Restriction on transfer of shares invalidated

In the case of Western Maharashtra Development Corporation v Bajaj Auto Limited, Bombay High Court held that section 3A of the Companies Act, 1956, mandates that there can be no restriction whatsoever on the transferability of shares in a public company. Therefore any agreement granting a right of pre-emption in respect of shares of a public company was held to be illegal.

In October 1974 Bajaj Auto (BAL) and Western Maharashtra Development Corporation (WMDC), promoted Maharashtra Scooters (MSL). At that time they agreed that if either party intended to part with or transfer its shareholding in MSL, then the other party would be given the first option to purchase the shares. So, in April 2003 WMDC offered to sell BAL its 27% shareholding in MSL at Rs232.20 (US$5) per share. While BAL confirmed its interest in buying the shares it said that the price was unacceptable. In January 2006 an arbitrator decided that 3,085,712 equity shares of MSL held by WMDC, valued at Rs151.63 each, were to be sold to BAL.

While challenging this in Bombay High Court, WMDC sought a ruling that the arbitral tribunal had no jurisdiction to entertain and decide the dispute on the ground that their initial agreement was void. One of the reasons for this was that the initial agreement placed restrictions on the transferability of the shareholding of MSL and so violated the provisions of section 3A read with section 9 of the Companies’ Act, 1956.

The update of court judgments is compiled by Bhasin & Co, Advocates, a corporate law firm based in New Delhi. The authors can be contacted at lbhasin@bhasinco.in or lbhasin@gmail.com. Readers should not act on the basis of this information without seeking professional legal advice.