A shot in the arm for all those shareholders of public companies who were worried about the un-enforceability of preemption rights like the right of first refusal, the drag and tag along rights. A recent judgment by the division bench of Bombay High Court [Messer holdings Limited v. Shyam M. Ruia and Ors. ('Ruia case') Appeal No. 855 of 2003 in Notice of Motion No. 534 of 2002 in Suit No. 509 of 2001 and Notice of Motion Nos. 1308 and 3956 of 2005, 4118 of 2007 and 1973 and 1418 of 2008] has pronounced the legal position in respect of the free transferability of the shares of a public company and has held such rights to be enforceable inter-se shareholders. In this case, the court ruled that transfer restrictions of the shares of a public limited company, consensually agreed to between shareholders, are valid and enforceable, and are not in violation of section 111A of the Companies Act, 1956 ('Act').
This is an overruling of an earlier decision given in February, 2010 by a single judge of the Court in the Western Maharashtra Development Corporation v. Bajaj Auto Limited ([ 2010 ] 154 CompCas 593( Bom) ) ('the Bajaj case') (dealt with in detail in our India brief issue of June, 2010) which had ruled that 'free transferability' under section 111A of the Act meant that any form of transfer restrictions relating to shares of a public limited company is unenforceable.
In 2005, a similar ruling was given by the Delhi H. C. in the Smt. Pushpa Katoch v. Manu Maharani Ltd. & Ors.( 2005 (121) DLD 333). As per this ruling the lock-in arrangements, Right of First Refusal ("ROFR"), tag along and drag along rights relating to public limited companies were not enforceable. It remains to be seen whether the judgment in the Ruia Case will get appealed to the Supreme Court. An appeal against the judgment of the Bajaj case is pending before another division bench of the Court. Until such appeals get decided, the ruling of the Bombay H.C. in the Ruia case will provide much needed certainty to shareholder rights in joint venture/private equity deals relating to public limited companies.
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