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2015 (5) TMI 1134 - HC - Indian LawsArbitral award challenged - ground on which the award was set aside by the learned Judge was that Clause 7 of the Protocol Agreement entered into between the parties and which gave the right of first refusal to the Appellant to purchase the shareholding of the Respondent, was contrary to section 111A of the Companies Act, 1956 - whether it impinges on the free transferability of shares of a public company as contemplated under section 111A of the Companies Act? - Held that:- Clause 7 of the Protocol Agreement inter alia provides 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 the agreed price, or in the absence of such agreement, decided upon by arbitration. The party desiring to part with or transfer its shareholding or any part thereof, is required to give written notice to the other party specifying its intention to do so and the rates at which it is willing to transfer/part with the same. Once this is done, clause 7 envisages 3 scenarios. (1) If the other party within 30 days of receipt of such notice agrees to such proposal, the party giving the notice is bound to sell such shares at the rate specified in the notice. (2) If the other party is willing to purchase the shares but considers the rate proposed in the notice as too high or unacceptable, it would communicate its intention to purchase the shares within 30 days from receipt of the notice and the question of rate is to be referred to arbitration. (3) If the other party, on receiving the notice to purchase the shares, fails to accept the said proposal within 30 days of its receipt, the party giving the notice is free to sell the shares to any other person, but only at a rate not less than the rate specified in such notice. The concept of free transferability would mean that a shareholder has the freedom to transfer his shares on terms defined by him, provided the terms are consistent with the Articles of Association as well as the Companies Act and Rules and other governing laws. The fact that the shares of a public company can be subscribed to by the public, unlike in the case of a private company, does not in any way whittle down the right of a shareholder of a public company to arrive at a consensual agreement/arrangement (either by way of sale, pledge, pre-emption etc.) with a third party or another shareholder, which is otherwise in conformity with the Articles of Association, the Companies Act and Rules, and any other governing laws. Whilst taking this view, we are supported by a judgment of the Division Bench of this Court in the case of Messer Holdings Ltd. [2010 (9) TMI 213 - HIGH COURT OF BOMBAY] If the parties are free to enter into a consensual arrangement which does not infract free transferability as contemplated under section 111A, we see no reason to hold that merely because the price of the shares is to be determined by the process of arbitration, the same would to be in violation of section 111A. The fact that the price of the shares is to be determined by the process of arbitration is also a term of the very same consensual arrangement which is not violative of the provisions of section 111A(2). We, therefore, find no substance in this argument. Notwithstanding the fact that the Protocol Agreement was incorporated in the Articles of Association of MSL, the same would not change the nature of that agreement namely being a consensual agreement/arrangement entered into between the parties determining the manner in which each party is allowed to dispose of its particular shareholding. At the highest and assuming everything in favour of the Respondent, it could be only be held that such a clause would not bind the company. However, it would certainly bind the parties to the Protocol Agreement. We, therefore, find no substance in this argument. Merely because Clause 7 of the Protocol Agreement was incorporated in the Articles of MSL, would not invalidate the same. We are also persuaded to take this view because we find that in today's global reality, joint ventures are extremely common and clauses similar to Clause 7 of the Protocol Agreement may become necessary to ensure that a joint promoter of a company does not sell his shareholding to a competitor who then possibly could get control of his rival. In this view of the matter and looking to the totality of the facts and circumstances of the case, we are clearly of the view that Clause 7 of the Protocol Agreement does not in any way impinge upon the principle of free transferability of shares as contemplated under section 111A of the Companies Act, 1956. Thus the order of the learned Single Judge is unsustainable, insofar as it set aside the impugned award on the ground that the effect of Clause 7 of the Protocol Agreement was to impose a restriction on the free transferability of shares as contemplated under section 111A of the Companies Act
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