RESEARCH ARTICLE ON COMPANY LAW

TITLE: SHAREHOLDER’S AGREEMENT AND ITS BINDIND EFFECT

ON THE COMPANY

SUBMITTED BY – KISHITA GUPTA

SUBMITTED TO – MR. NITESH NANAVATI

SEMESTER – 5

BATCH – (2017-22)

SECTION – CR B

ROLL NO. – 10
 DECLARATION

The text reported in the project is the outcome of my own efforts and no part of this project
assignment has been copied in any unauthorized manner and no part of it has been incorporated
without due acknowledgment.

I have projected and studied the Shareholder’s agreement and its binding effects on the
companies. The history of these laws and its inspiration and the comparison with the Foreign
Laws are also further explained in the present paper.

Kishita Gupta

Semester 5

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 TABLE OF CONTENTS

INTRODUCTION.................................................................................................................... 4

SHAREHOLDERS’ AGREEMENT ...................................................................................... 5

ADVANTAGES OF A SHAREHOLDERS' AGREEMENT ................................... 5

DISADVANTAGES OF A SHAREHOLDERS' AGREEMENT ............................. 6

ENFORCEMENT AND REMEDIES .................................................................................... 6

INDIAN JURISPRUDENCE .................................................................................................. 9

ENGLISH JURISPRUDENCE ......................................................................................... 15

CONCLUSIONS .................................................................................................................... 16

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 INTRODUCTION

A Shareholders Agreement typically grants rights to those shareholders who are party to the
agreement that are above and beyond the rights that are inherent in the shares that they own,
and is intended to ensure that those shareholders obtain the befits of the additional rights that
they bargained for when making the transaction.1 It would be trite to state that the enforceability
of any contract is taken for granted. This may not however, always hold good. enforceability
of Shareholders Agreement is one such instance. These kind of agreements have, sometimes,
clauses that go against the company legislation like drag-along rights, tagalong rights, right of
first refusal (ROFR), composition of board of directors, maintaining a particular structure of
the company.2 Thus it can be seen that Shareholders Agreement restrict the right of the
company over and above those provided by the Companies Act. Since the Shareholders
Agreement is an agreement outside the Articles of Association, the question of its validity is a
vexed question.

Essentially, Articles of Association constitute an agreement between the company and its
members as well as the members inter se and is binding on all members whether he was a
member originally or became a member later on. The Memorandum of Association and
Articles of Association of the company bind the company and the members to the same extent
as if they had been signed by each of them.3 The term „member‟ includes any person who has
subscribed to the Memorandum of the company and any member holding equity shares of the
company whose name has been entered in the register of members or depositors records.4 The
purpose of the paper is to evaluate the conditions under which Shareholders Agreement
[“SHA”] would be permissible vis-à-vis the Articles of Association of the company. The I part
of the article provides a brief introduction about the SHA. The II part of the article traces the
development of the Indian legal regime with respect to SHA vis-à-vis case laws. The III part
of the article will analyse the jurisprudence with respect to the same subject matter in English
courts. The IV part concludes by enumerating the scenarios in which SHAs are valid in India.

1
Corporation Law Committee of the Association of the Bar of the City of New York, The Enforceability and
Effectiveness of Typical Shareholders Agreement Provisions, available at
http://www.nycbar.org/pdf/report/uploads/20071830-
TheEnforceabilityandEffectivenessofTypicalShareholderAgreementProvisionsforweb.pdf . last accessed on 07-
10-2019
2
Nidhi Ladha, Legality of a Shareholders Agreement: Can Shareholders agree outside the Articles?, available at
https://india-financing.com/Legality_of_shareholders'_agreements.pdf. Last accessed on 07-10-2019
3
Section 36(1), Indian Companies Act, 1956.
4
Section 41, Indian Companies Act, 1956

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Shareholders are individuals who invest money in the company’s share and become owners of
that share of the company. Agreement can be defined as a consensus between the parties on
certain terms and conditions pertaining to their work or any article and they are bound by such
agreement and can be enforced against the parties agreeing to it. Shareholders agreement
(SHA) after amalgamating both the definitions shareholder’s agreement can be defined as a
consensus arrived by the shareholders of a company for managing the working of the company,
division of shares, company related or non-company related matter. “A shareholders’
agreement is an agreement entered into between all or some of the shareholders in a company.
It regulates the relationship between the shareholders, the management of the company,
ownership of the shares and the protection of the shareholders. They also govern the way in
which the company is run.”5

