LEGAL ASPECTS OF BUSINESS

ASSIGNMENT

Western Maharashtra Development Corporation Ltd.

vs Bajaj Auto

By
Deo Kumar – 18020
Manan Jambu – 1802086
Vidit Dave – 1802062
Lionel Gracias – 1802075
Hrishikesh Krishna - 18020
Contents

Citation.................................................................................................................................................... 3
Acts & Provisions Referred To ................................................................................................................ 3
1. Clause 7 of the Protocol Agreement ........................................................................................... 3
2. Free transferability of the shares ................................................................................................ 3
3. section 111 A of the Companies Act ........................................................................................... 3
Facts of The Case .................................................................................................................................... 4
Argument Advanced by The Applicant’s Counsel ................................................................................... 6
Citations Referred to by The Applicant’ Counsel .................................................................................... 6
Argument Advanced by The Respondent Counsel ................................................................................. 7
Citations Referred to by The Respondent’s Counsel .............................................................................. 7
Findings of the Court............................................................................................................................... 8
Decision of the Court ............................................................................................................................ 10
Bibliography .......................................................................................................................................... 11
Citation
Subject Free transferability of the shares - Section 111 A of the Companies
Act, 1956
Court 1. Bombay High Court 2. Supreme Court
Decided on 9th January 2019 by Supreme Court
Judge Justice R K Agrawal & Justice R Banumathi (Supreme Court)
Mohit S. Shah, C.J. & B. P. Colabawalla, J.
Reported in 153/2010
Acts Company Act, 1956 Sec 111 A
Company Act, 2013 Sec 58 (2) A
Securities Contracts (Resgulation) Act 1956, Sec 22 A
Indian Contract Act, 1872, Sec 23
Petitioner Bajaj Auto Ltd
Respondent Western Maharashtra Development Corporation Ltd
Petitioner Advocate Mr. Aspi Chinoy
Mr Snehal Shah
Shriraj Dhru
Lata Dhru
Mitesh Naik
Dhru and Co
Respondent Mr. D. J. Khambatta
Advocate Senior Advocate
Ms. Bindi Dave
Ms. Janhavi Dwarka Das
M. Mandevia
Sameer Pandit
WadiaGhandy

Acts & Provisions Referred To

1. Clause 7 of the Protocol Agreement
2. Free transferability of the shares
3. section 111 A of the Companies Act
Facts of The Case

Complainant - Bajaj Auto Limited

Defendant - Western Maharashtra Development Corporation Ltd

On 2nd October, 1974 Western Maharashtra Development Corporation and Bajaj Auto Limited
entered into agreement to incorporate Maharashtra Scooters Ltd. ("MSL"). Bajaj Auto Limited would
grant benefit of know-how and offer its assistance in the manufacture of two wheeler scooters to MSL
and would also participate in the equity share capital of MSL on the terms and conditions mention in
the agreement, Western Maharashtra Development Corporation is holding 27% i.e. 30, 85,712 shares
of the equity shareholding of MSL and Bajaj Auto Limited continues to hold 24% i.e.27, 42,848 shares.
The balance 49% of the equity shareholding of MSL is held by the public. Bajaj Auto Limited from last
20 odd years repeatedly was requesting the defendant to divest/transfer its 27% shareholding to the
Complainant.

The cause of the controversy was “Clause 7 of the Protocol Agreement” which states that if either
party desires to part with or transfer its shareholding or any part thereof, in the equity share capital
of MSL, such party shall give first option to the other party for the purchase of such shares at such rate
as may be agreed to between the parties or decided upon by arbitration.

30th june 2002- On the joint request of the Complainant and the defendant CRISIL carried out a
valuation of the shareholding of the defendant in MSL.

April 2002 – The defendant considered selling and transferring its 27% shareholding to the
Complainant

9th April 2003 - Addressed a letter offering to sell its 27% shareholding in MSL (30,85,712 shares) to
the Complainant at a price of Rs.232.20/- per share.

