INSTITUTE OF LAW NIRMA UNIVERSITY

CONTRACT LAW II
RESEARCH PAPER
ON
SHAREHOLDERS AGREEMENT

PREPARED BY:
KRISHNA PAREKH
(12BLL037)

SUBMITTED TO:
PROFFESSOR: NITESH UPADHYAY

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 DECLARATION

I do hereby declare that this project work entitled

“Shareholders agreement” has been prepared by me as a
partial fulfillment of the requirement of B.B.A.LL.B.
(Hons.). I also declared that I have acknowledged the
source / authorities in My project work accordingly.

Signature: ________________________

Name & Signature of Researcher

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CERTIFICATE:

This is to certify that the project entitled “ Shareholders Agreement” –

submitted by Ms. Krishna Parekh for the project work in the subject of
Contract Law II embodies independent and original research work
carried out by him under my supervision and guidance.
To the best of my knowledge and belief, it is her original work
submitted to fulfill the project assignment for the Semester End
Examination of fourth semester of B.B.A.LL.B. Programmed during the
academic year 2014.

Date : 15TH April, 2014 Mr. Nitesh Upadhyay

Institute of Law,
Nirma University
Ahmedabad

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 TABLE OF CONTENTS

CHAPTER 1

1.1 Synopsis…………………………………………………….
1.2 Introduction………………………………………….........
1.3 The need for shareholders agreement andoverview…..

CHAPTER 2

2.1 The requisites of the of the shareholders agreement….

2.2 AOA and the shareholders agreement……………………………...
2.2.1 V.B Rangrajan v. V.B. Gopalkrishnan
2.2.2 Crompton Greaves v. Sky Cell Communication Ltd.
2.2.3 IL and FS Trust Co. Ltd. V. Birla Perucchini Ltd.
2.2.4 Rolta India Ltd. V. Venire Industries Ltd. And Others
2.2.5 Smt. Pushpa Katoch v. Manu Majarani Hotels Ltd
2.2.6 Messer Holdings Ltd. V. Shyam Madanmohan Ruia

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CHAPTER 3

3.1 CONCLUSION………………………………………………

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 CHAPTER 1

1.1 SYNOPSIS:

TITLE:
Clash between the share holders agreement and the articles of the
company.

RESEARCH QUESTIONS:
1) Whether a provision in Shareholders agreement that is contrary to the
articles of the company is valid and enforceable?

2) what are the possible remedies for the shareholder in case of breach of
shareholders agreement by other shareholder even though such action
would not be constructed as a breach under the article of a company?

OBJECTIVES:
To understand in a proper manner the share holders agreement and the
various conflicts arising between the share holders agreement and
articles of company with the help of the recent cases.

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HYPOTHEISES:
Share holders can enter into an arrangement in the best interests of the
company but the only thing is that the provisions of the shareholders
agreement shall not go contrary to the articles of the company.

RESEARCH METHODOLOGY:
Research methodology is the basic fundamental process which ensures the entire
pathway and process of achieving the final goal of the project successfully. The
methodology adopted by me is the ‘Doctrinal Research Methodology’ i.e. the
research of the secondary data available in the form of( books, journals,
newsreports etc.) . Under this method the following steps have been adopted :

 An area of research was selected.

 Further a sub title had been decided for the same.

 Objectives and Hypothesis had been framed for the project.

 Various secondary data available(books , journals, articles) have been

referred as well as views of experts are also analyzed and included in the

research.

 A conscious and consistent effort has been made to acquire the conclusion.