SHAREHOLDERS’ AGREEMENT
 ADVANTAGES OF A SHAREHOLDERS' AGREEMENT
 Privacy

The predominant reason for using a shareholders’ agreement is that it is a private document
between the parties thereto which can be made subject to express confidentiality
restrictions. By contrast the articles of association are a public document available for
inspection by members of the public in the Companies Registration Office. This makes the
articles of association an unsuitable means for dealing with matters such as, for example, the
remuneration of directors or other sensitive internal management matters.

 Greater Binding Effect

As explained above articles of association can only bind a shareholder in his capacity as
shareholder. By contrast shareholders’ agreements may be used to give rights and impose
obligations on shareholders e.g. binding a person in his capacity as director or as a creditor or
agent. However, one needs to be very careful in imposing obligations on a party in his capacity
as a director in the context of the duties owed by a director to the company. This is considered
in section 96.

 Variation

5
Available at https://www.stephensons.co.uk/cms/document/Shareholders_agreements.pdf. Last accessed on 07-
10-2019
6
Section 9, The Companies Act, 1956

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As explained above articles of association can be amended by way of a special resolution. By
contrast, unless a shareholders’ agreement expressly provides for a specific variation
mechanism, it can only be varied by unanimous agreement of the parties thereto.

 DISADVANTAGES OF A SHAREHOLDERS' AGREEMENT

 Binding Effect

Because of its nature as a contract a shareholders’ agreement only binds the parties thereto and
does not automatically bind all shareholders. Therefore, if a party transfers his shares the
transferee will not automatically be bound by the terms of the shareholders’ agreement. To
circumvent this, it is normal to provide in a shareholders’ agreement that an existing
shareholder who is party to a shareholders’ agreement can only transfer his shares if he procures
that the transferee enters into what is known as a deed of adherence which joins the transferee
as a party to the shareholders’ agreement.

 Interpretation

Again as shareholders’ agreements are contracts they are subject to the ordinary rules of
contract law, in the event a dispute arising as to the meaning of a provision in the shareholders’
agreement, a court would, as a primary means of interpretation, seek to establish what was the
intent of the parties based on the wording of the contract. By contrast the language in articles
of association has become in many respects fairly standardised and many of the provisions used
in articles of association have been judicially considered over the years and there may therefore
be available judicial precedent to assist in the interpretation of those provisions. Situations
where inconsistencies arise between the articles of association and a shareholders' agreement
are considered in section 8.7

ENFORCEMENT AND REMEDIES

Bearing in mind that the essential purpose of a shareholders’ agreement in the first place is to
set down a set of rules for the internal management of the company and, as far as possible, to
prospectively address how potentially divisive issues will be dealt with, one also commonly
finds that shareholders’ agreements will sometimes contain mechanisms for resolving
disputes. Such mechanisms may include an escalation procedure where disputes between
shareholders are escalated to a non-executive chairman (if he is independent of the matter in
dispute) or another third party and the parties may agree that that third party’s decision on the

7
Section 8, The Companies Act, 1956

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matter is final and binding on them. Another variant to this is to give the chairman of the
company a casting vote on matters in which there is a tied vote but frequently this is not
commercially acceptable if the chairman is not truly independent because such a casting vote
arrangement could otherwise vest control in one or other factions within the company.

Another alternative is to provide for binding arbitration. An arbitration clause in a

shareholders’ agreement may provide that some or indeed all the disputes arising under in
connection with the shareholders’ agreement may be referred to an outside arbitrator. The
principal advantage of arbitration as a means of dispute resolution is not one of cost or speed
but rather one of confidentiality. Arbitration proceedings are held in private whereas most
proceedings that go to court will as a matter of public policy be heard in open court and indeed
may well become public a long time before the hearing of the matter by a court.

However, arbitration also has its disadvantages. A party to a dispute under a shareholders’
agreement may feel that the dispute might be more speedily or efficiently resolved by a court
but the other party may insist on the matter being presented to an arbitrator and would be able
to obtain a court order staying the legal proceedings until the arbitration had been carried out. A
further disadvantage of the arbitration route (depending, of course, on one’s perspective) is that
the decision of the arbitrator will normally be expressed to be binding and, with very limited
exceptions, is not open to appeal whereas a decision of the Circuit Court or the High Court is
normally open to appeal to a higher court.