3rd May 2003 - In reply thereto, by their letter, the Complainant, under clause 7 of the Protocol
agreement confirmed their interest in buying the shareholding of the Respondent. It was however
stated that the price at which the shares were offered was not acceptable to the Complainant and
therefore, requested that a meeting be called for by a High Level Committee to carry out official
negotiations to reach a fair and marketable settlement.

7thMay, 2003 - To confirm Complainant whether their letter dated 3rd May, 2003 was in response to
the buy back by the Bajaj Auto Limited.

10th May 2003 -The Complainant confirmed that their letter dated 3rd May, 2003 was a response to
the offer made by the defendant under clause 7 of the Protocol Agreement but the price offered was
not acceptable to the Complainant and therefore, requested that a meeting be called for by the High
Level Committee to negotiate the price.

6th June 2003 - the Complainant replied that they were not agreeable to the price of Rs.232.20 per
share as demanded by the defendant and offered to purchase the 27% shareholding of the defendant
at the rate of Rs.75/- per equity share.
27th October 2003 -Defendant addressed a letter to the arbitrator requesting him to accept his
appointment as a Sole Arbitrator for the assignment to determine the value of the shares. This process
of price offer and acceptance has been completed and since no agreement has been reached on the
value of the share. The parties involved must proceed to appoint a Sole Arbitrator for the purpose.
Kindly forward your acceptance to be appointed as the Sole Arbitrator for this assignment and
communicate the retainer ship charges and venue suitable to you for the purpose of Arbitration.

29th December 2003- Joint request was made to arbitrator. Cost of Arbitration shall be fixed by the
'Arbitration Tribunal' in accordance with Sec. 31(8) of the Arbitration and Conciliation Act 1996. These
costs will be shared equally by both parties. The Arbitrator, after considering all details held in favour
of the Complainant provided the valuation for selling price of Rs.151.63/- per share.
Argument Advanced by The Applicant’s Counsel

Western Maharashtra Development Corporation Ltd was not ready to sell/transfer shares even after
process of arbitration is followed and which lead the Bajaj Auto ltd to file a case against western
Maharashtra Development Corporation in Bombay High court in the year 2010.Complainant was
appealing to Bombay High court on strong establishment of the case Messer Holdings v. Shyam
Madanmohan Ruia, which effectively ruled that restrictions expressed in an agreement between 4
shareholders are not violating of the Companies Act, 1956 (the “1956 Act”) and that they can be
enforced inter se among shareholders. The dispute arose out of a share transfer restriction contained
in clause 7 of a protocol agreement between Bajaj Auto ltd and WMDC, which is in the nature of a
right of first refusal. A dispute related to the price at which Bajaj Auto could exercise the right to
acquire WMDC’s stake. The matter resulted in arbitration for determination of the price, wherein an
award was issued. They appeal to court that all terms and condition were mention in the agreement
under clause 7 of a protocol agreement. As per the agreement all procedure are followed and all
related documents are submitted in court the judgment should be in favour of Bajaj Auto Limited.
Clause 7 is not binding any free transfer of shares of MSL which are held by public as they can free
trade on stock exchanges only give first right of refusal to Bajaj Auto ltd as per the terms and condition
of agreement. Bajaj Auto has confirmed the interest to buy shares at proper valuation for which
transparent procedure has been followed

