Proviso to Section 58(2) of the Companies Act, 2013 recognizes that “any contract or arrangement between two or more persons in respect to transfer of securities shall be enforceable as a contract”. Interestingly, this applies solely to public companies when the Articles of Association (AOA) doesn’t address such matters. This raises the question: Why isn’t this provision applicable to private companies as well? 🤔
The Supreme Court’s Vodafone International Holdings BV v. Union of India ruling clarified that Shareholders’ Agreements (SHA) are private documents binding only the involved parties. It disagreed that SHA provisions must be a part of Articles of Association (AoA) and affirmed shareholders’ ability to craft beneficial agreements as long as it does not contradict the AOA. 💼
In March 2013, Delhi High Court overturned the Company Law Board’s decision in World Phone India, deeming parties’ rights unenforceable due to an absent affirmative vote clause in the Articles of Association. Similarly, in August 2013, HTA Ltd. And Ors case found deviations from agreed shareholding ratios non-actionable following AoA amendments. These rulings, diverging from the Vodafone precedent, have introduced uncertainty regarding enforceability. 🚫⚖️
On a concluding note, to ensure smooth enforcement of Shareholders’ Agreement (SHA) terms, especially regarding the transfer of securities, it’s wise to include these provisions in the Articles of Association (AoA) until there’s more clarity on the enforceability of Inter-se Governance Rights. 🤝✍️