Transfer of shares under scheme of amalgamation wouldn’t come under pre-emption clause of Articles – An Analysis

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Transfer of shares under scheme of amalgamation
wouldnt come under pre-emption clause of
Articles An Analysis
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• The Bombay High Court has held in the matter
  of Shakti Insulated Wires (P) Ltd. v. Great View
  Properties (P) Ltd. 2016 135 SCL 80/68
  taxmann.com 169 that the transfer of shares under
  the Scheme of Amalgamation sanctioned by the
  Court is not a transfer of shares but is
  transmission by operation of law which would not
  come within the pre-emptive clause of the
  Articles of Association of the company. This
  article highlights the nuances in determining the
  pre-emption clause in the Articles of Association
  and clarifies the difference between transfer of
  shares under the Scheme of amalgamation and
  transfer of shares covered under the pre-emption
  clause of the Articles of Association of the
  Company.

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• AN ANALYSIS
• 1. Introduction
• Section 58(2) of the Companies Act, 2013 provides
  that any contract or arrangement between two or
  more persons in respect of transfer of securities
  should be enforceable as a contract. This section
  has clarified the major issue of enforceability
  of pre-emption rights and options being exercised
  by the shareholders. This article highlights the
  nuances in determining the pre-emption clause in
  the Articles of Association and clarifies the
  difference between transfer of shares under the
  Scheme of amalgamation and transfer of shares
  covered under the pre-emption clause of the
  Articles of Association of the Company. The same
  has been explained by a landmark judgment dated
  1st March, 2016 of the Bombay High Court in the
  matter of Shakti Insulated Wires (P) Ltd (supra)
• 2. Meaning of Pre-emption clause
• Pre-emption rights are often defined as those
  rights that shareholders may have to be offered
  shares in a company before they are made
  available to anyone else. Pre-emption rights can
  arise on allotment of shares, transfer of shares
  and /or transmission of shares. Pre-emption is
  one way to ensure that existing shareholders'
  proportion of voting and other rights in a
  company are not diluted. Contracts for
  pre-emption including right of first refusal tag
  along or drag along rights can be provided in the
  Shareholders Agreements or in the Articles of
  Association of the companies.

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• 3. Facts of the case -Shakti Insulated Wires (P)
  Ltd. (supra) Judgment delivered by Bombay High
  Court on 1.3.2016
• Jayalaxmi Holdings Pvt. Ltd (JHPL) held 1980
  shares of the Appellant Company and the said
  shares are the subject shares. In pursuance of a
  Scheme of Amalgamation sanctioned by the Bombay
  High Court, all assets and liabilities of JHPL
  were transferred to the first Respondent. It is
  to be noted that the assets included the subject
  shares as well. The first Respondent thereafter
  applied for registration of transfer of shares
  and for inclusion of its name in the Register of
  Members. But the Appellant rejected the
  application on the ground that the transfer of
  shares was in breach of the relevant Articles of
  Association providing for a right of pre-emption.
  Aggrieved by this rejection, the first Respondent
  filed a Petition before the Company Law Board
  (CLB) under Section 111 of the Companies Act. The
  CLB allowed the Petition and directed
  rectification of the Register.
• 4. Proceedings before the Bombay High Court
• The contention of the Counsel for the Appellants
  stated that the CLB has erred in law by treating
  the transfer of shares under the Scheme of
  Amalgamation as a case of transmission by
  operation of law, whereas transfer of assets by a
  Scheme of Amalgamation is considered as a
  voluntary transfer between the transferor and the
  transferee companies. The Counsel also relied on
  the Articles of Association of the Appellant
  Company and contended that all voluntary
  transfers come within the pre-emption clause of
  the Articles. Since the subject transfer of
  shares was in breach of the Articles and was
  thus, rightly rejected by the Appellant Company.

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• 5. Relevant Articles concerning " Transfer of
  Shares"
• 5.1 Article 22 Except as hereinafter provided,
  no shares in the Company shall be transferred
  unless and until the rights of pre-emption
  hereinafter conferred shall have been exhausted.
• 5.2 Article 23 Except where the transfer is made
  pursuant to Article 29 or Article 38 hereto, the
  person proposing to transfer any share
  (hereinafter called "the Proposing Transferor")
  shall give notice in writing (hereinafter called
  " a Transfer Notice") to the company, that he
  desires to transfer the same. Such notice shall
  specify the sum he fixes as the fair value and
  shall constitute the Board of Directors his agent
  for the sale of the share to any member of the
  company or person approved of selected by the
  Board of Directors who is willing to purchase the
  share (hereinafter called " the Purchasing
  Member") at the price so fixed or at the option
  of the Purchasing Member at the fair value to the
  fixed or at the option of the Purchasing Member
  at the fair value to be fixed by the Auditors of
  the Company in accordance with Article 25 hereof.
  A Transfer Notice may include several shares and
  in such cases shall operate as if it were a
  separate notice in respect of each. A transfer
  Notice shall not be revocable except with the
  sanction of the Directors.

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