Citations Referred to by The Applicant’ Counsel

Clause 7 of the Protocol Agreement, whether it impinges on the free transferability of shares of a
public company as contemplated under section 111A of the Companies Act. Mr Chinoy, learned Senior
Counsel appearing on behalf of the Appellant, submitted that clause 7 of the Protocol Agreement did
not in any way impinge on the free transferability of shares as contemplated under section 111A of
the Companies Act. According to Mr Chinoy, the provisions of section 111A were not directed against
and did not restrict or affect a shareholder's right to deal with his own shares and enter into
consensual arrangements in relation thereto by way of sale, pledge or pre-emption. The provisions of
section 111A were really speaking, to ensure that the Board of Directors of a public company cannot
refuse transfer of shares except as specified in the section. He submitted that an agreement
voluntarily entered into by a shareholder of a public company regarding its own shares, was not within
the purview of nor affected by section 111A(2) of the Companies Act or its predecessor viz. section
22A(2) [as it then Aswale 13/120 appeal.153.10.doc stood before its deletion] of the Securities
Contracts (Regulation) Act 1956. In support of the aforesaid submissions, Mr Chinoy placed heavy
reliance on a Division Bench judgment of this Court in the case of Messer Holdings Ltd. v/s S.M. Ruia
and others.1 He submitted that in the aforesaid judgment, the order impugned in this Appeal, has
been specifically considered and the Division Bench has expressly disagreed with / overruled the view
expressed by the learned Single Judge in the order impugned before us. He therefore submitted that
the impugned order was clearly erroneous and requires interference in appeal in so far as it sets aside
the award on the ground that clause 7 of the Protocol Agreement impinges upon the principles of free
transferability of shares as contemplated under section 111A of the Companies Act.
Argument Advanced by The Respondent Counsel

Western Maharashtra Development Corporation Ltd negated the decision of arbitration and
challenges the same before this Court under the provisions of section 34 of the Arbitration and
Conciliation Act, 1996 and focused on the point that MSL being a listed public company, section 111A
of the Companies Act 1956 was thereby violated. Section 111A provides that the shares or debentures
of a public company and any interest therein shall be freely transferable. Section 9 of the Companies
Act further provides that the provisions of the Companies Act shall have effect notwithstanding
anything to the contrary contained in the Memorandum and Articles of Association of the company.
It was therefore submitted that a pre-emption right recognized by clause 7 of the Protocol Agreement,
and which was then incorporated in the Articles of Association of MSL, must yield to the provisions of
section 111A of the Companies Act. According to defendant In other words, it was submitted that
clause 7 of the Protocol Agreement being contrary to the provisions of the Companies Act, was
unenforceable. It was bounding the shareholders for free transfer of shares rights of listed company.

Citations Referred to by The Respondent’s Counsel

Respondent challenged the same before this Court under the provisions of section 34 of the
Arbitration and Conciliation Act, 1996. The submission of the Respondent before the learned Single
Judge was that clause 7 created a right of pre-emption, and MSL being a listed Aswale 11/120
appeal.153.10.doc public company, section 111A of the Companies Act 1956 was thereby violated. It
was the submission of the Respondent that section 111A provides that the shares or debentures of a
public company and any interest therein shall be freely transferable. It was the further submission of
the Respondent that section 9 of the Companies Act further provides that the provisions of the
Companies Act shall have effect notwithstanding anything to the contrary contained in the
Memorandum and Articles of Association of the company. It was therefore submitted that a pre-
emption right recognised by clause 7 of the Protocol Agreement, and which was then incorporated in
the Articles of Association of MSL, must yield to the provisions of section 111A of the Companies Act.
In other words, it was submitted that clause 7 of the Protocol Agreement being contrary to the
provisions of the Companies Act, was unenforceable.
Findings of the Court

Some key excerpts are set out below:

24. On a reading of section 22A as it stood then, it is clear that the provisions therein applied only to
public companies whose shares were listed on the recognised Stock Exchanges. The provision in
section 22A(2) that securities of public companies shall be freely transferable, was made only as the
basis for the consequential provisions in sections 22A(3) to (9) to provide for free transferability by
restricting the entitlement of public companies (through their Board of Directors) to refuse
registration of transfers only in four stipulated circumstances [section 22A sub-section (3)].

This is also borne out by the statement of objects and reasons discussed above.

In other words, section 22A(2) provided for free transferability and the actual steps taken to provide
for the same were set out in sections 22A(3) to (9).

25. The wordings of section 22A as well as the objects and reasons discussed above make it clear that
section 22A was introduced to ensure that the Board of Directors of public companies exercising
powers under its Articles of Association, do not place an undue burden on small investors by refusing
to transfer shares without assigning any reason. In light of the language of section 22A as well as the
statement of objects and reasons, we do not read section 22A(2) to mean that it would affect the right
of individual shareholders to deal with their own shares on such terms and conditions as they deem
fit or to enter into any consensual arrangement / agreement regarding their own shares by way of
sale, pledge, pre-emption or otherwise.