It is often the case that certain matters of an operational nature lend themselves to a more
efficient resolution by arbitration rather than by a court. It may be more appropriate that an
arbitration clause provides that certain (but not all) matters are to be resolved by arbitration
that other matters may be referred to a court of law. A particular situation giving rise to a
dispute may be so urgent to necessitate the obtaining of an injunction from the High Court to
restrain the matters subject to the dispute. An arbitration clause, if sufficiently well drafted,
can authorise an arbitrator to make provisional awards such as an injunction. However,
assuming the arbitrator had the power to grant an injunction and if the arbitrator were to grant
an injunctive award it would probably still need a High Court order to enforce the arbitrator’s
award. The same is also true of an arbitrator’s final award. In summary therefore on this point
you should not simply assume that dispute resolution by means of arbitration is automatically
better than resolution by way of court proceedings. The appropriateness of including an
arbitration clause should be carefully considered in each particular fact situation.

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Sometimes a shareholders’ agreement provides for other dispute resolution procedures
including the granting of an option in certain deadlock situations for one party to buy out the
other party or parties either at a stated price or at a price fixed by a third party valour. This
situation might arise where the negotiation power of one party is clearly superior to the other
party or parties. In other cases, where the parties are of similar negotiating power a procedure
is sometimes used whereby after a deadlock has arisen one party can serve a notice on another
party stating the price at which he wishes to sell his shares or by the other party’s shares. The
consequences of serving such a notice are that the other party will sell his shares at that price
or alternatively buy the shares of the party serving the notice. It is usual to precede the serving
of such notice with a form of escalation procedure before the procedure can be invoked or
allow for a 'cooling off' period.

It is however not absolutely essential to, and indeed many shareholders’ agreements do not,
provide for a dispute resolution procedure. In such cases the parties may have recourse to
remedies provided at law and under the Companies Acts.

Bearing in mind that ultimately a shareholders’ agreement is a contract one party can sue
another party for damages of breach of contract or, in appropriate cases, for injunctive relief
restraining certain actions that would be a breach of the shareholders’ agreement or, less
commonly, an injunction seeking a mandatory injunction requiring certain things to be
done. Courts generally only grant injunctions in certain fairly limited circumstances and the
most important consideration is that the court must be satisfied that damages would not be an
adequate remedy for the plaintiff.

The Companies Acts also afford shareholders certain remedies which are frequently combined
with a claim damages for breach of contract or other relief. Under Section 2058, the High Court
is given very wide powers to resolve shareholders’ disputes where the court if of the opinion
that the affairs of the company are being conducted or that the powers of the directors of the
company are being exercised in a manner oppressive to a shareholder or in disregard of a
shareholder’s interests as a member of the company. Under Section 205 the High Court can
make such order as it thinks fit, including, directing or prohibiting any act or cancelling or
varying any transaction or for regulating the conduct of the affairs of the company in future or
for the purchase of the shares of any shareholder. Frequently in cases such as this the High
Court will order one shareholder to purchase the shares of another shareholder and can order

8
Section 205, the Companies Act 1963

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the company to repurchase the shares of one or more of the shareholders. In addition, a
disaffected shareholder may also seek an order under Section 2139 for the winding up of the
company. Again the High Court may make such an order if it is of the opinion that it is just
and equitable to do so.

INDIAN JURISPRUDENCE
Shareholder Agreements in India have been held to be unenforceable unless they have been
incorporated in the Articles of Association of the company. The Articles of Association and
the Memorandum of Association are the constituent documents of the company. Any act of the
company shall have the sanction of these two documents. Thus, anything which is contained
in any document which is inconsistent with the provisions of the Act or the Memorandum of
Association or the Articles of Association of the company is ineffective.10

