A shareholders' agreement (hereinafter SHA) outlines the internal management framework of the company to effectively protect the overall interest of shareholders by setting out their rights and obligations. The SHA, as against the Articles of Association (hereinafter AoA) and Memorandum of Association (hereinafter MoA) which are public documents under Section 399 of the Companies Act, 2013 (hereinafter CA, 2013), is a private document in the form of an inter se contract between some or all the shareholders of the company. It mainly regulates the rights of shareholders with respect to the transfer of shares (hereinafter Share Transfer Rights) in a company. Other aspects which are regulated by SHAs are:

  1. proportion in which shareholders are going to hold the shares,
  2. pre-emption rights of shareholders,
  3. powers of the board of directors with respect to issuance and transfer of shares,
  4. rights of minority shareholders, etc.

While, the SHA binds only the parties to it, the AoA together with the MoA comprise the constitutional documents of a company and thus, along with the company, they bind all the shareholders of the company under Section 10 of the CA, 2013.

Nonetheless, SHA's provisions keep changing to keep abreast of change in shareholdings or shareholders. The said changes are not always reflected in the AoA, which may cloud their better judgment and be to their detriment. Therefore, murkiness looms over the enforceability of SHAs in the Indian courts since the erstwhile regime of the Companies Act, 1956 (hereinafter the CA, 1956). Back in 1992, the apex court took the radical view that Share Transfer Rights under SHAs should also be included in the AoA to be legally enforceable. In V.B. Rangaraj v. V.B. Gopalakrishnan and Ors.,1 the parties incorporated certain share transfer restrictions in the SHA that required them to offer shares to the other party before offering it to an outsider. However, as the pre-emption clause was not incorporated in the AoA, the parties eventually reached a juncture where the applicability of the share transfer restriction was questioned. The court, relying on Section 3(iii) and Section 82 of the erstwhile CA, 1956, held that:

"the AoA are the regulations of the company and binding on the company and its shareholders. Therefore, the only restriction on the transfer of the shares of a company is as laid down in its articles if any but a restriction which is not specified in the articles is not binding either on the company or on the shareholders."

Further, the Supreme Court accepted the proposition that an agreement between two shareholders of a company, by which restrictions are imposed on their ability to transfer the shares, is wholly ineffective unless it is incorporated in the AoA of the company.

On similar lines, in the cases Mafatlal Industries Ltd. v. Gujarat Gas Co. Ltd. and Ors.,2 and IL& FS Trust Co. Ltd. v. Birla Perucchini Ltd,3 it was held that the decision in VB Rangaraj would be applicable with respect to conflicts between SHA and AOA.

The first noteworthy case where the court didn't follow the law laid down in VB Rangaraj was Premier Hockey Development Private Limited v. Indian Hockey Federation4. In this case, the court opined that, as the SHA was not in contravention to the CA, 1956 and did not violate the AoA, these clauses would be binding on the parties despite their non-inclusion in the AoA.

The radical development in the erstwhile regime of the CA, 1956 was finally refurbished by the proviso to Section 58(2) of the CA, 2013 which recognizes that "any contract or arrangement between two or more persons in respect to transfer of securities shall be enforceable as a contract". Therefore, this proviso clarifies that the SHA is a legally recognized document under CA, 2013. The immediate supposition of this deduction is that the SHA can very well be executed with respect to matters on which AoA is silent. However, this position, which upholds the provisions of the SHA in the event the AoA is silent in the matter, is applicable only to public companies, not private companies.

This flexible position was recognized by the Supreme Court in Vodafone International Holdings BV v. Union of India5. The court stated that the SHA is a private document that binds parties thereof, but not the other remaining shareholders or the company, giving greater flexibility to make provisions for the resolution of any dispute among the shareholders and also the modus operandi of future capital contributions. Hence, the court stated, in verbatim, that:

"this court (in V.B. Rangaraj) has taken the view that provisions of the Shareholders' Agreement imposing restrictions, even when consistent with Company legislation, are to be authorized only when they are incorporated in the Articles of Association, (is) a view we do not subscribe. (Therefore,) the shareholders can enter into any agreement in the best interest of the company, but the only thing is that the provisions in the SHA shall not go contrary to the AoA. The essential purpose of the SHA is to make provisions for proper and effective internal management of the company. It can visualize the best interest of the company on diverse issues and can also find different ways not only for the best interest of the shareholders, but also for the company."

In essence, the Vodafone judgment disagreed only with the V.B. Rangaraj holding without expressly overruling it. As evident from the above extract, the Supreme Court merely restricted the partisan view taken in V.B. Rangaraj by holding that if the provisions of the SHA conflict with the provisions of the AoA, in that event the provisions of the AoA would prevail and not the provisions made in the SHA.