26. Once the context in which section 22A had been inserted is understood, it cannot be said that two
individual shareholders entering into a consensual agreement to deal with their shares in a particular
manner, either in presenti or at a future date, would impinge or violate the concept of free
transferability as contemplated under section 22A(2). The purpose of the said provision, as we
understand it, was to ensure that the Board of Directors of the company cannot refuse transfer of
shares except on the grounds specified in the said section. This does not mean that if an individual
shareholder enters into a separate agreement with another shareholder to deal with his specified
shares in a particular manner, the same would violate the concept of free transferability as envisaged
under section 22A.

27. We have come to this conclusion because we find that shares of a company are movable property
and the right of the shareholder to deal with his shares and / or to enter into contracts in relation
thereto (either by way of sale, pledge, pre-emption etc.), is nothing but a shareholder exercising his
property rights. Such contracts voluntarily entered into by a shareholder for his own shares giving
rights of pre-emption to a third party / another shareholder, cannot constitute a restriction on free
transferability as contemplated under section 22A. In fact, such contracts (either by way of sale, pledge
or pre-emption) are entered into by a shareholder in exercise of his right to freely deal with and / or
transfer his own shares.

Furthermore, the court concluded that even through the terms of the Protocol Agreement were
incorporated into the articles of association of the company, that would not alter the enforceability
of the agreement inter se between the parties.
An extended contribution of the division bench judgment is its analysis of the factual situation in the
context of the new legislation, i.e. Companies Act, 2013 (the “2013 Act”). Although the case itself was
decided under the 1956 Act, the court expressed its views on the 2013 Act (which can at best be
considered obiter dicta). It examined section 58(2) of the 2013, which “specifically provides that
without prejudice to sub-section (1), the securities or other interest of any member in a public
company shall be freely transferable. However, the proviso to the said section stipulates that any
contract or arrangement between two or more persons in respect of transfer of securities shall be
enforceable as a contract”. After briefly considering the parliamentary process behind the enactment
of this provision, the Court appears to suggest that the new provisions will resolve the matter:

40. On reading section 58 …, we are of the view that section 58 merely clarifies and codifies the existing
legal position regarding such pre-emption agreements. In other words, what was implicit in the
provisions of section 111A of the Companies Act, 1956 has now been made explicit in section 58 of
the Companies Act, 2013.
Decision of the Court

The Bombay High Court highlighting the provisions of Section 111A and Section 9 of the Companies
Act, 1956 thus held that “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 ltd company and same rules cannot be applied. The principle
of free transferability must be given a broad dimension in order to fulfill the object of the law.
Imposing restrictions on the principle of free transferability is a legislative function and cannot be bind
any shareholders in the case of listed company. Section 111A and Section 9 of the companies Act 1956
gives overriding force and effect to the provisions of the Act, notwithstanding anything to the contrary
contained in the Memorandum or Articles of a Company or in any agreement executed by it or for
that matter in any resolution of the Company in general meeting or of its Board of Directors. A
provision contained in the Memorandum, Articles, Agreement or Resolution is to the extent to which
it is repugnant to the provisions of the Act, regarded as void.”

Bombay high court judgement was relied upon the decision given by the Delhi High Court in Smt.
Pushpa Katoch vs. Manu Maharani Hotels Ltd. Decision of Delhi high court was based on decision
made by Supreme Court in V.B.Rangaraj vs. Gopalkrishnan The Supreme Court in Rangaraj’s case has
observed that whether under the Companies Act or the Transfer of Property Act, the shares are
transferable like any other movable property. Restrictions on transferability are valid only if contained
in the company’s articles. A private agreement between some shareholders which contains additional
restrictions on transferability is not binding either on the company or on its shareholders.
Bibliography

 http://indiacorplaw.blogspot.in/2015/07/bombay-high-court-on-share-transfer.html 2
 https://www.nseindia.com/content/corporate/eq_BAJAJHLDNG_base.pdf
 https://www.casemine.com/judgement/in/5608fc3de4b014971114bae2