Promoters, private equity investors and technical collaborators can now freely negotiate on the Right to First Refusal ("ROFR") while investing in shares of a public company in Maharashtra, India. On 8 May 2015, the Division Bench of the Bombay High Court in the case of Bajaj Auto Ltd Vs. Western Maharashtra Development Corporation Ltd. [2015(4) BomCR499] held that pre-emptive rights on shares of a publicly listed company do not amount to restrictions on their free transferability.
Facts of the case
Maharashtra Scooters Ltd. ("MSL") is a publicly listed company, floated by Bajaj Auto Ltd. ("BAL") and Western Maharashtra State Corporation Ltd. ("WMDC").
BAL and WMDC entered into a shareholders agreement (the "Protocol Agreement") to respectively hold a 24% and 27% shareholding in MSL and also agreed to incorporate ROFR in the agreement, meaning that if a party to the agreement wishes to sell its shares, the other party will have the first right to purchase the shares.
The Protocol Agreement also stated that the price for sale of shares under ROFR would be mutually decided by the parties and, in case of any dispute, the matter would be referred to arbitration. The terms and conditions of the Protocol Agreement were incorporated in the Articles of Association of MSL.
Eventually, a dispute arose with respect to the sale price of shares under ROFR and the matter was referred to arbitration. The Arbitrator determined the price. Dissatisfied by the 2006 arbitral award, a reference was made to the Learned Single Judge Bench of the Bombay High Court under section 34 of the Arbitration and Conciliation Act, 1996. In 2010, the Learned Single Judge Bench set aside the arbitral award on the ground that the existence of pre-emptive rights with respect to the sale of shares of a publicly listed company was in violation of the Companies Act, 1956 (which was in force at the relevant time). The Learned Single Judge Bench stated that ROFR was against section 111A(2) of the Companies Act, 1956 which stipulates that shares or debentures and any interest in shares/debentures of a public company should be freely transferable.
Judgment of the court
The matter was then appealed before a Division Bench (Honourable Chief Justice Mohit Shah and Justice B.P. Colabawala) which followed the reasoning of an earlier judgement of the same Court in the case of Messers Holding Ltd. (an unreported judgment) and held that:
- Consensual agreements/arrangements entered into by shareholders of a public company with third parties regarding their own specified shares either by way of sale, pre-emption or otherwise (in this case, the Protocol Agreement), do not impinge upon the free transferability of shares and do not violation provisions of the Indian Companies Act.
- Incorporation of pre-emptive rights in the Articles of Association of a company would be inconsistent with the provisions of the Indian Companies Act. However, terms of the Protocol Agreement survive independently.
Legal and regulatory updates
Since the single judge judgment dated 2010 in this case, there have been legal developments which have clarified the law by stating that a contract or arrangement between two or more persons in respect of transfer of securities (with pre-emption or not) does not amount to a restriction on the free transferability of shares of a public company. See section 58 of the Companies Act 2013 and the notification of Securities and Exchange Board of India dated 3 October 2013.
It may be noted that the existence of such private agreements between two or more persons in respect of transfer of securities do not impinge upon the rights of other public shareholders to deal in the securities of a public company freely. The restrictions of ROFR/tag along/drag along rights survive only as a part of the independent contract.
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