Saturday, January 1, 2011

Check out Shareholders Agreements: Clauses and Enforceability

I want you to take a look at: Shareholders Agreements: Clauses and Enforceability 

Shareholders agreements are contracts among shareholders of a company (to which the company is also usually a party) that confer rights and impose obligations over and above those provided by company law. The agreements provide for matters such as restrictions on transfer of shares (right of first refusal, right of first offer), forced transfers of shares (tag-along rights, drag-along rights), nomination of directors for representation on boards, quorum requirements and veto or supermajority rights available to certain shareholders at board level or shareholder level.

The enforceability of such agreements under Indian law has been a vexed question. Since these agreements have acquired popularity in the Indian context only over the last two decades or so, courts have not been presented with sufficient opportunities to decide upon the enforceability of their provisions. Where courts have indeed ruled on such agreements, it has often been a daunting task to draw common strands that present clarity for parties entering into such agreements. While there does exist one landmark decision of the Supreme Court (V.B. Rangaraj v. V.B. Gopalakrishnan, AIR 1992 SC 453, [1992] 73 Comp. Cas. 201), oft-cited in the context of shareholders’ agreements, most other decisions have been rendered by the High Courts in various states (although it must be pointed out that an unduly high proportion of them come from the Bombay High Court for obvious reasons, with Mumbai being the financial capital of India). The High Court decisions are limited in their applicability as they are susceptible to disagreements by other High Courts, thereby conferring limited precedential value. Various High Court decisions referred to in the context of enforceability of shareholders agreements are:

1. Mafatlal Industries Ltd. v. Gujarat Gas Co. Ltd., [1999] 97 Comp. Cas. 301 (Gujarat High Court);

2. Smt. Pushpa Katoch v. Manu Maharani Hotels Ltd., [2006] 131 Comp. Cas. 42 (Delhi High Court);

3. Western Maharashtra Development Corpn. Ltd. v. Bajaj Auto Limited, [2010] 154 Comp. Cas. 593 (Bombay High Court);

4. Messer Holdings Limited v. Shyam Madanmohan Ruia, [2010] 159 Comp. Cas. 29 (Bombay High Court);

5. IL and FS Trust Co. Ltd. v. Birla Perucchini Ltd., [2004] 121 Comp. Cas. 335 (Bombay High Court); and

6. Rolta India Ltd. v. Venire Industries Ltd., [2000] 100 Comp. Cas. 19 (Bombay High Court).
The Indian courts have generally not favoured complete freedom of contract in the case of shareholders agreements where clauses have gone against the tenor of company legislation. Courts have either refused to recognise clauses in shareholders agreements or, even when consistent with company legislation, enforced such clauses only if they have been incorporated in the articles of association. It is only recently that the Bombay High Court (in the Messer Holdings decision referred to in item 4 above) recognised rights inter se among shareholders in case of restrictions on transfer of shares by providing a more liberal interpretation. This decision provides some succour to the principle of freedom of contract and enables parties to rely on shareholders’ agreements. However, as mentioned earlier, its relevance may be limited to the extent that it is only a High Court decision and the extensiveness of the principle cannot be taken for granted unless the Supreme Court echoes that view.

Given this background, a useful discussion on the enforceability of shareholders’ agreements in general is contained in a recent report on The Enforceability and Effectiveness of Typical Shareholders Agreement Provisions prepared by the Corporation Law Committee of the Association of the Bar of the City of New York and published in the August 2010 issue of The Business Lawyer. The report contains a listing of the types of clauses included in a shareholders’ agreement, along with drafting considerations. The report, however, contains a discussion on the legal principles embedded in the laws of the states of Delaware and New York. Nevertheless, it is a useful tool for a corporate lawyer in any jurisdiction that can be used as the basis to test the various provisions for enforceability under relevant local law of a company’s jurisdiction of incorporation

Source - http://indiacorplaw.blogspot.com/2010/12/shareholders-agreements-clauses-and.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed:+IndianCorporateLaw+(Indian+Corporate+Law)

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