October 15, 2010
On September 1, 2010, a division bench of the Bombay High Court held that consensual preemptive arrangements between shareholders in a public listed company do not violate the principle of free transferability of shares enshrined in section 111A of the Indian Companies Act, 1956 ("Companies Act"). In its 103-page opinion in the case of Messer Holdings Limited v. Shyam Ruia (Appeal No. 855 of 2003), the High Court overruled its previous decision in the case of Western Maharashtra Development Corporation v. Bajaj Auto  154 CompCas 593 (Bom) where it had taken a contrary view.
The enforceability of preemptive rights in the context of public listed companies in India has been the subject of a long litigative contest. In 1991, the Supreme Court of India held that share transfer restrictions incorporated into the articles of private companies were enforceable. However, it was uncertain if the same principles would hold true for public companies, especially given section 111A of the Companies Act which mandates that public company shares "shall be freely transferable". On February 12, 2010, the Bombay High Court held in the Western Maharashtra case that a preemptive right contained in a shareholders agreement was not enforceable against a public company, despite having been incorporated into the company’s articles of association, since the effect of the clause was to impose a restriction on the free transferability of shares.
The Messer Holdings Decision
In its September 1 opinion, the Bombay High Court dealt with a set of appeals filed against an order of a single judge. Messer Griesheim Gmbh ("Messer"), a German company engaged in the business of supplying industrial gases, acquired a little over 50% in Bombay Oxygen Corporation Ltd. ("Bombay Oxygen"), a public company listed on the Bombay Stock Exchange, consequent to a Share Purchase Agreement with the majority shareholders. Clause 6.1 of the Share Purchase Agreement contained a right of first refusal. Messer attempted to transfer its stake in Bombay Oxygen to Messer Holdings Limited, a joint venture company it had incorporated with another partner. One of the main issues before the Bombay High Court was whether the preemptive right was enforceable.
The court found itself unable to accept its previous holding in the Western Maharashtra case, decided only seven months previously. It was held that an agreement of preemption, freely entered into, would not impose a restriction on the free transferability of public company shares, and that shareholders are free to enter into consensual agreements which do not conflict with the articles of association of a public listed company. Interestingly, while interpreting the Supreme Court’s decision in the case of Madhusoodhanan v. Kerala the High Court also found that consensual arrangements need not even be incorporated into the articles of association of a company in order to render them enforceable.
Given the high volume of litigation that this issue has generated, and the likelihood of appeal, the law on this question is far from settled. However, the Bombay High Court’s latest decision is certainly one to keep in mind while drafting the next shareholders agreement.
 AIR 2004 SC 909. In this case, the Supreme Court of India distinguished its previous decision in the VB Rangaraj case and found that its holding applied to "blanket" transfer restrictions on "all the shareholders, present and future". It was held that by contrast, an agreement between "particular shareholders" relating to the transfer of "specified shares" would be specifically enforceable even if the company were not a party to the agreement.
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