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1.2 INTRODUCTION:

At some point of time or the other every business or commercial venture

would require some additional funding. Out of the financial assistance
extended the percentage of equity holding in the assisted company by
the financial entity is more. Hence the assistance provided by the equity
holders is taken into consideration and hence the interests of the
financial entity must be protected. To provide such protection various
documents are entered into and executed and the shareholders agreement
is the fulcrum on which all other transaction documents revolve.
Share holders agreement in simple words is an agreement between the
shareholders of a company. A shareholder’s agreement is said to be the
contract between share holders of a private limited company with the
various provisions that will govern each of the shareholders who are a
party to the agreement vis-a-vis the company and the shares held by
each such share holders and also the provisions that will govern the
management of the company as agreed to by the parties to the
agreement. It may be noted that in the case of a public limited company,
there may be enforceability issues with certain provisions of the
shareholders agreement.
Basically the shareholders agreement lays down clearly defined rights
and obligations between and off the parties:
a) Appointment of decorum
b) Providing veto rights to certain share holders
c) Financing the requirements of the company
d) Restrictions on rights to transfer shares freely
e) Defining the obligation of each of the shareholder towards the
company.
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Shareholders agreements are contracts among shareholders of a
company (to which the company is also usually a party), it gives the
rights and imposes obligations those provided by company law. The
agreements mainly comprises of the matters such as restrictions on
transfer of shares (right of first refusal and right of first offer), forced
transfers of shares (tag-along rights and drag-along rights), nomination
of directors for representation on boards and finally the veto or
supermajority rights available to certain shareholders at board level .

Basically the conflict between the provisions in share holders agreement

and articles of association of a company are never ending The conflicts
between the share holders agreement and the articles of association are
of two types, first where the conflicts related to the management of the
company (board of directors, accounts, etc.) and second where the
conflict relates to transferability of shares. The latter has been subjected
to extreme case laws in the Supreme Court and the High court.

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1.3 THE NEED FOR SHARE HOLDERS AGREEMENTAND
OVERVIEW :
India is a country with a huge growth potential. The country now aims at
further, and faster integration of its economy with the global economy
and hence the shareholders agreement becomes so significant. The
shareholders agreement is also known as the “joint ventures agreement”.
The joint venture companies are the most preferred form of corporate
entities for entering into a business in India. A typical shareholders
agreement or the Joint venture agreement may typically involve: A)
equity contribution by the parties to the agreement for carrying out a
particular business. B) transfer of technology C) licensing of the
intellectual property rights D) pooling in of the resources for provision
for services. A joint venture may be any of the business entities available
in India. A typical joint venture is where: 1
1. Two parties (individuals or companies) sign a shareholders
agreement and promote and incorporate a special purpose vehicle
or a Joint Venture company whereby they subscribe to the shares
of such a company in agreed proportion, in cash, to start a new
business ;

2. Two parties (individuals or companies) sign a shareholders

agreement and promote and incorporate a Joint Venture company
in India. Business of one party is transferred to the company and as
consideration for such transfer; shares are issued by the company
and subscribed by that party. The other party subscribes for the
shares in cash ;

3. Promoter shareholder of an existing Indian company and a third

party, who/which may be individual/company, one of them non-
resident or both residents, collaborate to jointly carry on the
1
Nuances involved in drafting joint ventures/ shareholders agreements, Amit K. Vyas, FCS, Head- Legal, ICICI
Prudential Asset Mgt. Co. Ltd., Mumbai.

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 business of that company and its shares are taken by the said third
party through payment in cash

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 CHAPTER 2

2.1 REQUISITES OF THE SHARE HOLDERS AGREEMENT:

REQUISITE NO- 1 : There should be proper drafting of the Articles of

association of the joint venture company with respect to the term and
conditions contained in the shareholders agreement. The shareholders
agreement must be in compliance of the AOA of the company.

REQUISITE NO. 2: All the suitable clauses related to the

Transferability of shares by the joint venture partners must be included.

REQUISITE NO. 3: Mandatory holding of the shares.

REQUISITE NO. 4: Composition of the board of directors, Deligation

of powers to the board, Appointment of the managing director and
delegation of powers to them, Appointment of the nominee directors.

