfer, as the case may be, is delivered to the company, the transferee may appeal to the [Tribunal], and it shall direct such company to register the transfer of shares.”
In Canara Bank v. Ankit Granites Ltd.  it has been observed that the shares of a public company are freely transferable and if the transfer is refused without sufficient cause, the transferee may appeal to the Company Law Board, which shall examine whether such refusal is with sufficient cause or not. If the refusal is without the sufficient cause, this Board will direct the company to register the transfer.
“Sufficient cause” has not been explained anywhere in the Act, hence we must look to the precedents in this regard. In McDowell & Co. Ltd. v. Shaw Wallace & Co. Ltd  . the Company Law Board has held that in case of a public company, the term ‘sufficient cause’ would cover only 3 grounds as specified in Section 111A (3) viz. if the transfer is in contravention of the provisions of SEBI Act, or Regulations made there under, the provisions of Sick Industrial Companies Act or any other law in force for the time being. In other words, a public company cannot refuse registration on any other ground including non compliance with the provisions of the Articles. The Company Law Board, in the case of Estate Investment Company Private Limited and Anr., v. Siltap Chemicals Limited  , has categorically stated that “refusal on any other ground in respect of a public company cannot be considered to be sufficient cause for such refusal”.
But, to the contrary, in 2001, a High Court of India  has observed that the expression “sufficient cause” takes within its sweep not only those contingencies contemplated to undo a transfer but there can also be other circumstances and reasons which might require the company to refuse to register the transfer of shares. As a perfect example, the court observed that if the transfer of shares in favour of a person is likely to create, or, would ultimately place the company itself, in a situation to make a breach of certain existing contractual obligations of the company, thereby exposing the company to action in law, the company would be justified in refusing to register such transfer of shares. The court ultimately held that while there could be various reasons which could constitute “sufficient cause”, it would not be possible to enumerate all of them and should instead be decided on the facts of each case.
More importantly, in Finolex Industries Ltd. v. Anil Ramchand Chhabria  , the Bombay High Court has held- “Remedy provided in Section 111A(3) is in addition to the remedy provided in Section 111(4). It is, therefore, held that the remedies of appeal and rectification are available to all kinds of shares held in a public company under the proviso to Section 111A(2) and Section 111A(3) read with Sub-section (7) of Section 111A which would make applicable the provisions of Section 111(1), (2) and (4) by virtue of Section 111(5)”. The shares involved in this case were that of a listed company and the courts have held as above. In view of the fact that Section 111A was inserted in the Act pursuant to the enactment of the Depositories Act which is applicable to listed companies, that in case of unlisted public companies, all the provisions as are applicable to a private company should also be applicable  . If so, then the term “sufficient cause” in the proviso to Sub-section (2) of Section 111A should receive the same construction as in Section 111(4)  .
Also, If the sufficient cause for refusal was not communicated, the Company Law Board/High Court has to consider the reasons stated by the company for its refusal to register the transfer of shares  . This was laid down in Thalayar Tea Co. Ltd. v. Union of India  wherein the Company Law Board/High Court directed the company to register the transfer as it had not communicated the reason for the refusal. But the Supreme Court, setting aside the orders of the Company Law Board/High Court, held that the company should have been given an opportunity to state its reasons before the Company Law Board/High Court.
As again, the Supreme Court of India needs to clear this cloud of confusion regarding the meaning of the term ‘sufficient cause’.
WAIVER OF THE RIGHT OF FREE TRANSFER OF SHARES
The whole purpose of 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 think fit. The spirit of the section is to provide a right to shareholders rather than to regulate the affair of the Company regarding share transfer and that is why section 82 provides sufficient space for members to regulate their mutual rights as agreed upon between them and laid down in Articles. Now the crux of the question is whether the right can be waived or can be regulated by mutual agreement? In other words, whether legally there can be “waiver” of legal rights. In Basheshar Nath v.CIT  , the Supreme Court 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 the 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 bars a legal remedy without extinguishing a right, the courts treat mere failure to plead the Act as acquiescence. A statutory right, which is granted 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.
In this regard it is important to note that ss. 73(4), 69 (6), 309 (5B) and 603 (2) prohibit the waiver of a specific legal right. These provisions of the Companies Act, 1956, 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 shares flowing from section 111A (2) of the Act, it can be concluded that shareholders of public company or any of them can legally waive or regulate their right of free transferability of shares and to that extent it will not be hit by section 9.
Considering the above discussion, it can be said that in terms of the provisions of the Act and court decisions, the respondent company by its articles has restricted and regulated transfer of shares and the articles reflect voluntary waiver of right to transfer of shares and has agreed on specific way to transfer of shares by shareholder through shareholders agreement.
As a conclusion, it is important to note the intention of the legislature in making share transfers free from any restrictions is deeply manifested in the deletion of S. 22A(3) and (4) of the Securities Contracts Regulations Act 1956, which empowered the Board of Directors of a company to refuse share transfers. S. 22A of the Securities Contracts Regulations Act stipulated the various causes for refusing the transfer of shares in a listed public company. But this section was omitted by the Depositories Act 1996 by virtue of which Section 111A was inserted in the Companies Act 1956 which now governs both listed and unlisted public companies. By inserting subsection (14) in Section 111 of the Companies Act, it is now provided that this section, which related to the power to refuse registration of transfer of shares and appeal against such refusal, shall be applicable only to the private companies. Thus, this section will have no application to public companies now.
Due to newly inserted subsection (3) in Section 108 of the Companies Act, transfer of shares can now take place between a transferor and transferee directly in the records of the depository without following the detailed procedure under Section 108 (of submitting transfer form, etc) if both of them are entered as beneficial owners in the records of a depository. It is now clear that the shares of a public company have now been made freely transferable fully. In fact, transfer of dematerialised shares takes place in the records of the depository itself. The depository is required under Section 13 of the Depositories Act to furnish information about the transfer of securities in the names of the beneficial owners to the company at regular intervals
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 bars a legal remedy without extinguishing a right, the courts treat mere failure to plead the Act as acquiescence. A statutory right, which is granted 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.  Also, it is consequential to reiterate the fact that initially the Depositories Act 1996 did not account for any sort of refusal of transfer of shares by the Board of Directors as it stipulated that share transfer shall be electronic by-passing the involvement of the company. Clearly, the intention of legislature in inserting s.111A and the subsequent proviso to subsection (2) was to prevent the company from refusing to register the transfer of shares indiscriminately  .
But, then on the basis of the diverging precedents, a conclusive view may be difficult to take. Even so, what is comforting to know is that restrictions on share transfers may be enforceable (even in the case of public companies) when incorporated in the Articles if the court accepts that such restrictions constitute ‘sufficient cause’ based on the facts of the case.
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