The case of V.B.Rangaraj v. V.B Gopalakrishnan,11 was the first case in India pertaining to
Shareholders Agreement. There was an agreement between the shareholders restricting the
transferability of the shares of the company. The Supreme Court answered the question whether
such an agreement can be entered into by the shareholders of the company is enforceable even
if it is contrary to or inconsistent with the Articles of Association of a private company.12 The
Court noted that a private company means a company which by its Articles of Association,
restricts the right of transfer of shares, if any, and limits the number of its shares to 50
(excepting employees and the ex-employees who were and are members of the company) and
prohibits any invitation to the public to subscribe for any shares in, or debentures of, the
company.13 Then, the court noted that Section 82 of the Companies Act, 1956 stated that share
or other interests of the member shall be movable property transferable in a manner provided
by the Articles of Association of the company.14 The court then held that any restrictions on
the transferability of shares shall be enumerated in the Articles of Association. Therefore, any
restriction which is not specified in the Articles of Association is not binding on the company
and the shareholders.15 Hence, it can be concluded from the above decision that any agreement

9
Section 213, the Companies Act 1963
10
K. R. Chandratre, Articles of Association vis-à-vis Shareholders Agreement, available at
http://www.companyshoppe.com/upload/AOA.pdf. Last accessed on 07-10-2019
11
V.B.Rangaraj v. V.B Gopalakrishnan , AIR 1992 SC 453.
12
V.B.Rangaraj v. V.B Gopalakrishnan , AIR 1992 SC 453, ¶1
13
Section 3(iii) of the Indian Companies Act, 1956
14
V.B. Rangaraj v. V.B Gopalakrishnan , AIR 1992 SC 453, ¶5
15
V.B. Rangaraj v. V.B Gopalakrishnan , AIR 1992 SC 453, ¶6.

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between the shareholders of a private company to which the company is not a party cannot
restrict the transferability of its shares.

In Mafatlal Industries Ltd. v. Gujarat Gas Co. Ltd.16, the Gujarat High Court answered the
question with respect to enforceability of the SHAs granting pre-emption rights in a public
company. There was a SHA providing pre-emptory rights to Mafatlal Industries Ltd. However,
the pre-emption rights of Mafatlal Industries under the SHA were not honoured by the
defendants giving rise to litigation. The defendants contended that in view of the provisions of
Section 82 and 111A of the Companies Act, the Supreme Court had already held that shares
are freely transferable and that there cannot be any restriction on the shares.17

The defendants relied on the case V B Rangaraj v. V B Gopalakrishnan.18 It was the contention
of the petitioners that the case of V B Rangaraj would not apply to public companies as it
pertained to restriction on „transfer of shares‟ in a private company. The Gujarat High Court
noted that the case was certainly concerned with a private limited company. The very
distinction between a private limited company and a public limited company is, inter alia, the
provision of restriction against transfer being contained in the Articles of Association of a
private limited company whereas the Articles of Association of a private limited company
cannot contain any such restrictions. Therefore, the pre-emption agreement which is not
incorporated in the Articles of Association was held to be unenforceable.19

In 2002, the Supreme Court decided M S Mudhusoodhanan v. Kerala Kaumudi (P) Ltd.20 The
dispute arose out of an agreement that provided in Clause 2 “there would be no change in the
existing share structure” of a private company. Clause 2 also provided that the shares of two
members would pass to Mudhusoodhanan in a certain percentage on their death. The Supreme
Court distinguished V B Rangaraj on the basis that the restriction was not a share as a class,
but on specific identified shares, between specific identified individuals to which the company
need not be a party. Thus, the decision held that a transaction between identified members
imposing a restriction on identified shares is legal.

In Rolta India Ltd. v. Venire Industries Ltd.,21 there was an Memorandum of Understanding
between the shareholders restraining the power of directors. The court relying on Ringuet v.

16
Mafatlal Industries Ltd. v. Gujarat Gas Co. Ltd. [1997] 97 CompCas 301 (Guj.)
17
Mafatlal Industries Ltd. v. Gujarat Gas Co. Ltd. [1997] 97 CompCas 301 (Guj.), ¶69
18
V B Rangaraj v. V B Gopalakrishnan, AIR 1992 SC 453.
19
Mafatlal Industries Ltd. v. Gujarat Gas Co. Ltd. [1997] 97 CompCas 301 (Guj.); ¶73-74.
20
M S Mudhusoodhanan v. Kerala Kaumudi (P) Ltd, (2004) 9 SCC 204.
21
Rolta India Ltd. v. Venire Industries Ltd., [2000] 100 CompCas 19 (Bom)

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Bergeron22 noted that shareholders by entering into an agreement cannot fetter the discretion
of the Directors in the administration of the affairs of the company.23 Thus, the shareholders
agreement which restricted the power of directors was held to be unenforceable.