As the holding in V.B. Rangraj was not overruled in express terms, the Delhi High Court, in March 2013, while overruling the holding of the Company Law Board, held in the case of World Phone India Pvt. Ltd. and Ors. v. WPI Group Inc., USA6, that as the existence of an affirmative vote cannot be found in the AoA, the right of the parties remained unenforceable. In this case, the shareholders of the company entered into a SHA wherein affirmative rights were granted to the shareholders. However, the same was not expressly averred in the AoA. Similarly, in HTA Employees Union (Regd.) v. Hindustan Thompson Associates Ltd. and Ors.,7 wherein the shareholding was not maintained as per the pre-agreed ratios between the management and the non-management staff union, the Delhi High Court held in August 2013, that as the terms of the AoA were amended, the claims of such breach cannot be upheld. In such cases no relief lies in company law against the breach of SHA and the same can be challenged only under the Indian Contract Act, 1872 (for instance, damages or injunction) which dilutes the very essence of SHAs. It is therefore evident that the cases adjudicated by the Delhi High Court have chosen to ignore the Vodafone ruling, creating ambiguity in the legal jurisprudence in respect of the enforceability of provisions.

It is pertinent to mention that the Bombay High Court has taken a completely different route as against the Delhi High Court. The Bombay High Court in Messer Holdings Limited v. Shyam Madanmohan Ruia,8 held that a private arrangement between shareholders of a company on a voluntary basis, relating to share transfer restrictions would be enforceable between the shareholders and it is not mandatory for the company to be party to such an arrangement and further that it is not essential to incorporate share transfer restrictions in the AoA of the company. The division bench in Messer Holdings also stated that a restriction on the transfer of shares is "enforceable unless barred" by the byelaws of a company. The Division Bench of Bombay High Court in Bajaj Auto Ltd. v Western Maharashtra Development Corporation Ltd.9 also held that even if the terms of a private arrangement between shareholders were not permissible under the AoA of a company, it would not in any way destroy the enforceability of the agreement between the shareholders.

Future position of Vodafone judgement, therefore, depends on whether a larger bench of the Supreme Court, overrules the position adopted by V.B. Rangaraj judgment.

For the time being it can be deduced from the aforesaid discussion that for public companies, the clauses of SHA shall be treated as valid and enforceable as per Section 58(2), so long as the clauses are in compliance with the laws and are not contrary to the AoA. However, for the private companies, Section 58(2) is not applicable. Further, in the event, the company is not a party to the agreement, the same shall not be enforceable against the company and the clauses of the AoA shall prevail. In the event, the company is a party to the SHA, and the clauses in the SHA are not conflicting with the AOA, then SHA will prevail.

Additionally, the SHAs shall not be contrary to the provisions of CA, 2013, otherwise they will rendered void as per Section 6 of the CA, 2013. Section 6(b) of the CA, 2013 reads:

"any provision contained in the memorandum, articles, agreement or resolution shall, to the extent to which it is repugnant to the provisions of this Act, become or be void, as the case may be."

But ultimately, it should be kept in mind that, AoA is a charter document and is considered as a bible of the company and shall prevail over any agreement. Therefore, it is advisable in the wake of Delhi High Court's judgement in World Phone India and HTA Ltd. and Ors., that in order to enforce SHAs, an endeavor should be made to simultaneously incorporate all the changes in the AoA of company which are made in SHAs.


1. V.B. Rangaraj v. V.B. Gopalakrishnan and Ors., (1992) Comp LJ 11 (SC).

2. Mafatlal Industries Ltd. v. Gujarat Gas Co. Ltd. And Ors. (1999) 97 Comp Cas 301

3. IL& FS Trust Co. Ltd. v. Birla Perucchini Ltd. [2004] 121 Comp Cas 335.

4. Premier Hockey Development Private Limited vs. Indian Hockey Federation, O.M.P. 92/2011 & O.M.P. 52/2011.

5. Vodafone International Holdings BV v. Union of India, (2012) 6 SCC 613.

6. World Phone India Pvt. Ltd. & Ors. v. Wpi Group Inc. (2013) 178 Comp Cas 173 (Del).

7. HTA Employees Union (Regd.) v. Hindustan Thompson Associates Ltd. and Ors., RFA 247/2004.

8. Messer Holdings Limited v. Shyam Madanmohan Ruia, Appeal No. 855 of 2003.

9. Bajaj Auto Ltd. v Western Maharashtra Development Corporation Ltd., Appeal No.153 of 2010.

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