Corporate Law Case Brief – VB Rangaraj v. VB Gopalakrishnan

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Articles of Association

Facts: Family consisting of two brothers Baluswamy Naidu and Guruviah Naidu owning a Private company being the sole shareholders of the company, with equal distribution of shares among them. They entered into an oral agreement , that each of the branches of the family would always continue to hold equal number of shares and that if any member in either of the branches wished to sell his shares, he would give the first option of purchase to the members of that branch and only if the offer so made was declined, the shares would be sold to others. There was a restriction on transfer of shares by way of a right of pre-emption which were not stated in the agreement. The restrictions are in the latter event the shares of the deceased member shall be first distributed among the existing members equally and if they are to be transferred to any new member, it would be done so with the consent of the majority of the existing members.

One of the son’s of Baluswamy Naidu sold the shares to sons of Guruviah Naidu . Hence the plaintiffs who are the other son’s of Baluswamy’s filed the present suit for :

(i)         a declaration that the said sale was void and not binding upon the plaintiffs

(ii)        an order directing defendants to transfer the said shares to the plaintiffs

(iii)       a permanent injunction restraining defendants from applying for registering the said shares in their names and from acting adversely to the interests of the plaintiffs on the basis of the transfer of the said shares.

Issue:

 Whether the shareholders can among themselves enter into an agreement which is contrary to or inconsistent with the Articles of Association of the company.

Ratio:

The Articles of Association are the regulations of the company binding on the company and its shareholders and that the shares are a movable property and their transfer is regulated by the Articles of Association of the company.

“Whether under the Companies Act or Transfer of Property Act, the shares are, therefore, transferable like any other movable property. The only restriction on the transfer of the shares of a company is as laid down in its Articles, if any.  A restriction which is not specified in the Articles is, therefore, not binding either on the company or on the shareholders.  The vendee of the shares cannot be denied the registration of the shares purchased by him on a ground other than that stated in Articles.”

Judgement: The Trial Court holds that the sale of the said shares was invalid and not binding on the plaintiffs , and directed the defendants  to transfer the said shares to the plaintiffs, and granted permanent injunction . High Court Reversed the decision by Trial Court and held that

(i)         the sale of the shares by the defendant in favour of other two defendants was valid and the plaintiffs are not entitled to purchase the said shares.

(ii)        the agreement was not binding on the company and the shareholders.

(iii)       the company was not bound in law to register the said shares in the plaintiffs’ names.

The oral agreement which is relied upon by the plaintiffs whereunder there is a restriction on a living member to transfer his shareholding only to the branch of family to which he belongs in terms imposes two restrictions which are not stipulated in the Article. Firstly, it imposes a restriction on a living member to transfer the shares only to the existing members and secondly the transfer has to be only to a member belonging to the same branch of family. The agreement obviously, therefore, imposes additional restrictions on the member’s right to transfer his shares which are contrary to the agreement. They are, therefore, not binding either on the shareholders or on the company.

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