In IL&FS Company Limited v. Birla Perucchini Ltd.,24 a shareholder agreement was entered
into on 25th March, 2000 between the petitioners and the company which was incorporated
under the Companies Act, 1956. Article 3.10 of the Shareholders Agreement stipulated that the
second respondent, a director should not resign from the board “till the validity of the
agreement”.25 The Bombay High Court noted that the provisions of the Shareholders
Agreement so far as they relate to the management of the company and not incorporated in the
Shareholders Agreement could not be given effect to. It noted that the case of B V Rangaraj
had held that a shareholders will not bind the company if it has not been incorporated in the
Articles of Association of the company.26

In Western Maharashtra Development Corporation v. Bajaj Auto Limited,27 a Protocol

Agreement was entered into between the Petitioner and the Respondent pursuant to which
Maharashtra Scooters Ltd. (MSL) was incorporated and registered under the provisions of the
Companies Act, 1956 as a public company. By the terms of the Agreement it was agreed that
the shareholding of the petitioner, respondent and the public shall be 27%, 24% and 49%
respectively. Neither party to the agreement had the power to alter the management and
shareholdings without the consent of the other.28 The legality of the agreement was assailed on
the ground that it violated Section 111A of the Companies Act, 1956. The court noted that
Section 111A of the Companies Act, 1956 provided that a company for the purposes of this
section means any company other than the company as defined in Section 111(14). Section
111(14) provided that a company means a private company and a private company which has
become a public company under Section 43A. Therefore, §111A of the Companies Act, 1956
regulated the transferability of the shares in a public company. Section 111A of the Companies
Act, 1956 provides that subject to the provisions of the Section, “the shares or debentures or
any interest therein of a company shall be freely transferable”. Section 9 of the Act provided
that any provision in the Memorandum, Articles, resolution or agreement shall, to the extent to

22
Ringuet v. Bergeron ,1960 (24) D.L.R. 449.
23
Rolta India Ltd. v. Venire Industries Ltd., [2000] 100 CompCas 19 (Bom); ¶28.
24
IL&FS Company Limited v. Birla Perucchini Ltd., [2004] 121 CompCas 335 (Bom.).
25
IL&FS Company Limited v. Birla Perucchini Ltd., [2004] 121 CompCas 335 (Bom.);¶6
26
ibid
27
Western Maharashtra Development Corporation v. Bajaj Auto Limited, 2010(4) BomCR 873.
28
Western Maharashtra Development Corporation v. Bajaj Auto Limited, 2010(4) BomCR 873; ¶2.

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which it is repugnant to the provisions of the Act is void.29 Thus, Clause 7 of the Protocol
agreement which contained the pre-emption clause which restricted the right of transferability
was held to be impermissible.30

However, there have been a series of judgements of the Delhi High Court that have enforced
Shareholders Agreement even though they were not incorporated in the Articles of Association
of the company.

In Spectrum Technologies USA Inc. v. Spectrum Power Generation Co. Ltd.,31 a Promoters
Agreement was signed between Spectrum Technologies USA, Spectrum Power Generation Co.
Ltd.[SPGL] and Jaya Food Industries Pvt. Ltd. This agreement provided that SPGL shall ratify,
consent to and fully be bound by the promoters’ agreement and its Memorandum and Articles
of Association shall be amended so as to incorporate the terms of the agreement.32

SPGL contended that it was not bound it as it was not a party to the agreement. The court held
that SPGL was bound by the Promoters Agreement even though it was not a party to it. The
three cases: Russel v. Northern Bank Development Corporation,33 Shanti Prasad v. Kalnga
Mills,34 and V B Rangaraj were held to be inapplicable as in none of these cases the companies
had agreed to amend its Articles of Association to bring them in conformity with the Promoters
Agreement.35 Thus, the Shareholders Agreement was enforced against the company even when
it was not a party to the Agreement and it had not been incorporated in the Articles of
Association of the company.

