TMI Blog1999 (10) TMI 661X X X X Extracts X X X X X X X X Extracts X X X X ..... rival contentions, facts, in brief, may be noticed as follows :- 3. Plaintiff No. 2 (Kamal K. Singh) is the Chairman of Plaintiff No. 1 company (for short RIL ), Defendant No. 2 (Chetan K. Singh) is the Chairman and Managing Director of Defendant No. 1 company, which has three Directors on its board of directors. Defendant No. 3 is sought to be appointed as an Additional Director. Chetan is younger brother of Kamal. Defendant No. 1 company, which was originally known as Rolta Motors Ltd. (for short RML ) was incorporated on 19-5-1983. Kamal was the Chairman and Chetan was the Director of the said company. A Memoran-dum of Understanding (MoU) dated 19-4-1991 was executed between the two brothers, under which the elder brother Kamal, his wife and family trust, which held 10551 shares equivalent to 30 per cent of the issued capital of RML, agreed to transfer, without any monetary consideration, the said shares in favour of Chetan. RIL owned 40 per cent of the issued capital of RML. The MoU, inter alia, provides that, till RIL holds share capital in RML of the face value of ₹ 10 lakhs, it will continue to have a representative on board of directors of RML and that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... think most beneficial to the company. The correspondence exchanged between the two brothers after 25-6-1997 has been placed on record. According to the Plaintiffs, the offer of allotment of the Rights shares was not sent/received by RIL. That has, however, been strenuously disputed by the Defendants 1 and 2. Defendant No. 1-company, in Board s Meeting dated 12-8-1997, which was attended by Chetan, his wife and Baluja, decided to allot 20036 Rights shares of the quota of RIL to Chetan. The correspondence exchanged between the two brothers after 12-8-1997 has also been placed on record. In the Meeting of board of directors of Defendant No. 1-company dated 4-10-1997, the resignation of Baluja, nominee-Director was accepted and in his place the appointment of B.I. Joshipura as nominee-Director of RIL was approved. 8. In its Meeting dated 5-1-1999, the board of directors of Defendant No. 1 - company decided to issue fresh rights issue of 62.5 lacs (second Rights issue). This was objected by Joshipura. The offer of the second Rights issue was received by RIL. RIL objected the decision to issue this rights issue on the ground that the disputes relating to the first Rights issue had n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as always sent through courier and, therefore, it cannot be believed that the alleged letter of offer was sent by Defendant No. 1-company to RIL. Another contention urged is that there was no quorum for the meeting of 12-8-1997 when the shares of quota of RIL were allotted in favour of Chetan. The contention of Mr. Chinoy is that Chetan was an interested Director, since additional allotment was sought to be made in his favour, and therefore, he was not entitled to vote and thus there was no quorum. 10. We have perused various letters exchanged between the two brothers as also other material on record, including the Letter of Offer which Defendant No. 1 says was sent to RIL and also the Certificate of Posting. On perusal thereof, we find it difficult to accept the contention that the Letter of Offer was not sent to RIL. To our mind, it seems that at no stage, the Plaintiffs were interested in contributing any amount in Defendant No. 1 company. In none of the letters, even after 12-8-1997, it was stated that RIL was interested in subscribing to the Rights shares. What the Plaintiffs have been stating in the correspondence and that too in the guarded language is that they would c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting in a clandestine manner. If the object of defendants was to keep Plaintiffs in dark, Chetan would not have written letter dated 26th June and subsequent letters to Kamal, which are all admitted and have rather been acknowledged by Kamal. Repeated requests were made welcoming RIL to put in funds in proportion of their shareholding by contributing to the Rights issue. If the intentions of Defendants No. 1 and 2 were not honest, they would not have sent the type of letters acutally sent. Further, on these facts, it is also not possible to accept the contention that Chetan was an interested Director and there was no quorum for the meeting as urged on behalf of the Plaintiffs. 12. The decision of the Bombay High Court in Firestone Tyre Rubber Co. v. Synthetics Chemicals Ltd. [1977] 41 Comp. Cas. 377 has no applicability to the facts and circumstances of the present case. There was no such conflict of interests in the case in hand so as to contravene section 300 of the Act. Further, the allotment of the first Rights issue was made in August, 1997. The present suit was filed two years later. The question of in- juncting the Defendants from taking any steps pursuant to or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pe contemplated by clause 8 of the MoU regarding number of Directors. It has been provided in the Articles of Association that until otherwise determined by a General Meeting, the number of directors shall be not less than three and not more than twelve (Article 113). It has also been provided that the Board shall have power at any time and from time to time to appoint any person as a Director as an addition to the Board but the total number of directors shall not any time exceed the maximum number fixed by the Article (Article 117). Section 252 of the Act, inter alia , provides that every public company shall have at least three Directors. There has been no amendment of Articles of Association on the aspect of number of Directors. But for clause 8, the board of directors has the power to appoint any person as a Director as provided in the Articles of Association. 