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2.2 AOA AND THE SHAREHOLDERS AGREEMENT :
There should be proper drafting of the Articles of association of the joint
venture company with respect to the term and conditions contained in
the shareholders agreement. The shareholders agreement must be in
compliance of the AOA of the company.
The terms and conditions contained in the shareholders agreement
imposes an obligation on the joint venture company to perform to omit
to do any act must be contained in AOA. If it is not so then in terms of
legal perspective it cannot be enforced.
This is necessary, since the AOA forms the base of the company. It
regulates the internal management and affairs of the company. It defines
the powers of its officers. They inner way establish a contract between
the company and the members and also between the members inter-se.
2.2.1 In the case of V.B Rangrajan v. V.B. Gopalkrishnan 2 the question
raised was regarding the enforceability of the shareholders agreement
before the Supreme Court. In this case it was laid down that any of the
provisions of the shareholders agreement would not be compulsorily
implemented in the affairs of management of the company unless the
same provision is also provided for in the AOA of the company. In the
following case the shareholders of a private company enter into an
agreement. In the following agreement a restriction was imposed on a
living member of the company to transfer his shares only to a member of
his own branch of family. No where in the AOA of the company it was
mentioned about any such restriction. The court reffered to the sections
of the Companies Act which explicitly mention that the articles of
association are the ultimate regulations that are binding on the company
and thus any restriction regarding the transfer of the shares must be
2
V. B Rangrajan v. V.B Gopalfrishnan, AIR 1992 SC 453
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provided in the articles. In the absence of the same such an agreement is
enforceable. This judgment raised a question that if this judgment was to
be interpreted and to adhere to then in such a situation what is the point
in having a shareholders’ agreement since the every clause of the
shareholders’ agreement needs to specified in the AOA of the company
at prior instance.
2.2.2 This case was followed by Crompton Greaves v. Sky Cell
Communication Ltd. 3 The company was created under the Joint venture
agreement between the partners. Out of the terms of agreement specified
one of the terms of agreement was that the members of the company
would not transfer their shares without the consent in writing of the
other members. But, this term was not included in the AOA of the
company. One of the members transferred his shares to the other without
the written consent of the other members. The transfer was held to be
valid. The Court held that there was no restriction against it in the AOA
of the company and hence the members could transfer the shares without
the consent of the other members in writing.
2.2.3 In yet another case, IL and FS Trust Co. Ltd. V. Birla Perucchini
Ltd.4 The Bombay High Court held that “It is a general principle that
effect cannot be given to a shareholders’ agreement even in the matters
of management unless the agreement has been incorporated in the
company’s articles”. In the present case two parties entered into a
shareholders’ agreement on the basis of which a petition was filed which
retrained the respondent from accepting the resignation of the other
respondents from the post of the director and hence the same could not
be enforced by the agreement. Thus the Bombay High court once again

3
Crompton Greaves v. Sky Cell Communication Ltd. (2002) 39 SCL 704 (Mad-DB)

4
IL and FS Trust Co. Ltd. V. Birla Perucchini Ltd, [2004] 121 Comp. Cas. 335 (Bombay High Court)
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clarified that a restriction that is not mentioned in the AOA of the
company and is not binding either on the company or on the
shareholders.
2.2.4 In the case of Rolta India Ltd. V. Venire Industries Ltd. And
Others5 it was held that the shareholders cannot infringe upon the
Directors’ fiduciary rights and duties. Even the Directors cannot enter
into an agreement, thereby agreeing not to increase the number of
Directors when there is so much restriction in the AOA. The
shareholders cannot dictate the terms to the directors, except by
amendment of AOA or by the removal of Directors.
2.2.5 In the case of Smt. Pushpa Katoch v. Manu Majarani Hotels Ltd 6.
A petition under the section 397 and 398 of the companies act for
mismanagement and oppression was filed by the petitioner on the
grounds that the promoter group had transferred shareholdings to
outsiders before offering them to the petitioner who was another
shareholder of the company despite an agreement to the same effect
existing between the shareholders. The Delhi Court however held that
the articles of the company did not contain any specific provisions with
respect to preemption rights and the articles in such instances of conflict
would always prevail over any form of internal settlement or
arrangement among the shareholders.
2.2.6 However, in a recent 2010 judgment, the Bombay High Court
passed a judgment on the enforceability of the shareholders agreement.
In the case of Messer Holdings Ltd. V. Shyam Madanmohan Ruia 7 the
basic issue before the court was the interpretation of the section 111A of
Companies Act which the court rule does not explicitly restrict or take

