Promoters, private equity investors and technical collaborators
can now freely negotiate on the Right to First Refusal
("ROFR") while investing in shares of a public company in
Maharashtra, India. On 8 May 2015, the Division Bench of the Bombay
High Court in the case of Bajaj Auto Ltd Vs. Western Maharashtra
Development Corporation Ltd. [2015(4) BomCR499] held that
pre-emptive rights on shares of a publicly listed company do not
amount to restrictions on their free transferability.
Facts of the case
Maharashtra Scooters Ltd. ("MSL") is a publicly listed
company, floated by Bajaj Auto Ltd. ("BAL") and Western
Maharashtra State Corporation Ltd. ("WMDC").
BAL and WMDC entered into a shareholders agreement (the
"Protocol Agreement") to respectively hold a 24% and 27%
shareholding in MSL and also agreed to incorporate ROFR in the
agreement, meaning that if a party to the agreement wishes to sell
its shares, the other party will have the first right to purchase
The Protocol Agreement also stated that the price for sale of
shares under ROFR would be mutually decided by the parties and, in
case of any dispute, the matter would be referred to arbitration.
The terms and conditions of the Protocol Agreement were
incorporated in the Articles of Association of MSL.
Eventually, a dispute arose with respect to the sale price of
shares under ROFR and the matter was referred to arbitration. The
Arbitrator determined the price. Dissatisfied by the 2006 arbitral
award, a reference was made to the Learned Single Judge Bench of
the Bombay High Court under section 34 of the Arbitration and
Conciliation Act, 1996. In 2010, the Learned Single Judge Bench set
aside the arbitral award on the ground that the existence of
pre-emptive rights with respect to the sale of shares of a publicly
listed company was in violation of the Companies Act, 1956 (which
was in force at the relevant time). The Learned Single Judge Bench
stated that ROFR was against section 111A(2) of the Companies Act,
1956 which stipulates that shares or debentures and any interest in
shares/debentures of a public company should be freely
Judgment of the court
The matter was then appealed before a Division Bench (Honourable
Chief Justice Mohit Shah and Justice B.P. Colabawala) which
followed the reasoning of an earlier judgement of the same Court in
the case of Messers Holding Ltd. (an unreported judgment) and held
entered into by shareholders of a public company with third parties
regarding their own specified shares either by way of sale,
pre-emption or otherwise (in this case, the Protocol Agreement), do
not impinge upon the free transferability of shares and do not
violation provisions of the Indian Companies Act.
Incorporation of pre-emptive rights
in the Articles of Association of a company would be inconsistent
with the provisions of the Indian Companies Act. However, terms of
the Protocol Agreement survive independently.
Legal and regulatory updates
Since the single judge judgment dated 2010 in this case, there
have been legal developments which have clarified the law by
stating that a contract or arrangement between two or more persons
in respect of transfer of securities (with pre-emption or not) does
not amount to a restriction on the free transferability of shares
of a public company. See section 58 of the Companies Act 2013 and
the notification of Securities and Exchange Board of India dated 3
It may be noted that the existence of such private agreements
between two or more persons in respect of transfer of securities do
not impinge upon the rights of other public shareholders to deal in
the securities of a public company freely. The restrictions of
ROFR/tag along/drag along rights survive only as a part of the
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guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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The Ministry of Corporate Affairs notified on June 5, 2015 that certain provisions of the Companies Act, 2013 shall not apply to private limited companies or shall apply with such exceptions or modifications as directed in the notification.
Whilst trade and barter have existed since early times, the modern practice of forming business relationships through the means of contract has come into existence only since the industrial revolution in the West.
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