In Modi Rubber Co. v. Guardian International Corp.,36 a Shareholders Agreement was

entered into between the Respondent and the Petitioners of the company. Clause 14 of the
Shareholders Agreement prohibited the parties from undertaking any other business pertaining
to the business of float glass.37 This clause was not incorporated in the Articles of Association
of the company and thus the respondents contended that they were not bound by it. The court
held that clause 14 of the Agreement is not rendered illegal or unenforceable by any of the
provisions of the Companies Act or any clause of the Articles of Association or by virtue of

29
Western Maharashtra Development Corporation v. Bajaj Auto Limited, 2010(4) BomCR 873
30
ibid
31
Spectrum Technologies USA Inc. v. Spectrum Power Generation Co. Ltd., 2000 (56) DRJ 405.
32
ibid
33
Russel v. Northern Bank Development Corporation (1992) 3 All ER 161.
34
Shanti Prasad v. Kalinga Mills, [1965] 2 SCR 1970.
35
Spectrum Technologies USA Inc. v. Spectrum Power Generation Co. Ltd., 2000 (56) DRJ 405; ¶22.
36
Modi Rubber Co. v. Guardian International Corp.,2007 (2) ARBLR 133 (Delhi)
37
ibid

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judicial pronouncements noticed hereinabove. It was unconcerned with and independent of the
affairs of the joint venture.38 Hence, it was held in the judgement that any obligation in the
Shareholders Agreement which did not conflict with the Articles of Association of the company
or the Companies Act would be enforceable even if it is not incorporated in the Articles of
Association. It should not relate the management of the company.

The Delhi High Court in the recent judgement of World Phone India (P.) Ltd. v. WPI Group
Inc., USA39 reiterates the law laid down by the Supreme Court in the landmark judgment of
V.B. Rangaraj v. V.B. Gopalkrishnan40 that a clause in a shareholders' agreement that is not
repugnant to the Companies Act or to the company's memorandum would stand legal scrutiny
only when it is incorporated in the company's AoA. In this case, an agreement had been entered
into between shareholders of a private company wherein a restriction was imposed on a living
member of the company to transfer his shares only to a member of his own branch of the family.
Such restrictions were however not envisaged nor provided for within the articles of the
company. The court referred to sections of the Companies Act which provide that the articles
of associations are the regulations which are binding upon the company and thus any restriction
regarding transfer of shares must be provided for in the AoA.

In a subsequent case of IL and FS Trust Co. Ltd. v. Birla Perucchini Ltd41, the Bombay High
Court once again upheld the dicta laid down by the apex court in the Rangarajan Case. In this
case, a shareholder’s agreement was entered into between parties on the basis of which a
petition was filed restraining the respondent from accepting resignation of the other
respondents from the post of directors of the company. The Court held that the AoA of the
company did not stipulate any restriction on resignation of the respondents from the post of
director and hence the same could not be enforced by the agreement. Referring to the judgment
in the Rangarajan case the Bombay high court once again clarified that a restriction which is
not specified in the articles of association is not binding either on the company or on the
shareholders.

38
ibid
39
World Phone India (P.) Ltd. v. WPI Group Inc., USA [2013] 178 Comp Cas 173 (Del)
40
V.B. Rangarajan v. V.B Gopalakrishnan, AIR 1992 SC 453,
41
IL and FS Trust Co. Ltd. v. Birla Perucchini Ltd 2003 47 SCL 426 Bom

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In 2010, the Bombay High Court adopted a more liberal interpretation in Messer Holdings
Limited v. Shyam Madanmohan Ruia.42 The primary question before the court involved an
interpretation of section 111A of the Companies Act which as the court ruled does not explicitly
restrict or take away the right of shareholders to enter into consensual arrangement or
agreement in respect of shares held by them. In this regard the court also enunciated that
shareholders did have the freedom to enter into consensual agreements which were not in
conflict with the AoA of the Company or with the existing legislations governing companies.

It has been argued that if the interpretation of the courts in the Rangaraj and Perucchini
judgments is to be adhered to then it would be futile to have a shareholder’s agreement in the
first place since every clause in the agreement would have to be incorporated in the AoA.
Further, although the decision of the Supreme Court in Rangaraj often cited in the context of
shareholders’ agreements, most other decisions have been rendered by the High Courts in
various states. The High Court decisions are of limited precedential value as they are open to
disagreements by other high courts as has been the case in Messer Holdings judgment. In the
absence of any other precedents of the apex court, for the time being it is advisable that
provisions of shareholders’ agreements be incorporated either by insertion or by reference in
the AoA.