17. The question is, on aforesaid facts, can Chetan as a Director be restrained from voting in favour of appointment of an Additional Director. 18. Let us, first examine V.B. Rangaraj s case ( supra ). In that case, the main question that fell for consideration was whether the shareholders can among themselve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s like a shareholders agreement providing for voting in a particular manner which has always been held to be enforceable. Thus, according to Mr. Chinoy, Rangraj s case has no applicability to the present case. A little later we will examine what are shareholders or pooling agreements and their enforceability and whether enforceability of such agreements can be extended to the present case which limits or denudes powers of Directors. 19. To reinforce the proposition that the restriction, on transfer of shares, which is not specified in the Articles of Association, is not binding either on the company or on the Shareholders, the earlier decision of the Supreme Court in Shanti Prasad Jain v. Kalinga Tubes Ltd. [1965] 35 Comp. Cas. 351 , was also referred to. In Kalinga Tubes, the company was not party to the Agreement, which, inter alia , provided that the appellant, Shanti Prasad Jain, would be allotted shares in the company equal to those held by Patnaik and Loganathan after increasing the share capital of the company, so that the company would have three groups of shareholders represented by Jain, Patnaik and Loganathan holding equal number of shares, besides a foreign co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that, in these circumstances, a shareholder Directors can enter into an agreement stipulating not to exceed the minimum number of three Directors. According to the learned counsel, those are in the nature of proprietary rights as opposed to corporate rights and like shareholders or pooling agreements, such right could be circumscribed by the will of the shareholders reflected by the Agreement entered into by them. 21. Regarding pooling agreement, it may be noted that it is an agreement between two or more shareholders which generally provides that in exercising any voting rights, the shares held by the shareholders shall be voted as provided therein; it is a contract to the effect that the shares held by them shall be voted as one single unit. The shareholders bind one another to vote as they mutually agree. In a pooling agreement, each shareholder retains sole ownership of shares binding himself only to vote for a specific person or in a certain way. These agreements are enforceable because the right to vote is a proprietary right. The right to vote may be guided and effectuated by a contract. Generally, pooling agreements are thought of in relation to control of private com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce to stock prices, but shall also be obliged to charter a course for the company which is in its best interest without regard to fixed investment horizon. 24. Applying the aforesaid principle, in particular the principle of fixed investment horizon, it would be noticed that the MoU was entered into essentially to favour a fixed investment pattern. It was to protect the family interest in the event of division of the shareholding : It was never contemplated that the company would do well and would require infusion of capital. If this is the purpose, for which the MoU was entered into, and if this object is required to be kept in mind, then, it is clear that the MoU, which imposes a ban on the increase on the number of Directors for all times, is likely to denude the powers of the board of directors and may cause sterilisation of Directors, a terminology used in America. It is for this reason that the American Courts have taken the view that the pooling agreements, which are based on fixed investment objectives, should not be made enforceable, if such agreements come in the way of Directors decision to character a course which favours expansion of the company. It is also beca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... into agreement to vote unanimously and observing such agreements not to be illegal, at the same time held that the fiduciary relationship occupied by Directors requires the exercise of these entire duties and attention to the best interest of the company and its shareholders. It was accordingly held that the discretion of the Directors to act in the administration of the affairs of the company cannot be fettered by agreement and, therefore, such agreement was invalid. 29. In Boulting v. Association of Cinematograph Television Allied Technicians [1963] 2 Q.B. 606, Lord Denning M.R. while dealing with fiduciary nature of Directors duties and also referring to the opinion of Lord Cranworth L.C. in Aberdeen Railway Co. v. Blaikie Bros. [1854] 1 Macq. 461, 471, H.L. (SC) said : It seems to me that no one, who has duties of a fiduciary nature to discharge, can be allowed to enter into an engagement by which he binds himself to disregard those duties or to act inconsistently with them. No stipulation is lawful by which he agrees to carry out his duties in accordance with the instructions of another rather than on his own conscientious judgment; or by which he agrees to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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