5
Rolta India Ltd. And another v. Venire Industries Ltd. And Others ( 2000 100 Comp. Cas 19 Bom)
6
Smt. Pushpa Katoch v. Manu Majarani Hotels Ltd., 2006 131Comp. Cas 42(Delhi High Court)
7
Messer Holdings Ltd. V. Shyam Madanmohan Ruia, [2010] 159 Comp. Cas. 29 (Bombay High Court)
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away the shareholders right to enter into a consensual agreement or an
agreement with respect to the shares held by them. The court further
held that shareholders did have the freedom to enter into a consensual
agreement which do not conflict the AOA of the company or the
legislations governing the company. Thus the court was of the view that
such agreements can be enforced.
Moreover in this case the court has only said that a shareholder’s
agreement will hold force so long as it is in consequence with the
articles of the company. 8

8
Enforceability of shareholders agreement in India: A legal paradox, Priyoma Majumdar
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 CHAPTER 3

3.4 CONCLUSION:
Taking into consideration the Indian context, there exists one landmark
judgment of the Apex court. The case of V.B Rangrajan (supra) is
generally cited when the shareholders agreement is concerned. Rest,
most of the judgments have been given by the High Courts of the
various states. The applicability of the high courts judgment are limited
as they can be subjected to disagreement by the High Courts of the other
state, thereby conferring limited precidential value. Hence it is difficult
to lay down the enforceability of the shareholders agreement. Ideally the
shareholders agreement should be incorporated either by insertion or
incorporation by reference. Reference may also be made to the
provisions of section 192(4)(e) of the Companies Act which permits
filing of certain agreement that are intended to be binding n members of
a class.
“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 ref used to
recognise clauses in shareholders agreements or, even whenconsistent
with company legislation, enf orced 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 transf er of shares by providing a more liberal
interpretation. This decision provides some succour to the principle of

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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 usef ul discussion on the
enforceability of shareholders”9

9
Shareholders agreement : Clauses and Enforceability, indiacorplaw.blogspot.in /2010/12/shareholders-
agreements-clauses-and.html

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 CHAPTER 4

4.1 BIBLOGRAPHY

LITIGATION REFERRED:
The Companies Act, 2013

CASES REFERRED:
V.B Rangrajan v. V.B. Gopalkrishnan, AIR 1992 SC 453
Crompton Greaves v. Sky Cell Communication Ltd, (2002) 39 SCL 704
(Mad-DB)
IL and FS Trust Co. Ltd. V. Birla Perucchini Ltd, [2004] 121 Comp.
Cas. 335 (Bombay High Court)
Rolta India Ltd. V. Venire Industries Ltd. And Others, Others ( 2000
100 Comp. Cas 19 Bom)

Smt. Pushpa Katoch v. Manu Majarani Hotels Ltd., 2006 131Comp. Cas
42(Delhi High Court)

Messer Holdings Ltd. V. Shyam Madanmohan Ruia, [2010] 159 Comp.

Cas. 29 (Bombay High Court)

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ARTICLES REFERRED:

A)Legality of a shareholders’ agreement- Can shareholders agree

outside the Articles?, Author Nidhi Ladha, Vinod Kothari and
company ;

B) Articles of association vis-à-vis shareholders’ agreement, Author

Dr. K.R. Chandratre;

C) Naunces involved in drafting joint ventures/ shareholders’

agreements, Author Amit K Vyas

D)Enforceability of shareholder agreements in India: a legal paradox,

Author Priyoma Majumdar.

WEBSITES REFERRED:

Shareholders agreement : Clauses and Enforceability,

indiacorplaw.blogspot.in /2010/12/shareholders-agreements-clauses-
and.htmL

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