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Sector Update (company): Decision could kill pre-emption rights in JVAs and SHAs

In a decision that could have major adverse consequences in the practice of corporate law the Bombay High Court on 15 February 2010 has effectively declared that transfer restriction clauses like rights of first refusal, tag along and drag along rights, or put and call options in joint venture agreements and shareholder agreements of public companies are void.

The order in the case of Western Maharashtra Development Corporation Limited vs Bajaj Auto Limited has ruled against rights of pre-emption in favour of shareholders of a listed company, as violating section 111A of the Companies Act.

Kolkata firm Argus Partners commented that this case could potentially affect a wide range of agreements, which often incorporate transfer restriction clauses.

Section 111A provides that subject to the provisions of the section, ‘the shares or debentures and any interest therein of a Company shall be freely transferable’ and the current decision pronounced by Justice D Y Chandrachud held restrictions transferability of shares impermissible and against public policy.

The agreement in contention was entered into between Western Maharashtra Development Corporation Limited and Bajaj Auto Limited, which together held 51 per cent equity in Maharashtra Scooters Limited (MSL).

It provided that if either party intended to part with or transfer its share holding in MSL, then such party should give the other party the first option to purchase such shares.

Relevant excerpts of the judgement read: "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 incorporation of a Company in the public, as distinguished from the private, realm leads to specific consequences and the imposition of obligations envisaged in law.

"The effect of a clause of pre-emption is to impose a restriction on the free transferability of the shares by subjecting the norms of transferability laid down in Section 111A to a pre-emptive right created by the agreement between the parties. This is impermissible."
Case: Western Maharashtra Development Corpn Ltd. Vs. Bajaj Auto Limited (MANU/MH/0109/2010)

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