In Premier Hockey Development Private Limited v. Indian Hockey Federation 43, a

Shareholders Agreement was entered into between the Indian Hockey Federation and the
petitioner company. The court distinguished the case from B V Rangaraj. It held that the
agreement was enforceable against the shareholders and the company as the company was a
party to the Shareholders Agreement.44 From an analysis of the above judgement, certain
principles can be discerned about enforceability of Shareholders Agreement in India. They are
as follows:

 If a company is not a party to the Shareholders Agreement, then:

1. A shareholder’s agreement is enforceable only if it is incorporated in the Articles of
Association of the company for a private company. This is particularly relevant if it
imposes any restrictions on the transferability of shares of the members of the

42
Messer Holdings Limited v. Shyam Madanmohan Ruia. Special Leave Petition (Civil) Nos. 33429-33434 of
2010 & 23088-23090 of 2012 Decided On, 19 April 2016
43
Premier Hockey Development Private Limited v. Indian Hockey Federation, 2011 (2) ArbLR 492 (Delhi).
44
ibid

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 company. The rationale for the same can be found in Section 3 of the Indian
Companies Act, 1956. Section 3 of the Companies Act defines a private company as
a company which imposes restrictions on the transferability of shares in its Articles of
Association.
2. In case of public companies, if a Shareholders‟ Agreement is not contrary to the
Articles of Association or the Companies Act, then it binds the companies. However,
no restrictions can be imposed on the statutory powers of the company.
 In case of a Company being a party to the Shareholders Agreement
1. The company will be bound by the Shareholders Agreement by virtue of normal
contractual principles.

Having analysed the position in India pertaining to the enforceability of Shareholders

Agreement, we now analyse the jurisprudence from English Courts as the basis of Indian
cases have principles enunciated by them.

ENGLISH JURISPRUDENCE
The leading English case pertaining to the enforceability of Shareholders Agreement is Russell
v. Northern Bank Development Corporation.45 In 1979, the control of two brick making
companies came to be vested in Tyrone Brick Ltd. with an authorized share capital of £1000
divided into 1000 shares of £1 each. The plaintiff and the second to fourth defendants were
allotted 20 shares each and the first defendant bank 120 shares. The remaining shares were not
allocated. There was a Shareholders Agreement between the plaintiff and the second to fourth
defendants whereby they undertook that the company shall be created or issued by the company
without their written consent.

In 1988, a proposal was made in the extraordinary general meeting to increase the capital of
the company. The House of Lords upheld the Shareholders Agreement as it did not place
restrictions on the statutory powers of the company or on shareholders who were not a party to
the Agreement. It becomes evident from an analysis of the above case that similar principles
are followed in India. Firstly, Section 9 of the Companies Act, 1956 states that any agreement
which is contravention of the Act is void. Thus, no agreement can place any restrictions on the
statutory powers of the company.

45
Russell v. Northern Bank Development Corporation, [1992] 1 WLR 588.

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 CONCLUSIONS

The articles of association constitute a statutory contract between the shareholders and the
company.46 The articles bind the members of the company although there is no contract
between each individual member.47 As is evident from Section 9 and 31 of the Companies Act,
1956, any agreement which is inconsistent with the provisions of the Act or memorandum or
the articles of association of the company is ineffective and cannot be enforced. In India, there
has been a sea change with respect to the enforceability of Shareholder Agreements.

In V.B Rangaraj v. V B Gopalakrishnan,48 the court held that unless incorporated in the Articles
of Association of the company will not be enforceable against the shareholders and the
company. However, the recent judgements of the Delhi High Court and Bombay High Court
have noted that incorporation of the Shareholder Agreements in the Articles of Association of
the company is not necessary for them to be enforceable. If the Shareholder Agreements do not
curtail the statutory powers of the company and do not bind future shareholders, they can be
enforced even if they are not incorporated in the Articles of Association of the company.

46
Borland Trustee v. Steel Bros & Co. (1901) 1 Ch. 279.
47
Salmon v. Quin and Axtens (1901) 1 Ch 311.
48
V.B.Rangaraj v. V.B Gopalakrishnan , AIR 1992 SC 453

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